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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (MARK ONE)

|X|      QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(D) OF THE  SECURITIES
         EXCHANGE ACT OF 1934.

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

                                       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: 0-26006
                                   ----------

                              TARRANT APPAREL GROUP
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           CALIFORNIA                                           95-4181026
(STATE OR OTHER JURISDICTION OF                             (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NUMBER)

                         3151 EAST WASHINGTON BOULEVARD
                          LOS ANGELES, CALIFORNIA 90023
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 780-8250

         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 whether the  registrant  is a large  accelerated
filer,  an  accelerated  filer or a  non-accelerated  filer.  See  definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]


Number of shares of Common  Stock of the  Registrant  outstanding  as of May 12,
2006: 30,543,763.

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





                              TARRANT APPAREL GROUP
                                    FORM 10-Q
                                      INDEX

                          PART I.  FINANCIAL INFORMATION
                                                                           PAGE
                                                                          ------
Item 1.    Financial Statements

           Consolidated Balance Sheets at March 31, 2006 (unaudited)
              and December 31, 2005 (audited)..........................      2

           Consolidated Statements of Operations  for the Three Months
           Ended March 31, 2006 and March 31, 2005 (unaudited).........      3

           Consolidated Statements of Cash Flows for the Three Months
              Ended March 31, 2006 and March 31, 2005 (unaudited)......      4

           Notes to Consolidated Financial Statements (unaudited)......      5

Item 2.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations ..............................       19

Item 3.    Quantitative and Qualitative Disclosures About Market Risk .      31

Item 4.    Controls and Procedures.....................................      31

                          PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings...........................................      32

Item 1A.   Risk Factors................................................      32

Item 6.    Exhibits....................................................      38

           SIGNATURES..................................................      39


            CAUTIONARY LEGEND REGARDING FORWARD-LOOKING STATEMENTS

         Some of the  information  in this  Quarterly  Report  on Form  10-Q may
constitute  forward-looking  statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,
both as amended.  These forward-looking  statements are subject to various risks
and uncertainties.  The forward-looking  statements include, without limitation,
statements  regarding our future  business  plans and  strategies and our future
financial  position or results of operations,  as well as other  statements that
are not historical.  You can find many of these  statements by looking for words
like  "will",  "may",   "believes",   "expects",   "anticipates",   "plans"  and
"estimates"  and for similar  expressions.  Because  forward-looking  statements
involve  risks and  uncertainties,  there are many  factors that could cause the
actual  results to differ  materially  from those  expressed  or implied.  These
include, but are not limited to, economic  conditions.  This Quarterly Report on
Form 10-Q contains important  cautionary  statements and a discussion of many of
the  factors   that  could   materially   affect  the   accuracy  of   Tarrant's
forward-looking  statements and such statements and discussions are incorporated
herein by reference.  Any subsequent written or oral forward-looking  statements
made by us or any person acting on our behalf are qualified in their entirety by
the cautionary  statements and factors contained or referred to in this section.
We do not intend or  undertake  any  obligation  to update  any  forward-looking
statements to reflect events or circumstances after the date of this document or
the date on which any subsequent forward-looking statement is made or to reflect
the occurrence of unanticipated events.


                                       1



                         PART I -- FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS.


                              TARRANT APPAREL GROUP
                           CONSOLIDATED BALANCE SHEETS


                                                               MARCH 31,       DECEMBER 31,
                                                                  2006            2005
                                                             -------------    -------------
                                                              (unaudited)       (audited)
                                                                        
                           ASSETS
Current assets:
   Cash and cash equivalents .............................   $     500,636    $   1,641,768
   Accounts receivable, net ..............................      62,370,128       54,598,443
   Due from related parties ..............................       3,359,888        3,100,928
   Inventory .............................................      21,836,090       31,628,960
   Current portion of notes receivable -- related parties        5,139,387        5,139,387
   Prepaid expenses ......................................       1,264,688        1,292,441
   Prepaid royalties .....................................            --          1,123,531
   Income taxes receivable ...............................          25,468           25,468
                                                             -------------    -------------
 Total current assets ....................................      94,496,285       98,550,926

   Property and equipment, net  of $10.9 million and $10.8
     million accumulated depreciation at March 31, 2006
     and December 31, 2005, respectively .................       1,587,822        1,702,840
   Notes receivable - related parties, net of current
   portion ...............................................      35,834,002       36,268,446
   Due from related parties ..............................       3,004,352        2,994,945
   Equity method investment ..............................       2,186,278        2,138,865
   Deferred financing cost, net of $823,097 and $711,250
     accumulated amortization at March 31, 2006 and
     December 31, 2005, respectively .....................         726,939          838,786
   Other assets ..........................................         258,062          164,564
   Goodwill ..............................................       8,582,845        8,582,845
                                                             -------------    -------------
 Total assets ............................................   $ 146,676,585    $ 151,242,217
                                                             =============    =============

            LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Short-term bank borrowings ............................   $  12,479,989    $  13,833,532
   Accounts payable ......................................      25,888,506       33,278,959
   Accrued expenses ......................................       9,564,188        9,503,806
   Income taxes ..........................................      16,795,605       16,828,538
   Current portion of long-term obligations  and factoring
     arrangement .........................................      39,540,629       36,109,699
                                                             -------------    -------------
 Total current liabilities ...............................     104,268,917      109,554,534

Long-term obligations ....................................          14,774          239,935
Convertible debentures, net ..............................       6,083,539        5,965,098
Deferred tax liabilities .................................          25,403           47,098

Minority interest ........................................          63,747           75,241


Shareholders' equity:
   Preferred stock, 2,000,000 shares authorized; no shares
     at March 31, 2006 and December 31, 2005 issued and
     outstanding .........................................            --               --
   Common stock, no par value, 100,000,000 shares
     authorized; 30,543,763 shares at March 31, 2006 and
     30,553,763 shares at December 31, 2005 issued and
     outstanding .........................................     114,977,465      114,977,465
   Warrant to purchase common stock ......................       2,846,833        2,846,833
   Contributed capital ...................................      10,004,331       10,004,331
   Accumulated deficit ...................................     (89,353,243)     (90,189,615)
   Notes receivable from officer/shareholder .............      (2,255,181)      (2,278,703)
                                                             -------------    -------------
 Total shareholders' equity ..............................      36,220,205       35,360,311
                                                             -------------    -------------

 Total liabilities and shareholders' equity ..............   $ 146,676,585    $ 151,242,217
                                                             =============    =============



              The accompanying notes are an integral part of these
                       consolidated financial statements


                                       2



                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                    THREE MONTHS ENDED MARCH 31,
                                                   ----------------------------
                                                       2006            2005
                                                   ------------    ------------

Net sales ......................................   $ 61,261,243    $ 44,830,291
Cost of sales ..................................     48,742,481      35,884,573
                                                   ------------    ------------

Gross profit ...................................     12,518,762       8,945,718
Selling and distribution expenses ..............      2,929,690       2,561,854
General and administrative expenses ............      6,460,143       5,855,823
Royalty expenses ...............................      1,482,945         294,765
                                                   ------------    ------------

Income from operations .........................      1,645,984         233,276

Interest expense ...............................     (1,188,056)       (813,185)
Interest income ................................        485,343         553,223
Interest in income of equity method investee ...         47,413         163,311
Other income ...................................         33,806          64,557
Other expense ..................................           --            (5,839)
Minority interest ..............................         11,494            --
                                                   ------------    ------------

Income before provision for income taxes .......      1,035,984         195,343
Provision for income taxes .....................        199,612         301,163
                                                   ------------    ------------

Net income (loss) ..............................   $    836,372    $   (105,820)
                                                   ============    ============

Net income (loss) per share - Basic ............   $       0.03    $      (0.00)

Net income (loss) per share -- Diluted .........   $       0.03    $      (0.00)
                                                   ============    ============

Weighted average common and common equivalent
   shares outstanding:
   Basic .......................................     30,551,207      28,814,763

   Diluted .....................................     30,551,207      28,814,763
                                                   ============    ============


              The accompanying notes are an integral part of these
                       consolidated financial statements


                                       3




                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                           THREE MONTHS ENDED MARCH 31,
                                                          ----------------------------
                                                              2006            2005
                                                          ------------    ------------
                                                                    
Operating activities:
Net income (loss) .....................................   $    836,372    $   (105,820)
Adjustments to reconcile net income (loss) to net cash
  (used in) provided by operating activities:
   Deferred taxes .....................................        (21,695)        (52,011)
   Depreciation and amortization ......................        372,738         568,165
   Provision for returns and discounts ................        155,978         254,040
   Gain on sale of fixed assets .......................         (1,283)           (849)
   Interest in income of equity method investee .......        (47,413)       (163,311)
   Minority interest ..................................        (11,494)           --
   Changes in operating assets and liabilities:
     Accounts receivable ..............................     (7,927,663)     (5,777,964)
     Due to/from related parties ......................       (268,367)      1,237,215
     Inventory ........................................      9,792,870         866,125
     Prepaid expenses .................................      1,151,283      (1,120,844)
     Accounts payable .................................     (7,390,453)     (5,867,978)
     Accrued expenses and income tax payable ..........         27,449         586,759
                                                          ------------    ------------

     Net cash used in operating activities ............     (3,331,678)     (9,576,473)

Investing activities:
   Purchase of fixed assets ...........................        (22,447)        (77,018)
   Proceeds from sale of fixed assets .................          2,800           6,387
   Collection on notes receivable, related parties ....        434,444         217,222
   Collection of advances from shareholders/officers ..         23,522       2,334,053
                                                          ------------    ------------

     Net cash provided by investing activities ........        438,319       2,480,644

Financing activities:
   Short-term bank borrowings, net ....................      1,652,736      (5,292,126)
   Proceeds from long-term obligations ................     51,911,927      50,602,423
   Payment of long-term obligations and bank borrowings    (51,812,436)    (39,228,376)
                                                          ------------    ------------

     Net cash provided by financing activities ........      1,752,227       6,081,921
                                                          ------------    ------------

Decrease in cash and cash equivalents .................     (1,141,132)     (1,013,908)
Cash and cash equivalents at beginning of period ......      1,641,768       1,214,944
                                                          ------------    ------------

Cash and cash equivalents at end of period ............   $    500,636    $    201,036
                                                          ============    ============



              The accompanying notes are an integral part of these
                       consolidated financial statements


                                       4



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.       ORGANIZATION AND BASIS OF CONSOLIDATION

         The accompanying  financial  statements consist of the consolidation of
Tarrant  Apparel  Group,  a  California  corporation,  and  its  majority  owned
subsidiaries  located primarily in the U.S., Asia,  Mexico,  and Luxembourg.  At
March 31, 2006, we own 50.1% of United Apparel Ventures ("UAV") and 75% of PBG7,
LLC ("PBG7").  We consolidate these entities and reflect the minority  interests
in earnings (losses) of the ventures in the accompanying  financial  statements.
All inter-company  amounts are eliminated in  consolidation.  The 49.9% minority
interest in UAV is owned by Azteca Production International, a corporation owned
by the brothers of our  Chairman and Interim  Chief  Executive  Officer,  Gerard
Guez.  The 25%  minority  interest in PBG7 is owned by BH7,  LLC,  an  unrelated
party.

         We serve specialty retail, mass merchandise and department store chains
and major international brands by designing, merchandising,  contracting for the
manufacture  of, and selling  casual  apparel for women,  men and children under
private  label.  Commencing  in 1999, we expanded our  operations  from sourcing
apparel to sourcing and operating our own  vertically  integrated  manufacturing
facilities.  In August 2003, we determined to abandon our strategy of being both
a  trading  and  vertically  integrated  manufacturing  company,  and  effective
September  1, 2003,  we leased and  outsourced  operation  of our  manufacturing
facilities in Mexico to affiliates of Mr. Kamel Nacif, a shareholder at the time
of the  transaction.  In  August  2004,  we  entered  into a  purchase  and sale
agreement to sell these facilities to affiliates of Mr. Nacif, which transaction
was  consummated  in the fourth  quarter  of 2004.  See Note 13 of the "Notes to
Consolidated Financial Statements".

         Historically,  our  operating  results  have been  subject to  seasonal
trends when measured on a quarterly  basis.  This trend is dependent on numerous
factors,  including the markets in which we operate,  holiday seasons,  consumer
demand,  climate,  economic  conditions  and numerous  other factors  beyond our
control.  Generally,  the second and third  quarters are stronger than the first
and fourth  quarters.  There can be no  assurance  that the  historic  operating
patterns will continue in future periods.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The accompanying  unaudited financial  statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") for interim financial  information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly,  they do not include
all of the information and footnotes  required by US GAAP for complete financial
statements. In the opinion of management,  all adjustments (consisting of normal
recurring accruals)  considered necessary for a fair presentation of the results
of operations for the periods presented have been included.

         The  consolidated  financial  data at December 31, 2005 is derived from
audited  financial  statements  which are included in our Annual  Report on Form
10-K for the year ended  December  31, 2005,  and should be read in  conjunction
with the audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.

         The accompanying  unaudited  consolidated  financial statements include
all  majority-owned  subsidiaries in which we exercise  control.  Investments in
which we  exercise  significant  influence,  but  which we do not  control,  are
accounted  for under the  equity  method of  accounting.  The  equity  method of
accounting is used when we have a 20% to 50% interest in other entities,  except
for  variable  interest  entities  for  which  we  are  considered  the  primary
beneficiary under Financial Accounting  Standards Board ("FASB")  Interpretation
No. 46,  "Consolidation of Variable Interest Entities," an interpretation of ARB
No. 51. Under the equity method,  original  investments are recorded at cost and
adjusted by our share of undistributed earnings or losses of these entities. All
significant  inter-company  transactions  and balances have been eliminated from
the consolidated financial statements.


                                       5




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

         The  preparation  of financial  statements in  conformity  with US GAAP
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
us  in  preparation  of  the  consolidated  financial  statements  include:  (i)
allowance for returns,  discounts and bad debts, (ii) inventory, (iii) valuation
of long lived and intangible assets and goodwill,  and (iv) income taxes. Actual
results could differ from those estimates.

         ROYALTY EXPENSES

         Royalty  expenses  consist of the royalty  payments and marketing  fund
commitments  according to the various licensing agreements we have entered into.
Royalty expenses are calculated based on certain percentage of net sales. All of
these  agreements  include  minimum  royalties.  See  Note 14 of the  "Notes  to
Consolidated  Financial Statements" regarding various agreements we have entered
into.

         DEFERRED RENT PROVISION

         When a lease requires fixed  escalation of the minimum lease  payments,
rental  expense is  recognized on a straight line basis over the initial term of
the lease,  and the  difference  between the average  rental  amount  charged to
expense and amounts payable under the lease is included in deferred  amount.  As
of March 31, 2006,  deferred rent of $25,000 was recorded under accrued  expense
in our consolidated financial statements.

         STOCK BASED COMPENSATION

         On January  1, 2006,  we adopted  Statements  of  Financial  Accounting
Standards  (SFAS) No. 123 (revised  2004),  Share-Based  Payment,  (SFAS 123(R))
which requires the measurement  and recognition of compensation  expense for all
share-based  payment  awards made to employees and directors  based on estimated
fair values.  SFAS 123(R)  supersedes our previous  accounting  under Accounting
Principles Board (APB) Opinion No. 25,  Accounting for Stock Issued to Employees
(APB 25) for periods beginning in fiscal 2006. In March 2005, the Securities and
Exchange  Commission  issued Staff  Accounting  Bulletin (SAB) No. 107 (SAB 107)
relating  to SFAS  123(R).  We have  applied  the  provisions  of SAB 107 in its
adoption of SFAS 123(R).

         We  adopted  SFAS  123(R)  using the  modified  prospective  transition
method,  which requires the application of the accounting standard as of January
1, 2006, the first day of our fiscal year 2006.  Our financial  statements as of
and for the three months ended March 31, 2006 reflect the impact of SFAS 123(R).
In accordance with the modified  prospective  transition  method,  our financial
statements  for prior  periods  have not been  restated to  reflect,  and do not
include, the impact of SFAS 123(R).

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2005:  weighted-average volatility factors of the
expected  market  price of our common  stock of 0.55 for the three  months ended
March 31, 2005,  weighted-average  risk-free  interest rates of 4% for the three
months ended March 31, 2005, dividend yield of 0% and weighted-average  expected
life of the options of 4 years. These pro forma results may not be indicative of
the future results for the full fiscal year due to potential grants, vesting and
other factors.

         The  following  table  illustrates  the effect on net loss and loss per
share if we had applied  the fair value  recognition  provisions  of SFAS 123 to
stock-based  awards  granted  under our stock  option plans for the three months
ended March 31, 2005:


                                       6




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

                                                                    THREE MONTHS
                                                                       ENDED
                                                                     MARCH 31,
                                                                        2005
                                                                    -----------
Net loss as reported ............................................   $  (105,820)
Add stock-based employee compensation
   charges reported in net loss .................................          --
Pro forma compensation expense, net of tax ......................       (76,509)
                                                                    -----------
Pro forma net loss ..............................................   $  (182,329)
                                                                    ===========

Net loss per share as reported - Basic and Diluted ..............   $     (0.00)
Add stock-based employee compensation charges
reported in net loss - Basic and Diluted ........................          --
Pro forma compensation expense per share -
   Basic and Diluted ............................................         (0.00)
                                                                    -----------
Pro forma loss per share - Basic and Diluted ....................   $     (0.00)
                                                                    ===========


         SFAS  123(R)   requires   companies  to  estimate  the  fair  value  of
share-based payment awards to employees and directors on the date of grant using
an  option-pricing  model.  The  value  of the  portion  of the  award  that  is
ultimately  expected to vest is recognized as expense over the requisite service
periods in our consolidated  statements of operations.  Prior to the adoption of
SFAS 123(R),  we accounted  for  stock-based  awards to employees  and directors
using the intrinsic value method in accordance with APB 25 as allowed under SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). Under the intrinsic
value method,  no stock-based  compensation  expense had been  recognized in our
consolidated  statements  of  operations  for awards to employees  and directors
because the exercise price of our stock options equaled the fair market value of
the underlying stock at the date of grant.

         We did not have any option granted during the first quarter of 2006. On
September 23, 2005, the Board of Directors  approved the acceleration of vesting
of all our unvested stock options.  In total,  1.7 million stock options with an
average exercise price of $3.69 and an average remaining contractual life of 7.9
years  were  subject to this  acceleration.  The  exercise  prices and number of
shares subject to the accelerated  options were unchanged.  The acceleration was
effective  as of  September  23,  2005.  As a result,  there was not any options
granted  prior  to,  but not yet  vested as of  January  1,  2006.  There was no
stock-based compensation expense related to employees or directors stock options
recognized during the three months ended March 31, 2006 and 2005.

           Certain 2005 amounts  have been  reclassified  to conform to the 2006
presentation.

3.       STOCK BASED COMPENSATION

         Our Employee  Incentive  Plan,  formerly the 1995 Stock Option Plan, as
amended and restated in May 1999 (the Plan),  has  authorized  the grant of both
incentive and non-qualified stock options to officers, employees,  directors and
consultants  of the Company for up to 5,100,000  shares (as adjusted for a stock
split  effective May 1998) of our common stock.  The exercise price of incentive
options  must be equal to 100% of fair market  value of common stock on the date
of grant and the exercise price of  non-qualified  options must not be less than
the par value of a share of common stock on the date of grant. The Plan was also
amended to expand the types of awards,  which may be granted pursuant thereto to
include stock appreciation rights,  restricted stock and other performance-based
benefits. At March 31, 2006, no further options may be granted under the Plan.

         In October 1998, we granted 1,000,000  non-qualified  stock options not
under the Plan.  The options were  granted to our Chairman and Vice  Chairman at
$13.50 per share,  the closing sales price of the common stock on the day of the
grant.  The  options  expire in 2008 and vest over four years.  In May 2002,  we
granted  3,000,000  non-qualified  stock options not under the Plan. The options
were  granted to our  Chairman,  Vice  Chairman and Mr. Kamel Nacif at $5.50 per
share,  the closing sales price of the common stock on the day of the grant. The
options  expire in 2012 and vest over three years.  The 1,000,000  stock options
granted to Kamel Nacif were forfeited in 2005. In May 2003, we granted 2,000,000
non-qualified  stock  options  not  under  the  Plan to our  Chairman  and  Vice
Chairman.  The options were granted at $3.65 per share,  the closing sales price
of the common stock on the day of the grant. The options expire in 2013 and vest
over four years.  In  December  2003,  we granted  400,000  non-qualified  stock
options not under the Plan to our  President.  The options were



                                       7




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

granted at $3.94 per share,  the closing  sales price of the common stock on the
day of the grant. The options expire in 2013 and vest over four years.

A summary of our stock option  activity,  and related  information  for the year
ended December 31, 2005 and the three months ended March 31, 2006 is as follows:

                                                             EMPLOYEES
                                                    ----------------------------
                                                     NUMBER OF        EXERCISE
                                                       SHARES          PRICE
                                                    ------------    ------------

Options outstanding at December 31, 2004 ........      8,331,962    $1.39-$45.50
Granted .........................................         42,000     $1.95-$3.68
Exercised .......................................           --              --
Forfeited .......................................     (1,573,300)   $1.95-$25.00
Expired .........................................        (67,612)   $       4.50
                                                    ------------    ------------
Options outstanding at December 31, 2005 ........      6,733,050    $1.39-$45.50
Granted .........................................           --              --
Exercised .......................................           --              --
Forfeited .......................................           (200)   $       3.60
Expired .........................................           --              --
                                                    ------------    ------------
Options outstanding at March 31, 2006 ...........      6,732,850    $1.39-$45.50

We had no stock option  outstanding to non-employees as of December 31, 2005 and
March 31, 2006.

The following table summarizes information about stock options outstanding as of
December 31, 2005 and March 31, 2006:


                                                           WEIGHTED
                                               WEIGHTED    AVERAGE
                                               AVERAGE    REMAINING
                                   NUMBER OF   EXERCISE   CONTRACTUAL  INTRINSIC
                                     SHARES     PRICE    LIFE (YEARS)    VALUE
                                   ---------   ---------   ---------   ---------

As of December 31, 2005:
Employees - Outstanding ........   6,733,050   $    6.25      6.0      $  12,440
Employees - Exercisable ........   6,733,050   $    6.25      6.0      $  12,440

As of March 31, 2006:
Employees - Outstanding ........   6,732,850   $    6.25      5.7      $       0
Employees - Exercisable ........   6,732,850   $    6.25      5.7      $       0



4.       ACCOUNTS RECEIVABLE

         Accounts receivable consists of the following:

                                                     MARCH 31,      DECEMBER 31,
                                                       2006            2005
                                                   ------------    ------------

U.S. trade accounts receivable .................   $ 11,008,456    $  2,893,217
Foreign trade accounts receivable ..............     18,142,370      19,619,172
Factored accounts receivable ...................     33,877,827      33,222,354
Other receivables ..............................      2,449,203       1,815,450
Allowance for returns, discounts and bad debts .     (3,107,728)     (2,951,750)
                                                   ------------    ------------
                                                   $ 62,370,128    $ 54,598,443
                                                   ============    ============


                                       8




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

5.       INVENTORY

         Inventory consists of the following:

                                                       MARCH 31,    DECEMBER 31,
                                                         2006           2005
                                                      -----------    -----------
Raw materials - fabric and trim accessories ......    $ 3,824,852    $ 5,079,428
Finished goods shipments-in-transit ..............      7,262,727      8,800,014
Finished goods ...................................     10,748,511     17,749,518
                                                      -----------    -----------
                                                      $21,836,090    $31,628,960
                                                      ===========    ===========


6.       EQUITY METHOD INVESTMENT - AMERICAN RAG

         In the second quarter of 2003, we acquired a 45% equity interest in the
owner of the  trademark  "American  Rag CIE" and the  operator of  American  Rag
retail  stores for $1.4  million,  and our  subsidiary,  Private  Brands,  Inc.,
acquired  a license  to  certain  exclusive  rights to this  trademark.  We have
guaranteed  the payment to the licensor of minimum  royalties  of $10.4  million
over the initial  10-year term of the agreement.  The guaranteed  annual minimum
royalty  is  payable  in  equal  monthly  installments  during  the  term of the
agreement. The royalty owed to the licensor in excess of the guaranteed minimum,
if any,  are payable no later than 30 days after the end of the  preceding  full
quarter with the amount for last quarter adjusted based on actual royalties owed
for the year.  The minimum  royalty  paid and expensed for the three month ended
March  31,  2006 was  $165,000.  At March 31,  2006,  the  total  commitment  on
royalties  remaining on the term was $8.9 million.  Private  Brands also entered
into a multi-year  exclusive  distribution  agreement with Macy's  Merchandising
Group, LLC ("MMG"),  the sourcing arm of Federated  Department Stores, to supply
MMG with American Rag CIE, a casual sportswear  collection for juniors and young
men. Under this  arrangement,  Private Brands designs and manufactures  American
Rag apparel,  which is distributed by MMG exclusively to Federated stores across
the country. Beginning in August 2003, the American Rag collection was available
in  approximately  100 select  Macy's,  the Bon Marche,  Burdines,  Goldsmith's,
Lazarus and  Rich's-Macy's  locations.  The  investment in American Rag CIE, LLC
totaling  $2.2  million at March 31,  2006,  is  accounted  for under the equity
method and included in equity method investment on the accompanying consolidated
balance  sheets.  Income from the equity  method  investment  is recorded in the
United  States  geographical  segment.  The change in investment in American Rag
during the three month ended March 31, 2006 was as follows:

         Balance as of December 31, 2005 ...........       $ 2,138,865
         Share of income ...........................            47,413
         Distribution ..............................                (0)
                                                           -----------

          Balance as of March 31, 2006 .............       $ 2,186,278
                                                           ===========


7.       DEBT

         Short-term bank borrowings consist of the following:

                                                     MARCH 31,      DECEMBER 31,
                                                       2006            2005
                                                    -----------      -----------
Import trade bills payable - UPS,
   DBS Bank and Aurora Capital ...............      $ 4,857,531      $ 4,165,306
Bank direct acceptances - UPS and
   DBS Bank ..................................        1,368,219        1,471,476
Other Hong Kong credit facilities -
   UPS and DBS Bank ..........................        6,254,239        8,196,750
                                                    -----------      -----------
                                                    $12,479,989      $13,833,532
                                                    ===========      ===========


                                       9




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

         Long-term obligations consist of the following:

                                                MARCH 31,           DECEMBER 31,
                                                  2006                  2005
                                              ------------          ------------
Loan from Max Azria ................         $  3,006,279          $       --
Equipment financing ................               34,725                83,206
Term loan - UPS ....................            2,083,333             2,708,333
Debt facility - GMAC CF ............           34,431,066            33,558,095
                                             ------------          ------------
                                               39,555,403            36,349,634
Less current portion ...............          (39,540,629)          (36,109,699)
                                             ------------          ------------
                                             $     14,774          $    239,935
                                             ============          ============

IMPORT TRADE BILLS PAYABLE,  BANK DIRECT  ACCEPTANCES AND OTHER HONG KONG CREDIT
FACILITIES

         On June 13, 2002,  we entered  into a letter of credit  facility of $25
million with UPS Capital Global Trade Finance  Corporation  ("UPS").  Under this
facility,  we may arrange for the issuance of letters of credit and acceptances.
The  facility  is  collateralized  by the  shares and  debentures  of all of our
subsidiaries  in Hong Kong.  In addition to the  guarantees  provided by Tarrant
Apparel  Group and our  subsidiaries,  Fashion  Resource  (TCL) Inc. and Tarrant
Luxembourg Sarl, Gerard Guez, our Chairman and Interim Chief Executive  Officer,
also signed a guarantee  of $5 million in favor of UPS to secure this  facility.
This facility  bore  interest at 10.75% per annum at March 31, 2006.  Under this
facility,  we were subject to certain restrictive  covenants,  including that we
maintain a specified tangible net worth, fixed charge ratio, and leverage ratio.
On June 27, 2005,  we amended the letter of credit  facility  with UPS to extend
the expiration date of the facility from June 30, 2005 to August 31, 2005 and to
reduce the tangible net worth  requirement at June 30, 2005. On August 31, 2005,
we  amended  the  letter of  credit  facility  with UPS to  further  extend  the
expiration  date of the  facility to October 31,  2005,  immediately  reduce the
maximum  amount of  borrowings to $14.5 million on September 1, 2005 and further
reduced the maximum  amount of borrowing to $14.0 million on October 1, 2005. On
October 31, 2005, we further  amended the letter of credit  facility with UPS to
extend the  expiration  date of the  facility  to January 31, 2006 and amend the
interest rate to "prime rate" plus 3%. The facility  amendment also provided for
reduction in the maximum  amount of borrowings  to $13.5  million  commencing on
November 1, 2005, to $13.0 million  commencing on December 1, 2005, and to $12.5
million commencing on January 1, 2006.  Additionally,  Gerard Guez, our Chairman
and Interim Chief  Executive  Officer,  pledged to UPS 4.6 million shares of our
common  stock  held by Mr.  Guez to secure  the  obligations  under  the  credit
facility.  On January 27, 2006, we further amended the letter of credit facility
with UPS to extend the expiration  date of the facility from January 31, 2006 to
July 31, 2006.  The amendment  provides for  reduction of the maximum  amount of
borrowings  under the  facility to $12.0  million  commencing  on April 1, 2006,
$11.5  million  commencing on May 1, 2006,  $11.0 million  commencing on June 1,
2006 and to $10.5 million  commencing on July 1, 2006.  Under the amended letter
of credit  facility,  we are  subject  to  restrictive  financial  covenants  of
maintaining  tangible  net worth of $25 million as of December  31, 2005 and the
last day of each fiscal quarter  thereafter.  There is also a provision  capping
maximum capital  expenditures per quarter of $800,000.  As of March 31, 2006, we
were in compliance  with the covenants.  As of March 31, 2006,  $8.0 million was
outstanding  under this facility  with UPS  (classified  above as follows:  $1.8
million in import trade bills payable;  $1.4 million in bank direct  acceptances
and $4.8 million in other Hong Kong credit  facilities)  and an additional  $2.5
million was available for future borrowings.  In addition,  $2.0 million of open
letters of credit was outstanding as of March 31, 2006.

         Since March 2003, DBS Bank (Hong Kong) Limited  (formerly  known as Dao
Heng  Bank)  has made  available  a letter of  credit  facility  of up to HKD 20
million  (equivalent to US $2.6 million) to our  subsidiaries in Hong Kong. This
is a demand facility and is secured by the pledge of our office property,  which
is owned by Gerard Guez, our Chairman and Interim Chief Executive  Officer,  and
Todd Kay, our Vice Chairman, and by our guarantee. The letter of credit facility
was increased to HKD 30 million (equivalent to US $3.9 million) in June 2004. As
of March 31,  2006,  $2.5  million  was  outstanding  under  this  facility.  In
addition,  $1.1 million of open letters of credit was  outstanding  and $294,000
was available for future borrowings as of March 31, 2006. In October 2005, a tax
loan for HKD 6.233 million  (equivalent  to US $804,000) was also made available
to our Hong Kong  subsidiaries.  As of March 31, 2006,  $478,000 was outstanding
under this tax loan.

         As of March 31, 2006, the total balance  outstanding under the DBS Bank
credit facilities was $3.0 million (classified above as follows: $1.6 million in
import trade bills payable,  $0 in bank direct  acceptances  and $1.4 million in
other Hong Kong credit facilities).


                                       10




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

         From time to time, we open letters of credit under an uncommitted  line
of credit from Aurora Capital  Associates  which issues these letters of credits
out of Israeli Discount Bank. As of March 31, 2006, $1.5 million was outstanding
under this facility (classified above under import trade bills payable) and $3.2
million  of  letters  of  credit  were open  under  this  arrangement.  We pay a
commission fee of 2.25% on all letters of credits issued under this arrangement.

LOAN FROM MAX AZRIA

         On January 19, 2006, we borrowed  $4.0 million from Max Azria  pursuant
to the terms of a promissory  note,  which amount bears  interest at the rate of
5.5% per annum and is payable in weekly  installments  of $200,000  beginning on
March 1, 2006. This is an unsecured loan. As of March 31, 2006, $3.0 million was
outstanding under this loan.

EQUIPMENT FINANCING

         We had three equipment  loans  outstanding at December 31, 2005. One of
these equipment loans bore interest at 6% payable in installments  through 2009,
which we paid off in January  2006.  The second  loan  bears  interest  at 15.8%
payable in  installment  through 2007 and the third loan bears interest at 6.15%
payable  in  installment  through  2007.  As of  March  31,  2006,  $35,000  was
outstanding under the two remaining loans.

TERM LOAN - UPS

         On December 31, 2004,  our Hong Kong  subsidiaries  entered into a loan
agreement  with UPS  pursuant  to which UPS made a $5  million  term  loan,  the
proceeds  of which  were used to repay $5 million  of  indebtedness  owed to UPS
under the letter of credit of facility. The principal amount of this loan is due
and payable in 24 equal monthly  installments  of  approximately  $208,333 each,
plus  interest  equivalent to the "prime rate" plus 2% commencing on February 1,
2005.  This facility bore interest at 9.75% per annum at March 31, 2006. On June
27,  2005,  we amended the loan  agreement  with UPS to reduce the  tangible net
worth  requirement at June 30, 2005.  Under the amended loan  agreement,  we are
subject to restrictive  financial covenants of maintaining tangible net worth of
$25  million  at  December  31,  2005 and the last  day of each  fiscal  quarter
thereafter.  There is also a provision  capping maximum capital  expenditure per
quarter  at  $800,000.  As of March 31,  2006,  we were in  compliance  with the
covenants.  As of March 31, 2006, $2.1 million was outstanding.  The obligations
under the loan agreement are  collateralized by the same security  interests and
guarantees provided under our letter of credit facility with UPS.  Additionally,
the term loan is secured by two promissory  notes payable to Tarrant  Luxembourg
Sarl in the amounts of $2,550,000  and  $1,360,000  and a pledge by Gerard Guez,
our Chairman and Interim Chief Executive  Officer,  of 4.6 million shares of our
common stock.

DEBT FACILITY AND FACTORING AGREEMENT - GMAC CF

         We were previously party to a revolving credit,  factoring and security
agreement (the "Debt Facility") with GMAC Commercial  Finance,  LLC ("GMAC CF").
This Debt  Facility  provided a revolving  facility of $90 million,  including a
letter of credit facility not to exceed $20 million, and was scheduled to mature
on January 31, 2005. The Debt Facility also provided a term loan of $25 million,
which was being repaid in monthly  installments  of $687,500.  The Debt Facility
provided  for  interest  at LIBOR plus the LIBOR rate margin  determined  by the
Total  Leverage  Ratio (as  defined in the Debt  Facility  agreements),  and was
collateralized  by our  receivables,  intangibles,  inventory  and various other
specified  non-equipment  assets.  In May 2004, the maximum  facility amount was
reduced to $45 million in total and we established new financial  covenants with
GMAC CF for the fiscal year of 2004.

         On October 1, 2004, we amended and restated the Debt Facility with GMAC
CF by  entering  into a new  factoring  agreement  with GMAC CF. The amended and
restated agreement (the factoring agreement) extended the expiration date of the
facility to  September  30, 2007 and added as parties our  subsidiaries  Private
Brands,  Inc and No! Jeans,  Inc. In addition,  in connection with the factoring
agreement,  our  indirect  majority-owned  subsidiary  PBG7,  LLC entered into a
separate  factoring  agreement  with  GMAC  CF.  Pursuant  to the  terms  of the
factoring  agreement,  we and our subsidiaries  agree to assign and sell to GMAC
CF,  as  factor,  all  accounts  which  arise  from our sale of  merchandise  or
rendition of service created on a going forward basis. At our request,  GMAC CF,
in its discretion,  may make advances to us up to the lesser of (a) up to 90% of
our accounts on which GMAC CF has the risk of loss and (b) $40 million, minus in
each case,  any amount owed by us to GMAC CF.  Pursuant to the terms of the PBG7
factoring  agreement,  PBG7 agreed to assign and sell to GMAC CF, as factor, all
accounts, which arise from PBG7's sale of merchandise or


                                       11




                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

rendition of services created on a going-forward basis. At PBG7's request,  GMAC
CF, in its  discretion,  may make advances to PBG7 up to the lesser of (a) up to
90% of PBG7's accounts on which GMAC CF has the risk of loss, and (b) $5 million
minus in each case,  any  amounts  owed to GMAC CF by PBG7.  The  facility  bore
interest at 7.8256% per annum and the facility  under PBG7, LLC bore interest at
8.25% per annum,  respectively,  at March 31, 2006.  Restrictive covenants under
the revised facility  include a limit on quarterly  capital expenses of $800,000
and  tangible  net worth of $25 million at  December  31, 2005 and at the end of
each fiscal quarter thereafter. As of March 31, 2006, we were in compliance with
the  covenants.  A total  of $29.9  million  was  outstanding  with  respect  to
receivables factored under the GMAC CF facility at March 31, 2006.

         In May 2005, we amended our factoring  agreement with GMAC CF to permit
our subsidiaries  party thereto and us, to borrow up to the lesser of $3 million
or 50% of the value of eligible inventory. In connection with this amendment, we
granted GMAC CF a lien on certain of our inventory located in the United States.
On January 23, 2006, we further amended our factoring  agreement with GMAC CF to
increase the amount we may borrow against  inventory to the lesser of $5 million
or 50% of the value of eligible inventory.  The $5 million limit will be reduced
to $4 million on April 1, 2006 and will be further reduced to $3 million on July
1, 2006. The maximum borrowing availability under the factoring agreement, based
on the borrowing  base formula  remains at $40 million.  A total of $4.5 million
was  outstanding  under the GMAC CF facility  at March 31, 2006 with  respect to
collateralized inventory.

         The credit facility with GMAC CF and the credit facility with UPS carry
cross-default  clauses.  A breach of a financial  covenant set by GMAC CF or UPS
constitutes an event of default under the other credit facility,  entitling both
financial  institutions  to demand  payment in full of all  outstanding  amounts
under their respective debt and credit facilities.

8.       CONVERTIBLE DEBENTURES AND WARRANTS

         On December 14, 2004, we completed a $10 million  financing through the
issuance  of (i) 6%  Secured  Convertible  Debentures  ("Debentures")  and  (ii)
warrants  to  purchase  up to  1,250,000  shares of our common  stock.  Prior to
maturity,  the  investors may convert the  Debentures  into shares of our common
stock at a price of $2.00 per share.  The warrants have a term of five years and
an exercise price of $2.50 per share. The warrants were valued at $866,000 using
the  Black-Scholes  option  valuation  model  with  the  following  assumptions:
risk-free  interest rate of 4%; dividend yields of 0%; volatility factors of the
expected  market price of our common stock of 0.55; and an expected life of four
years. The Debentures bear interest at a rate of 6% per annum and have a term of
three  years.  We may elect to pay interest on the  Debentures  in shares of our
common stock if certain conditions are met, including a minimum market price and
trading volume for our common stock. The Debentures  contain customary events of
default and permit the holder  thereof to  accelerate  the  maturity if the full
principal  amount  together  with  interest  and other  amounts  owing  upon the
occurrence  of  such  events  of  default.  The  Debentures  are  secured  by  a
subordinated lien on certain of our accounts  receivable and related assets. The
closing  market price of our common  stock on the closing date of the  financing
was $1.96. The convertible debenture was thus valued at $8,996,000, resulting in
an effective  conversion  price of $1.799 per share.  The intrinsic value of the
conversion  option of $804,000 is being amortized over the life of the loan. The
value of the  warrants of $866,000  and the  intrinsic  value of the  conversion
option of $804,000 were netted from the $10 million presented as the convertible
debentures, net on our accompanying balance sheets at December 31, 2004.

         The placement  agent in the financing,  received  compensation  for its
services in the amount of $620,000 in cash and issuance of five year warrants to
purchase up to 200,000  shares of our common stock at an exercise price of $2.50
per share.  The  warrants to purchase  200,000  shares of our common  stock were
valued at  $138,000  using the  Black-Scholes  option  valuation  model with the
following  assumptions:  risk-free  interest rate of 4%;  dividend yields of 0%;
volatility factors of the expected market price of our common stock of 0.55; and
an  expected  life  of four  years.  The  $620,000  financing  cost  paid to the
placement agent and the value of the warrants to purchase  200,000 shares of our
common stock of $138,000 are included in the deferred financing cost, net on our
accompanying balance sheets and are amortized over the life of the loan.

         In June 2005, holders of our Debentures  converted an aggregate of $2.3
million of Debentures into 1,133,687 shares of our common stock. In August 2005,
holders of our Debentures  converted an aggregate of $820,000 of Debentures into
410,000 shares of our common stock.  The Debentures were converted at the option
of the holders at a price of $2.00 per share.  Debt discount of $248,000 related
to the intrinsic  value of the  conversion  option of $804,000 was expensed upon
the  conversion.  Of the $620,000  financing  cost paid to the placement  agent,
$191,000 was expensed upon the conversion. The intrinsic value of the


                                       12



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

conversion  option,  and the value of the warrant  amortized  in the first three
months of 2006 was $118,000.  Total  deferred  financing  cost  amortized in the
first three months of 2006 was $47,000.  Total  interest  paid to the holders of
the  Debentures in the first three months of 2006 was $104,000.  As of March 31,
2006, $6.1 million, net of $829,000 of debt discount, remained outstanding under
the Debentures.

9.       EQUITY TRANSACTIONS

         In March 2005, in connection with a settlement of a dispute involving a
former  employee named Nicolas  Nunez,  we agreed to compensate Mr. Nunez in the
total amount of $875,000.  In April 2005, we issued 195,313 shares of our common
stock  (having a value of  $375,000)  to Mr.  Nunez  pursuant to the terms of an
agreement and plan of  reorganization  and paid Mr. Nunez $500,000 in settlement
of all  remaining  claims  by Mr.  Nunez  against  us. In  connection  with this
settlement,  in March  2006,  we  cancelled  10,000  shares of our common  stock
previously issued to him.

10.      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing
of Financial  Assets"  ("SFAS No. 156"),  which provides an approach to simplify
efforts to obtain  hedge-like  (offset)  accounting.  This Statement amends FASB
Statement No. 140,  "Accounting for Transfers and Servicing of Financial  Assets
and  Extinguishments  of  Liabilities",  with  respect  to  the  accounting  for
separately recognized servicing assets and servicing liabilities.  The Statement
(1)  requires an entity to recognize a servicing  asset or  servicing  liability
each time it undertakes  an obligation to service a financial  asset by entering
into a servicing contract in certain situations;  (2) requires that a separately
recognized  servicing asset or servicing liability be initially measured at fair
value, if practicable;  (3) permits an entity to choose either the  amortization
method or the fair value  method for  subsequent  measurement  for each class of
separately recognized servicing assets or servicing liabilities;  (4) permits at
initial adoption a one-time reclassification of available-for-sale securities to
trading securities by an entity with recognized  servicing rights,  provided the
securities  reclassified  offset the  entity's  exposure  to changes in the fair
value  of the  servicing  assets  or  liabilities;  and  (5)  requires  separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for  all  separately  recognized  servicing  assets  and  liabilities  as of the
beginning of an entity's  fiscal year that begins after September 15, 2006, with
earlier  adoption  permitted  in  certain  circumstances.   The  Statement  also
describes the manner in which it should be initially  applied.  We are currently
evaluating the impact of this Statement.

11.      INCOME TAXES

         Our effective tax rate differs from the statutory rate  principally due
to the following reasons:  (1) a full valuation  allowance has been provided for
deferred tax assets as a result of the operating losses in the United States and
Mexico,  since  recoverability  of those  assets has not been  assessed  as more
likely than not; (2) although we have taxable  losses in Mexico,  we are subject
to a minimum tax; and (3) the earnings of our Hong Kong  subsidiary are taxed at
a rate of 17.5%  versus the 35% U.S.  federal  rate.  The  impairment  charge in
Mexico did not  result in a tax  benefit  due to an  increase  in the  valuation
allowance against the future tax benefit.  We believe it is more likely than not
that the tax benefit will not be realized based on our future  business plans in
Mexico.

         In January 2004, the Internal  Revenue  Service  ("IRS")  completed its
examination  of our Federal  income tax returns for the years ended December 31,
1996 through 2001.  The IRS has proposed  adjustments to increase our income tax
payable for the six years under examination.  In addition, in July 2004, the IRS
initiated  an  examination  of our Federal  income tax return for the year ended
December 31, 2002. In March 2005,  the IRS proposed an adjustment to our taxable
income of approximately $6 million related to similar issues identified in their
audit  of the 1996  through  2001  federal  income  tax  returns.  The  proposed
adjustments to our 2002 federal income tax return would not result in additional
tax due for that year due to the tax loss  reported in the 2002 federal  return.
However,  it could reduce the amount of net operating losses available to offset
taxes due from the preceding  tax years.  This  adjustment  would also result in
additional  state  taxes  and  interest.  We  believe  that we have  meritorious
defenses to and intend to vigorously  contest the proposed  adjustments.  If the
proposed  adjustments are upheld through the  administrative  and legal process,
they could have a material  impact on our earnings and cash flow.  We believe we
have provided adequate reserves for any reasonably  foreseeable  outcome related
to these matters on the consolidated balance sheets included in the consolidated
financial  statements  under the caption "Income  Taxes".  The maximum amount of
loss in  excess  of the  amount  accrued  in the  financial  statements  is $7.7


                                       13



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

million.  We do not believe that the  adjustments,  if any, arising from the IRS
examination,  will result in an additional  income tax liability  beyond what is
recorded in the accompanying consolidated balance sheets.

12.      NET INCOME (LOSS) PER SHARE

         A  reconciliation  of the numerator and  denominator  of basic earnings
(loss) per share and diluted earnings (loss) per share is as follows:


                                                    THREE MONTHS ENDED MARCH 31,
                                                   ----------------------------
Basic EPS Computation:                                 2006            2005
                                                   ------------    ------------
Numerator .....................................    $    836,372    $   (105,820)
Denominator:
Weighted average common shares outstanding ....      30,551,207      28,814,763

Basic EPS .....................................    $       0.03    $      (0.00)
                                                   ============    ============

Diluted EPS Computation:
Numerator .....................................    $    836,372    $   (105,820)
Denominator:
Weighted average common shares outstanding ....      30,551,207      28,814,763
Incremental shares from assumed exercise of
warrants ......................................            --              --
convertible debentures ........................            --              --
options .......................................            --              --
                                                   ------------    ------------
Total shares ..................................      30,551,207      28,814,763

Diluted EPS ...................................    $       0.03    $      (0.00)
                                                   ============    ============

         Basic and diluted loss per share has been computed in  accordance  with
SFAS No. 128, "Earnings Per Share".

         No shares of  outstanding  options and  warrants  were  included in the
computation  of income per share in the three  months  ended  March 31, 2006 and
2005 as the  exercise  prices of the  remaining  shares  were  greater  than the
average  market price for the three  months  ended March 31, 2006 and 2005.  All
options,  warrants and convertible debentures were excluded from the computation
of net income  (loss) per share in the three  months  ended  March 31,  2006 and
2005, as the impact would be anti-dilutive. The effect of applying "IF Converted
Method"  to the  convertible  debenture  was  anti-dilutive;  therefore,  it was
excluded  from the  computation  of income per share in the three  months  ended
March 31, 2006 and 2005.  The  following  table  presents  outstanding  options,
warrants and convertible debentures.

                                                    AS OF MARCH 31,
                                              -------------------------
                                                 2006           2005
                                              ----------     ----------

         Options ........................      6,732,850      6,994,787
         Warrants .......................      2,361,732      2,361,732
         Convertible debentures .........      3,456,313      5,000,000
                                              ----------     ----------
         Total ..........................     12,550,895     14,356,519
                                              ==========     ==========

13.      RELATED PARTY TRANSACTIONS

         As of March 31, 2006,  related party  affiliates were indebted to us in
the amounts of $8.6  million.  These include  amounts due from Gerard Guez,  our
Chairman and Interim Chief Executive Officer.  From time to time in the past, we
borrowed funds from,  and advanced funds to, Mr. Guez. The greatest  outstanding
balance  of  such  advances  to Mr.  Guez  in the  first  quarter  of  2006  was
approximately  $2,279,000.  At March 31, 2006,  the entire  balance due from Mr.
Guez totaling


                                       14



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

$2.3  million  is  payable  on  demand  and has  been  shown  as  reductions  to
shareholders' equity in the accompanying financial statements.  All advances to,
and  borrowings  from,  Mr. Guez bore  interest at the rate of 7.75%  during the
period.  Total  interest  paid by Mr. Guez was $44,000 and $74,000 for the three
months ended March 31, 2006 and 2005,  respectively.  Mr. Guez paid  expenses on
our behalf of  approximately  $67,000 and  $108,000  for the three  months ended
March 31, 2006 and 2005,  respectively,  which  amounts  were  applied to reduce
accrued  interest and principal on Mr. Guez's loan.  These amounts included fuel
and related expenses incurred by 477 Aviation, LLC, a company owned by Mr. Guez,
when our executives used this company's  aircraft for business  purposes.  Since
the enactment of the  Sarbanes-Oxley  Act in 2002, no further personal loans (or
amendments  to  existing  loans)  have  been or  will  be made to our  executive
officers or directors.

         On July 1, 2001, we formed an entity to jointly  market,  share certain
risks and achieve economics of scale with Azteca Production International,  Inc.
("Azteca"), a corporation owned by the brothers of Gerard Guez, our Chairman and
Interim Chief Executive  Officer,  called United Apparel Ventures,  LLC ("UAV").
This entity was created to  coordinate  the  production  of apparel for a single
customer  of our branded  business.  UAV is owned  50.1% by Tag Mex,  Inc.,  our
wholly owned  subsidiary,  and 49.9% by Azteca.  Results of the operation of UAV
have been  consolidated  into our  results  since  July  2001 with the  minority
partner's share of gain and losses eliminated through the minority interest line
in our financial statements.  Due to the restructuring of our Mexico operations,
we discontinued  manufacturing  for UAV customers in the second quarter of 2004.
UAV made  purchases from two related  parties in Mexico,  an affiliate of Azteca
and Tag-It Pacific, Inc.

         At March 31, 2006, Messrs.  Guez and Kay beneficially owned 590,000 and
1,003,500  shares,  respectively,  of  common  stock  of  Tag-It  Pacific,  Inc.
("Tag-It"),  collectively  representing  approximately  8.7% of Tag-It Pacific's
common stock.  Tag-It is a provider of brand identity  programs to manufacturers
and retailers of apparel and accessories. Starting from 1998, Tag-It assumed the
responsibility  for  managing  and  sourcing  all  trim  and  packaging  used in
connection with products  manufactured  by or on behalf of us in Mexico.  Due to
the  restructuring of our Mexico  operations,  Tag-It no longer manages our trim
and packaging  requirements.  We purchased $97,000 and $0 of trim inventory from
Tag-It in the three  months  ended  March 31,  2006 and 2005,  respectively.  We
purchased  $0 and  $135,000  of finished  goods and service  from Azteca and its
affiliates in the three months ended March 31, 2006 and 2005, respectively.  Our
total sales of fabric and service to Azteca in the three  months ended March 31,
2006 and 2005 were $9,000 and $63,000,  respectively.  Pursuant to the operating
agreement  for UAV,  two and one half percent of gross sales of UAV were paid to
each of the members of UAV as management fees. Net amount due from these related
parties as of March 31, 2006 was $5.6 million.

         In August 2004,  we entered  into an  Agreement  for Purchase of Assets
with  affiliates  of  Mr.  Kamel  Nacif,  a  shareholder  at  the  time  of  the
transaction,  which  agreement  was  amended in October  2004.  Pursuant  to the
agreement,  as  amended,  on  November  30,  2004,  we  sold  to the  purchasers
substantially  all of our assets and real  property  in  Mexico,  including  the
equipment  and  facilities  we previously  leased to Mr.  Nacif's  affiliates in
October 2003, for an aggregate purchase price consisting of: a) $105,400 in cash
and  $3,910,000 by delivery of unsecured  promissory  notes bearing  interest at
5.5% per annum;  and b)  $40,204,000,  by delivery of secured  promissory  notes
bearing interest at 4.5% per annum, maturing on December 31, 2005 and every year
thereafter until December 31, 2014. The secured  promissory notes are payable in
partial or total amounts anytime prior to the maturity of each note. Included in
the $41.0 million notes receivable - related party on the  accompanying  balance
sheet as of March 31, 2006 was $1.3  million of Mexico  value added taxes on the
real property  component of this transaction.  Upon consummation of the sale, we
entered into a purchase  commitment  agreement with the purchasers,  pursuant to
which  we have  agreed  to  purchase  annually  over  the  ten-year  term of the
agreement,  $5 million of fabric  manufactured at our former facilities acquired
by the purchasers at negotiated  market prices.  We purchased $0 and $840,000 of
fabric from  Acabados y Terminados  in the three months ended March 31, 2006 and
2005,  respectively.  Net amount due from these parties as of March 31, 2006 was
$507,000.

         We lease our executive  offices in Los Angeles,  California from GET, a
corporation  which is owned by  Gerard  Guez (our  Chairman  and  Interim  Chief
Executive Officer) and Todd Kay (our Vice Chairman).  Additionally, we lease our
warehouse and office space in Hong Kong from Lynx International  Limited, a Hong
Kong  corporation  that is owned by Messrs.  Guez and Kay. We paid  $269,000 and
$255,000  in  rent  in  the  three   months  ended  March  31,  2006  and  2005,
respectively,  for office and warehouse facilities.  Our Los Angeles offices and
warehouse  is leased on a month to month basis.  On January 1, 2006,  we renewed
our lease agreement with Lynx International Limited for our office space in Hong
Kong for one year.


                                       15



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

         At  March  31,  2006,  we had  various  employee  receivables  totaling
$273,000 included in due from related parties.

         We  believe  that  each of the  transactions  described  above has been
entered into on terms no less favorable to us than could have been obtained from
unaffiliated third parties.

14.      COMMITMENTS AND CONTINGENCIES

         On January 3, 2005, Private Brands,  Inc., our wholly owned subsidiary,
entered into a term sheet exclusive licensing agreement with Beyond Productions,
LLC and Kids  Headquarters  to  collaborate  on the  design,  manufacturing  and
distribution of women's contemporary, large sizes and junior apparel bearing the
brand name "House of  Dereon",  Couture,  Kick and Soul.  This  agreement  was a
three-year contract, and providing compliance with all terms of the license, was
renewable  for one  additional  three-year  term.  The  agreement  also provided
payment  of  royalties  at the rate of 8% on net  sales  and 3% on net sales for
marketing  fund  commitments.  In the first  quarter of 2005,  we advanced  $1.2
million as payment  for the first  year's  minimum  royalty and  marketing  fund
commitment.  We had applied  $34,000 from the above advance  against the royalty
and  marketing  expenses in 2005.  In March  2006,  we agreed to  terminate  our
agreement  to design,  market and sell House of Dereon by Tina  Knowles  branded
apparel and we agreed to sell all  remaining  inventory  to the  licensor or its
designee.  As a  result,  we will no  longer  be  involved  in the sales of this
private  brand.  Prior to December 31, 2005, we had written off the  capitalized
balance of $1.2  million  related to the first  year term of the  agreement  and
recognized a corresponding loss in 2005.

         On October 17, 2004,  Private  Brands,  Inc.  entered into an agreement
with J. S.  Brand  Management  to design,  manufacture  and  distribute  Jessica
Simpson  branded  jeans  and  casual  apparel.  This  agreement  has an  initial
three-year  term,  and  provided  we are in  compliance  with  the  terms of the
agreement,  is renewable for one additional two-year term. Minimum net sales are
$20  million  in year 1, $25  million  in year 2 and $30  million in year 3. The
agreement provides for payment of a sales royalty and advertising  commitment at
the rate of 8% and 3%,  respectively,  of net sales, for a total minimum payment
obligation of $8.3 million over the initial term of the  agreement.  In December
2004,  we  advanced  $2.2  million  as  payment  for the  first  year's  minimum
royalties.  We applied $1.1 million from the above  advance  against the royalty
and  marketing  expenses in 2005 and $884,000 in the first three months of 2006.
In March  2006,  we had  written off the  capitalized  balance of  $192,000  and
recognized a  corresponding  loss. The loss was classified as royalty expense on
our consolidated statements of operations.  In March 2006, we became involved in
a dispute with the  licensor of the Jessica  Simpson  brands over our  continued
rights to these brands. We are presently in litigation with the licensor.

         In the second quarter of 2003, we acquired a 45% equity interest in the
owner of the  trademark  "American  Rag CIE" and the  operator of  American  Rag
retail  stores for $1.4  million,  and our  subsidiary,  Private  Brands,  Inc.,
acquired  a license  to  certain  exclusive  rights to this  trademark.  We have
guaranteed  the payment to the licensor of minimum  royalties  of $10.4  million
over the initial  10-year term of the agreement.  The guaranteed  annual minimum
royalty  is  payable  in  equal  monthly  installments  during  the  term of the
agreement. The royalty owed to the licensor in excess of the guaranteed minimum,
if any,  are payable no later than 30 days after the end of the  preceding  full
quarter with the amount for last quarter adjusted based on actual royalties owed
for the year. At March 31, 2006, the total commitment on royalties  remaining on
the term was $8.9 million.

         In  August 2004,  we entered  into an Agreement  for Purchase of Assets
with  affiliates  of  Mr.  Kamel  Nacif;  a  shareholder  at  the  time  of  the
transaction,  with  agreement  was  amended in  October  2004.  Pursuant  to the
agreement,  as  amended,  on  November  30,  2004,  we  sold  to the  purchasers
substantially  all of our assets and real  property  in  Mexico,  including  the
equipment and facilities we previously  leased to Mr. Nacif's  affiliates.  Upon
consummation of the sale, we entered into a purchase  commitment  agreement with
the purchasers,  pursuant to which we have agreed to purchase  annually over the
ten-year term of the agreement,  $5 million of fabric manufactured at our former
facilities  acquired by the purchasers at negotiated market prices. We purchased
$0 and  $840,000  of fabric in the three  months  ended March 31, 2006 and 2005,
respectively.


                                       16



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

15.      OPERATIONS BY GEOGRAPHIC AREAS

Our predominant business is the design,  distribution and importation of private
label and private brand casual  apparel.  Substantially  all of our revenues are
from the sales of apparel.  We are organized into four geographic  regions:  the
United States,  Asia,  Mexico and  Luxembourg.  We evaluate  performance of each
region based on profit or loss from operations before income taxes not including
the cumulative effect of change in accounting principles.  Information about our
operations in the United States, Asia, Mexico and Luxembourg is presented below.
Inter-company  revenues  and  assets  have  been  eliminated  to  arrive  at the
consolidated amounts.



                                                                                                      ADJUSTMENTS
                                                                                                          AND
                                    UNITED STATES        ASIA           MEXICO        LUXEMBOURG      ELIMINATIONS        TOTAL
                                    -------------    -------------   -------------   -------------   -------------    -------------
                                                                                                    
THREE MONTHS ENDED MARCH 31, 2006
Sales ...........................   $  60,570,000    $     681,000   $      10,000   $        --     $        --      $  61,261,000
Inter-company sales .............            --         29,351,000            --              --       (29,351,000)            --
                                    -------------    -------------   -------------   -------------   -------------    -------------
Total revenue ...................   $  60,570,000    $  30,032,000   $      10,000   $        --     $ (29,351,000)   $  61,261,000
                                    =============    =============   =============   =============   =============    =============


Income (loss) from operations ...   $     571,000    $   1,164,000   $     (87,000)  $      (2,000)  $        --      $   1,646,000
                                    =============    =============   =============   =============   =============    =============
Interest income .................   $      44,000    $     657,000   $        --     $     441,000   $    (657,000)   $     485,000
                                    =============    =============   =============   =============   =============    =============
Interest expense ................   $   1,127,000    $      58,000   $       3,000   $     657,000   $    (657,000)   $   1,188,000
                                    =============    =============   =============   =============   =============    =============
Provision for depreciation
 and amortization ...............   $     346,000    $      27,000   $        --     $        --     $        --      $     373,000
                                    =============    =============   =============   =============   =============    =============
Capital expenditures ............   $       9,000    $      13,000   $        --     $        --     $        --      $      22,000
                                    =============    =============   =============   =============   =============    =============

Total assets ....................   $ 111,857,000    $ 120,898,000   $  14,691,000   $ 211,801,000   $(312,570,000)   $ 146,677,000
                                    =============    =============   =============   =============   =============    =============



THREE MONTHS ENDED MARCH 31, 2005
Sales ...........................   $  44,600,000    $     224,000   $       6,000   $        --     $        --      $  44,830,000
Inter-company sales .............            --         26,835,000            --              --       (26,835,000)            --
                                    -------------    -------------   -------------   -------------   -------------    -------------
Total revenue ...................   $  44,600,000    $  27,059,000   $       6,000   $        --     $ (26,835,000)   $  44,830,000
                                    =============    =============   =============   =============   =============    =============

Income (loss) from operations ...   $    (696,000)   $   1,133,000   $    (204,000)  $        --     $        --      $     233,000
                                    =============    =============   =============   =============   =============    =============
Interest income .................   $      75,000    $     374,000   $        --     $     478,000   $    (374,000)   $     553,000
                                    =============    =============   =============   =============   =============    =============
Interest expense ................   $     789,000    $      24,000   $        --     $     374,000   $    (374,000)   $     813,000
                                    =============    =============   =============   =============   =============    =============
Provision for depreciation
 and amortization ...............   $     473,000    $      24,000   $      71,000   $        --     $        --      $     568,000
                                    =============    =============   =============   =============   =============    =============
Capital expenditures ............   $      47,000    $      24,000   $        --     $        --     $        --      $      71,000
                                    =============    =============   =============   =============   =============    =============

Total assets ....................   $ 104,742,000    $ 113,199,000   $  27,969,000   $ 212,269,000   $(325,490,000)   $ 132,689,000
                                    =============    =============   =============   =============   =============    =============



                                       17



                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

16.      LITIGATION

         On or about April 6, 2006, we commenced an action  against the licensor
of the Jessica  Simpson  brands in the  Supreme  Court of the State of New York,
County of New York. The suit named Camuto Consulting Group, Inc., VCJS LLC, With
You, Inc. and Jessica  Simpson as  defendants,  and asserts that the  defendants
failed to provide promised  support in connection with our sublicense  agreement
for the Jessica Simpson brands.  The complaint  includes eight causes of action,
including two seeking a declaration  that the sublicense  agreement is exclusive
and remains in full force and  effect,  as well as claims for breach of contract
by Camuto,  breach of the duty of good  faith and fair  dealing  and  fraudulent
inducement  against  Camuto,  and a claim against With You, Inc. and Ms. Simpson
that we are an intended third party  beneficiary  of the licenses  between those
defendants and Camuto.  On or about April 26, 2006,  Camuto served its answer to
our  complaint  and  included  a  counterclaim  against  us  for  breach  of the
sublicense  agreement and alleging  damages of no less than $100 million.  On or
about April 17, 2006, Ms. Simpson served a motion seeking dismissal of the cause
of  action  asserted  against  her.  We  intend to  vigorously  defend  Camuto's
counterclaim and vigorously oppose Ms. Simpson's motion.

         Shortly before May 2004, Bazak International Corp.  commenced an action
against us in the New York County  Supreme  Court  claiming  that we breached an
oral contract to sell a quantity of close-out  goods,  as a consequence of which
Bazak was  damaged  to the extent of $1.3  million.  Bazak  International  Corp.
claimed that our liability exists under a theory of breach of contract or unjust
enrichment.  This case is currently  pending in the United States District Court
for the Southern District of New York and is scheduled for trial on December 18,
2006. We will continue to vigorously  defend  against the breach of contract and
unjust enrichment claim.

         From time to time, we are involved in various routine legal proceedings
incidental to the conduct of our business.  Our management does not believe that
any of these  legal  proceedings  will  have a  material  adverse  impact on our
business, financial condition or results of operations, either due to the nature
of the claims,  or because our  management  believes that such claims should not
exceed the limits of the our insurance coverage.

17.      SUBSEQUENT EVENTS

         On May 12, 2006,  we entered into a commitment  letter with  Guggenheim
Corporate  Funding,  LLC with  respect to a $65  million  credit  facility.  The
commitment  letter  contemplates  that the credit  facility  will  consist of an
initial term loan of $30 million,  which will be used to repay certain  existing
indebtedness  and fund our general  operating and working  capital needs,  and a
second term loan of $35 million to be used,  if at all, to finance  acquisitions
acceptable  to  Guggenheim.  The  credit  facility  would be  secured  by all or
substantially  all of our  consolidated  assets.  Completion of the financing is
subject to customary conditions precedent,  including,  without limitation,  the
preparation and execution of definitive loan documents,  Guggenheim's completion
and  satisfaction  with its legal due  diligence  review  of us,  obtaining  all
necessary  consents and other third party  approvals,  and the  preparation  and
execution  of an  inter-creditor  agreement  between  the  lenders and our other
lenders.

         We are also in  negotiations  with GMAC CF, UPS and DBS  concerning our
credit facilities in effect with these lenders.

         On  May 1,  2006,  we  sublet  our  executive  office  in Los  Angeles,
California  and our sales  office in New York to Seven  Licensing  Company,  LLC
("Seven  Licensing") for a monthly payment of $25,000 on a month to month basis.
Seven Licensing is  beneficially  owned by Gerard Guez, our Chairman and Interim
Chief Executive Officer.


                                       18



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

BUSINESS OVERVIEW AND RECENT DEVELOPMENTS

         We are a design and  sourcing  company  for  private  label and private
brand casual apparel  serving mass  merchandisers,  department  stores,  branded
wholesalers  and specialty  chains located  primarily in the United States.  Our
major  customers  include leading  retailers,  such as Kohl's,  Chico's,  Macy's
Merchandising Group, Mervyn's,  Mothers Work, Sears, Wal-Mart,  Dillard's,  Lane
Bryant,  Lerner  New  York,  the  Avenue,  and J.C.  Penney.  Our  products  are
manufactured in a variety of woven and knit fabrications and include jeans wear,
casual pants,  t-shirts,  shorts,  blouses,  shirts and other tops,  dresses and
jackets.  Our private  brands include  American Rag Cie, No! Jeans,  Alain Weiz,
Gear 7, Souvenir by Cynthia Rowley and brands  associated with Jessica  Simpson,
which include "JS by Jessica  Simpson",  "Princy by Jessica  Simpson" and "Sweet
Kisses by Jessica Simpson.

PRIVATE LABEL

         Private  label  business has been our core  competency  for over twenty
years, and involves a one to one relationship with a large, centrally controlled
retailer   with  whom  we  can   develop   product   lines  that  fit  with  the
characteristics of their particular  customer.  Private label sales in the first
quarter  of 2006 were  $42.1  million  compared  to $33.5  million  in the first
quarter of 2005.

         The  success  of  our  private  brands   collections  has  created  new
opportunities  within the private label business to add value in the development
and marketing of new initiatives for Sears,  Mothers Work, Avenue,  Chico's, and
other retailers.  These  initiatives were launched during 2005, and are on track
to be significant growth areas for 2006.

PRIVATE BRANDS

         We launched our private brands initiative in 2003, pursuant to which we
acquire ownership of or license rights to a brand name and sell apparel products
under this brand,  generally  to a single  retail  company  within a  geographic
region.  Private  brands sales in the first  quarter of 2006 were $19.2  million
compared to $11.3  million in the first  quarter of 2005.  At March 31, 2006, we
owned or licensed rights to the following private brands:

         o        AMERICAN  RAG CIE:  During  the  first  quarter  of  2005,  we
                  extended our agreement with Macy's Merchandising Group for six
                  years,  pursuant  to  which  we  exclusively   distribute  our
                  American Rag Cie brand through  Macy's  Merchandising  Group's
                  national  Department  Store  organization  of  more  than  500
                  stores.  Net sales of American Rag Cie branded apparel totaled
                  $5.3 million in the first quarter of 2006.

         o        ALAIN WEIZ: We continue to sell Alan Weiz apparel  exclusively
                  to  Dillard's  Department  Stores.  Net  sales of  Alain  Weiz
                  branded  apparel  totaled $2.0 million in the first quarter of
                  2006.

         o        SOUVENIR  BY  CYNTHIA  ROWLEY:  We  are  in  discussions  with
                  retailers  to identify a potential  distribution  alliance for
                  the 2006  fall or  holiday  season  for  Souvenir  by  Cynthia
                  Rowley.

         o        GEAR 7: During the fourth quarter of 2005, K-Mart discontinued
                  sales of Gear 7 products, which resulted in a decline in sales
                  for  this  brand in the  fourth  quarter  of  2005.  We do not
                  anticipate sales of Gear 7 branded apparel in 2006.

         o        JESSICA  SIMPSON  brands:  The JS by Jessica Simpson brand was
                  originally launched as a denim line with Charming Shoppes. Net
                  sales of JS by Jessica Simpson and Princy by Jessica  Simpson,
                  which is the  department  store  and  better  specialty  store
                  brand,  totaled $9.7 million in the first  quarter of 2006. In
                  March 2006, we became  involved in a dispute with the licensor
                  of the Jessica  Simpson  brands over our  continued  rights to
                  these brands,  and we are  presently in  litigation  with this
                  licensor. Accordingly, we do not


                                       19



                  anticipate  sales of Jessica Simpson branded apparel after the
                  first  quarter  of  2006  unless  and  until  we are  able  to
                  successfully  resolve  our  dispute  and  retain our rights to
                  these brands.

         o        HOUSE OF DEREON BY TINA KNOWLES:  We began  shipping  products
                  for the House of Dereon by Tina  Knowles  brand in the  fourth
                  quarter of 2005,  resulting  in net sales of $309,000 in 2005.
                  In March 2006,  we terminated  our license  agreement for this
                  brand, and sold our remaining inventory to the licensor or its
                  designee.  Prior to December 31, 2005,  we had written off the
                  capitalized  balance of $1.2 million  related to the agreement
                  and  recognized  a  corresponding  loss in 2005.  Net sales of
                  House of Dereon by Tina Knowles  branded  apparel totaled $2.2
                  million  in the first  quarter  of 2006  which  included  $1.5
                  million of sales of inventory to a designee of the licensor.

INTERNAL REVENUE SERVICE AUDIT

         In January 2004, the Internal Revenue Service completed its examination
of our Federal  income tax returns for the years ended December 31, 1996 through
2001.  The IRS has proposed  adjustments  to increase our income tax payable for
the six years under examination. This adjustment would also result in additional
state taxes and  interest.  In  addition,  in July 2004,  the IRS  initiated  an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996 through 2001 federal  income tax returns.  The proposed  adjustments to
our 2002 federal  income tax return would not result in  additional  tax due for
that year due to the tax loss reported in the 2002 federal return.  However,  it
could reduce the amount of net  operating  losses  available to offset taxes due
from the preceding tax years.  We believe that we have  meritorious  defenses to
and intend to vigorously  contest the proposed  adjustments  made to our federal
income tax  returns  for the years  ended 1996  through  2002.  If the  proposed
adjustments are upheld through the administrative and legal process,  they could
have a  material  impact on our  earnings  and cash  flow.  We  believe  we have
provided  adequate  reserves for any reasonably  foreseeable  outcome related to
these matters on the  consolidated  balance sheets included in the  consolidated
financial  statements  under the caption "Income  Taxes".  The maximum amount of
loss in  excess  of the  amount  accrued  in the  financial  statements  is $7.7
million.  We do not believe that the  adjustments,  if any, arising from the IRS
examination,  will result in an additional  income tax liability  beyond what is
recorded in the accompanying consolidated balance sheets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Management's  discussion  and analysis of our  financial  condition and
results of  operations  are based upon our  consolidated  financial  statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States of America.  The  preparation  of these  financial
statements  requires us to make estimates and judgments that affect the reported
amounts of assets,  liabilities,  revenues and expenses, and related disclosures
of contingent assets and liabilities.  We are required to make assumptions about
matters,  which are  highly  uncertain  at the time of the  estimate.  Different
estimates we could  reasonably  have used or changes in the  estimates  that are
reasonably  likely  to occur  could  have a  material  effect  on our  financial
condition or result of operations. Estimates and assumptions about future events
and their effects cannot be determined with  certainty.  On an ongoing basis, we
evaluate estimates,  including those related to returns,  discounts,  bad debts,
inventories,  intangible assets, income taxes, and contingencies and litigation.
We base our  estimates  on  historical  experience  and on  various  assumptions
believed  to  be  applicable  and  reasonable  under  the  circumstances.  These
estimates may change as new events occur, as additional  information is obtained
and  as  our  operating   environment   changes.  In  addition,   management  is
periodically faced with uncertainties,  the outcomes of which are not within its
control and will not be known for prolonged period of time.

         We believe our  financial  statements  are fairly  stated in accordance
with accounting  principles  generally  accepted in the United States of America
and provide a meaningful  presentation of our financial condition and results of
operations.

         We believe the following critical  accounting  policies affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial  statements.  For a further discussion on the application of these and
other accounting  policies,  see Note 1 of the "Notes to Consolidated  Financial
Statements"  included  in our  Annual  Report  on Form  10-K for the year  ended
December 31, 2005.


                                       20



ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS

         We evaluate the  collectibility of accounts  receivable and chargebacks
(disputes  from  the  customer)   based  upon  a  combination  of  factors.   In
circumstances where we are aware of a specific customer's  inability to meet its
financial  obligations (such as in the case of bankruptcy filings or substantial
downgrading  of  credit  sources),  a  specific  reserve  for bad debts is taken
against  amounts  due to reduce  the net  recognized  receivable  to the  amount
reasonably  expected to be  collected.  For all other  customers,  we  recognize
reserves  for bad  debts  and  chargebacks  based on our  historical  collection
experience.  If our collection  experience  deteriorates (for example, due to an
unexpected  material  adverse change in a major  customer's  ability to meet its
financial obligations to us), the estimates of the recoverability of amounts due
us could be reduced by a material amount.

         As of March  31,  2006,  the  balance  in the  allowance  for  returns,
discounts and bad debts reserves was $3.1 million.

INVENTORY

         Our  inventories  are  valued  at the  lower of cost or  market.  Under
certain  market  conditions,  we  use  estimates  and  judgments  regarding  the
valuation of inventory to properly value  inventory.  Inventory  adjustments are
made for the  difference  between the cost of the  inventory  and the  estimated
market  value and  charged to  operations  in the period in which the facts that
give rise to the adjustments become known.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

         We assess the impairment of identifiable intangibles, long-lived assets
and  goodwill  whenever  events or changes in  circumstances  indicate  that the
carrying value may not be recoverable.  Factors considered  important that could
trigger an impairment review include, but are not limited to, the following:

         o        a significant underperformance relative to expected historical
                  or projected future operating results;

         o        a significant  change in the manner of the use of the acquired
                  asset or the strategy for the overall business; or

         o        a significant negative industry or economic trend.

         Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142,  "Goodwill and Other  Intangible  Assets."  According to this
statement,  goodwill and other  intangible  assets with indefinite  lives are no
longer subject to amortization,  but rather an assessment of impairment  applied
on a  fair-value-based  test on an annual basis or more  frequently  if an event
occurs or  circumstances  change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.

         We utilized  the  discounted  cash flow  methodology  to estimate  fair
value. As of March 31, 2006, we have a goodwill  balance of $8.6 million,  and a
net property and equipment balance of $1.6 million.

INCOME TAXES

         As  part  of  the  process  of  preparing  our  consolidated  financial
statements,  management  is  required to  estimate  income  taxes in each of the
jurisdictions  in which we  operate.  The  process  involves  estimating  actual
current tax expense along with assessing  temporary  differences  resulting from
differing treatment of items for book and tax purposes. These timing differences
result in  deferred  tax  assets  and  liabilities,  which are  included  in our
consolidated  balance sheet.  Management records a valuation allowance to reduce
our net  deferred  tax assets to the amount  that is more  likely than not to be
realized.  Management  has  considered  future  taxable  income and  ongoing tax
planning strategies in assessing the need for the valuation allowance. Increases
in the valuation  allowance result in additional  expense to be reflected within
the tax provision in the consolidated statement of operations.

         In addition,  accruals are also estimated for ongoing audits  regarding
U.S. Federal tax issues that are currently unresolved,  based on our estimate of
whether, and the extent to which, additional taxes will be due. We


                                       21



routinely  monitor the  potential  impact of these  situations  and believe that
amounts are properly  accrued for. If we  ultimately  determine  that payment of
these amounts is unnecessary,  we will reverse the liability and recognize a tax
benefit  during the period in which we determine that the liability is no longer
necessary. We will record an additional charge in our provision for taxes in any
period we determine  that the original  estimate of a tax liability is less than
we  expect  the  ultimate  assessment  to  be.  See  Note  11 of the  "Notes  to
Consolidated Financial Statements" for a discussion of current tax matters.

DEBT COVENANTS

         Our debt agreements require certain covenants including a minimum level
of net worth as  discussed  in Note 7 of the  "Notes to  Consolidated  Financial
Statements."  If our results of  operations  erode and we are not able to obtain
waivers  from the  lenders,  the debt would be in default  and  callable  by our
lenders.  In addition,  due to cross-default  provisions in our debt agreements,
substantially  all of our long-term  debt would become due in full if any of the
debt is in default.  In  anticipation  of us not being able to meet the required
covenants  due to  various  reasons,  we either  negotiate  for  changes  in the
relative  covenants or obtain an advance  waiver or reclassify the relevant debt
as current. We also believe that our lenders would provide waivers if necessary.
However,  our expectations of future operating results and continued  compliance
with other debt  covenants  cannot be assured and our  lenders'  actions are not
controllable by us. If projections of future operating  results are not achieved
and the debt is placed in default,  we would be required to reduce our expenses,
by  curtailing  operations,  and to raise  capital  through  the sale of assets,
issuance  of equity or  otherwise,  any of which  could have a material  adverse
effect on our financial condition and results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

         For a description  of recent  accounting  pronouncements  including the
respective  expected  dates of adoption and effects on results of operations and
financial  condition,  see  Note  10 of the  "Notes  to  Consolidated  Financial
Statements."

RESULTS OF OPERATIONS

         The  following  table sets forth,  for the periods  indicated,  certain
items in our consolidated statements of operations as a percentage of net sales:

                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                         ---------------------
                                                           2006         2005
                                                         --------     --------
Net sales ............................................      100.0%       100.0%
Cost of sales ........................................       79.6         80.0
                                                         --------     --------
Gross profit .........................................       20.4         20.0
Selling and distribution expenses
     .................................................        4.8          5.7
General and administration
   expenses ..........................................       10.5         13.1
Royalty expenses .....................................        2.4          0.6
                                                         --------     --------
Income from operations ...............................        2.7          0.6
Interest expense .....................................       (1.9)        (1.8)
Interest income ......................................        0.8          1.2
Interest in income of equity method
   investee ..........................................        0.1          0.4
Other income .........................................        0.0          0.1
Other expense ........................................       (0.0)        (0.0)
Minority interest ....................................        0.0          0.0
                                                         --------     --------
Income before taxes ..................................        1.7          0.5
Income taxes .........................................        0.3          0.7
                                                         --------     --------
Net income (loss) ....................................        1.4%        (0.2)%
                                                         ========     ========


FIRST QUARTER 2006 COMPARED TO FIRST QUARTER 2005

         Net sales  increased by $16.4  million,  or 36.7%,  to $61.3 million in
first quarter of 2006 from $44.8 million in the first quarter of 2005.  Sales of
private label in the first quarter of 2006 were $42.1 million  compared to $33.5
million in the same period of 2005, with the increase  resulting  primarily from
increased  sales to Chico's,  Mervyn's,  Mothers  Work and Macy's  Merchandising
Group. Sales of private brands in the first quarter of 2006 were $19.2


                                       22



million  compared to $11.3 million in the same period of 2005.  The sales in the
first  quarter of 2006  included  sales of Jessica  Simpson and House of Dereon,
compared to no such sales in the first quarter of 2005.  As described  elsewhere
in this report,  we will have no further sales of House of Dereon apparel and do
not anticipate further sales of Jessica Simpson apparel in 2006.

         Gross profit  consists of net sales less product  costs,  direct labor,
manufacturing  overhead,  duty, quota,  freight in, and brokerage.  Gross profit
increased  by $3.6  million to $12.5  million in the first  quarter of 2006 from
$8.9 million in the first quarter of 2005. The increase in gross profit occurred
primarily  because of an increase in sales and gross margin.  As a percentage of
net sales,  gross profit  increased  from 20.0% in the first  quarter of 2005 to
20.4% in the first quarter of 2006. The improvement in gross margin is primarily
attributable  to the  improved  margins in the  private  label  business  due to
expansion  of our  business to include  more  knitwear  and woven tops at better
margins  using private brand product  developments.  We also  experienced  lower
margins  from sales of House of Dereon  apparel  during the quarter due to close
out sales resulting from the termination of the House of Dereon license.

         Selling and distribution  expenses increased by $368,000,  or 14.4%, to
$2.9 million in the first quarter of 2006 from $2.6 million in the first quarter
of 2005. As a percentage of net sales,  these expenses  decreased to 4.8% in the
first quarter of 2006 from 5.7% in the first quarter of 2005 due to the increase
in sales during the first quarter of 2006.

         General and administrative expenses increased by $604,000, or 10.3%, to
$6.5 million in the first quarter of 2006 from $5.9 million in the first quarter
of 2005. As a percentage of net sales,  these expenses decreased to 10.5% in the
first  quarter  of 2006  from  13.1%  in the  first  quarter  of 2005 due to the
increase in sales during the first quarter of 2006.

         Royalty and marketing  allowance expenses increased by $1.2 million, or
403.1%,  to $1.5 million in the first quarter of 2006 from $295,000 in the first
quarter of 2005.  The  increase  was  primarily  due to sales under the licensed
Jessica Simpson brands,  for which there were no such sales in the first quarter
of 2005. As a percentage of net sales,  these expenses  increased to 2.4% in the
first quarter of 2006 from 0.6% in the first quarter of 2005.

         Operating income in the first quarter of 2006 was $1.6 million, or 2.7%
of net sales,  compared to  $233,000,  or 0.6% of net sales,  in the  comparable
period of 2005, because of the factors discussed above.

         Interest  expense  increased by $375,000,  or 46.1%, to $1.2 million in
the first  quarter of 2006 from  $813,000  in the first  quarter  of 2005.  As a
percentage of net sales,  this expense increased to 1.9% in the first quarter of
2006 from 1.8% in the first  quarter of 2005.  The increase in interest  expense
was  primarily  due to  higher  interest  rates  we paid on our  short-term  and
long-term  debts.  Interest income decreased by $68,000 or 12.3%, to $485,000 in
the first  quarter  of 2005 from  $553,000  in the first  quarter  of 2005.  The
interest  income  was  primarily  due to the  interest  earned  from  the  notes
receivable related to the sale of our fixed assets in Mexico. Interest in income
of equity method investee was $47,000 in the first quarter of 2006,  compared to
$163,000  in the first  quarter of 2005.  Other  income was $34,000 in the first
quarter of 2006, compared to $65,000 in the first quarter of 2005. Other expense
was $0 in the first quarter of 2006,  compared to $6,000 in the first quarter of
2005.

         Losses  allocated to minority  interests  in the first  quarter of 2006
were  $11,000,  representing  the  minority  partner's  share of losses in PBG7.
Earnings from the equity method investments, UAV and PBG7, totaled approximately
$57,000 for the first  quarter of 2005.  None of the profit in the equity method
investments  was allocated to the minority  members in the first quarter of 2005
because  we  previously  absorbed  losses  in excess  of the  minority  members'
investment.

LIQUIDITY AND CAPITAL RESOURCES

         Our  liquidity  requirements  arise  from the  funding  of our  working
capital  needs,  principally  inventory,  finished  goods  shipments-in-transit,
work-in-process and accounts receivable, including receivables from our contract
manufacturers  that  relate  primarily  to fabric we  purchase  for use by those
manufacturers.  Our primary sources for working capital and capital expenditures
are cash  flow from  operations,  borrowings  under  our bank and  other  credit
facilities, issuance of long-term debt, sales of equity and debt securities, and
vendor financing. In the near term, we expect that our operations and borrowings
under bank and other credit facilities will provide sufficient


                                       23



cash to fund our operating expenses,  capital expenditures and interest payments
on our debt. In the long-term,  we expect to use internally  generated funds and
external sources to satisfy our debt and other long-term liabilities.

         Our liquidity is dependent,  in part, on customers  paying on time. Any
abnormal chargebacks or returns may affect our source of short-term funding. Any
changes in credit terms given to major  customers may have an impact on our cash
flow.  Suppliers' credit is another major source of short-term financing and any
adverse changes in their terms will have negative impact on our cash flow.

         Other  principal  factors  that could  affect the  availability  of our
internally generated funds include:

         o        deterioration of sales due to weakness in the markets in which
                  we sell our products;

         o        decreases in market prices for our products;

         o        increases in costs of raw materials; and

         o        changes in our working capital requirements.

         Principal  factors  that could  affect our  ability to obtain cash from
external sources include:

         o        financial  covenants  contained  in our current or future bank
                  and debt facilities; and

         o        volatility  in the market  price of our common stock or in the
                  stock markets in general.

         Cash flows for the three  months  ended March 31, 2006 and 2005 were as
follows (dollars in thousands):

CASH FLOWS:                                                   2006         2005
                                                             ------       ------
Net cash used in operating activities ................       $3,332       $9,576
Net cash provided by investing activities ............       $  438       $2,481
Net cash provided by financing activities ............       $1,752       $6,082

         During  the  first  three  months of 2006,  net cash used in  operating
activities  was  $3.3  million,  as  compared  to net  cash  used  in  operating
activities  of $9.6  million  for the  same  period  in 2005.  Net cash  used in
operating  activities in the first quarter of 2006  resulted  primarily  from an
increase of $7.9 million in accounts  receivable  and a decrease of $7.4 million
in accounts payable, partially offset by income of $836,000 and depreciation and
amortization  expense of $373,000 and a decrease in  inventory of $9.8  million.
The increase in accounts  receivable and decrease in inventory was primarily due
to the  increase  in sales in the first  quarter of 2006,  and the  decrease  in
accounts payable resulted from the pay down of payables.

         During the first three months of 2006,  net cash  provided by investing
activities  was  $438,000,  as  compared  to  net  cash  provided  by  investing
activities of $2.5 million in 2005. Net cash provided by investing activities in
the first  quarter of 2006 resulted  primarily  from  approximately  $434,000 of
collection on notes receivable.

         During the first three months of 2006,  net cash  provided by financing
activities  was $1.8  million,  as  compared to net cash  provided by  financing
activities of $6.1 million in 2005. Net cash provided by financing activities in
2006 resulted  primarily from $1.7 million net proceeds from our short-term bank
borrowings.


                                       24



CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         Following is a summary of our  contractual  obligations  and commercial
commitments available to us as of March 31, 2006 (in millions):



                                                    PAYMENTS DUE BY PERIOD
                                     ----------------------------------------------------
                                                           Between    Between
CONTRACTUAL OBLIGATIONS                Total    Less than    2-3        4-5       After
                                                 1 year     years      years     5 years
----------------------------------   --------   --------   --------   --------   --------
                                                               
Long-term debt(1) ................   $   39.6   $   39.6   $   --     $   --     $   --
Convertible debentures, net ......        6.9       --          6.9       --         --
Operating leases .................        6.5        1.1        1.2        1.2        3.0
Minimum royalties ................       16.9        5.8        4.6        2.2        4.3
Purchase commitment ..............       45.5        6.7       10.0       10.0       18.8
                                     --------   --------   --------   --------   --------
Total Contractual Cash Obligations   $  115.4   $   53.2   $   22.7   $   13.4   $   26.1


   (1)   Excludes interest on long-term debt  obligations.  Based on outstanding
         borrowings  as of March 31, 2006,  and  assuming all such  indebtedness
         remained  outstanding  and the interest  rates remained  unchanged,  we
         estimate   that  our  interest   cost  on   long-term   debt  would  be
         approximately $3.5 million.



                                                        AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------   -------------   -----------------------------------------------------
                                   TOTAL AMOUNTS
COMMERCIAL COMMITMENTS               COMMITTED       LESS THAN     BETWEEN       BETWEEN        AFTER
AVAILABLE TO US                        TO US          1 YEAR      2-3 YEARS     4-5 YEARS      5 YEARS
--------------------------------   -------------   -----------   -----------   -----------   -----------
                                                                              
Lines of credit.................   $        61.4   $      61.4   $      --     $       --    $      --
Letters of credit (within
   lines of credit).............   $        16.4   $      16.4   $      --     $       --    $      --
Total commercial commitments....   $        61.4   $      61.4   $      --     $       --    $      --


         On June 13, 2002,  we entered  into a letter of credit  facility of $25
million with UPS Capital Global Trade Finance  Corporation  ("UPS").  Under this
facility,  we may arrange for the issuance of letters of credit and acceptances.
The  facility  is  collateralized  by the  shares and  debentures  of all of our
subsidiaries  in Hong Kong.  In addition to the  guarantees  provided by Tarrant
Apparel  Group and our  subsidiaries,  Fashion  Resource  (TCL) Inc. and Tarrant
Luxembourg Sarl, Gerard Guez, our Chairman and Interim Chief Executive  Officer,
also signed a guarantee  of $5 million in favor of UPS to secure this  facility.
This facility  bore  interest at 10.75% per annum at March 31, 2006.  Under this
facility,  we were subject to certain restrictive  covenants,  including that we
maintain a specified tangible net worth, fixed charge ratio, and leverage ratio.
On June 27, 2005,  we amended the letter of credit  facility  with UPS to extend
the expiration date of the facility from June 30, 2005 to August 31, 2005 and to
reduce the tangible net worth  requirement at June 30, 2005. On August 31, 2005,
we  amended  the  letter of  credit  facility  with UPS to  further  extend  the
expiration  date of the  facility to October 31,  2005,  immediately  reduce the
maximum  amount of  borrowings to $14.5 million on September 1, 2005 and further
reduced the maximum  amount of borrowing to $14.0 million on October 1, 2005. On
October 31, 2005, we further  amended the letter of credit  facility with UPS to
extend the  expiration  date of the  facility  to January 31, 2006 and amend the
interest rate to "prime rate" plus 3%. The facility  amendment also provided for
reduction in the maximum  amount of borrowings  to $13.5  million  commencing on
November 1, 2005, to $13.0 million  commencing on December 1, 2005, and to $12.5
million commencing on January 1, 2006.  Additionally,  Gerard Guez, our Chairman
and Interim Chief  Executive  Officer,  pledged to UPS 4.6 million shares of our
common  stock  held by Mr.  Guez to secure  the  obligations  under  the  credit
facility.  On January 27, 2006, we further amended the letter of credit facility
with UPS to extend the expiration  date of the facility from January 31, 2006 to
July 31, 2006.  The amendment  provides for  reduction of the maximum  amount of
borrowings  under the  facility to $12.0  million  commencing  on April 1, 2006,
$11.5  million  commencing on May 1, 2006,  $11.0 million  commencing on June 1,
2006 and to $10.5 million  commencing on July 1, 2006.  Under the amended letter
of credit  facility,  we are  subject  to  restrictive  financial  covenants  of
maintaining  tangible  net worth of $25 million as of December  31, 2005 and the
last day of each fiscal quarter  thereafter.  There is also a provision  capping
maximum capital  expenditures per quarter of $800,000.  As of March 31, 2006, we
were in compliance  with the covenants.  As of March 31, 2006,  $8.0 million was
outstanding  under this  facility  with UPS and an  additional  $2.5 million was
available for future  borrowings.  In addition,  $2.0 million of open letters of
credit was outstanding as of March 31, 2006.

         On December 31, 2004,  our Hong Kong  subsidiaries  entered into a loan
agreement  with UPS  pursuant  to which UPS made a $5  million  term  loan,  the
proceeds  of which  were used to repay $5 million  of  indebtedness  owed to UPS
under the letter of credit of facility. The principal amount of this loan is due
and payable in 24 equal


                                       25



monthly installments of approximately $208,333 each, plus interest equivalent to
the "prime rate" plus 2%  commencing  on February 1, 2005.  This  facility  bore
interest at 9.75% per annum at March 31, 2006.  On June 27, 2005, we amended the
loan agreement with UPS to reduce the tangible net worth requirement at June 30,
2005. Under the amended loan agreement,  we are subject to restrictive financial
covenants of maintaining  tangible net worth of $25 million at December 31, 2005
and the last day of each fiscal  quarter  thereafter.  There is also a provision
capping  maximum capital  expenditure  per quarter at $800,000.  As of March 31,
2006,  we were in  compliance  with the  covenants.  As of March 31, 2006,  $2.1
million  was  outstanding.   The  obligations   under  the  loan  agreement  are
collateralized by the same security interests and guarantees  provided under our
letter of credit  facility with UPS.  Additionally,  the term loan is secured by
two  promissory  notes  payable to  Tarrant  Luxembourg  Sarl in the  amounts of
$2,550,000  and $1,360,000 and a pledge by Gerard Guez, our Chairman and Interim
Chief Executive Officer, of 4.6 million shares of our common stock.

         Since March 2003, DBS Bank (Hong Kong) Limited  (formerly  known as Dao
Heng  Bank)  has made  available  a letter of  credit  facility  of up to HKD 20
million  (equivalent to US $2.6 million) to our  subsidiaries in Hong Kong. This
is a demand facility and is secured by the pledge of our office property,  which
is owned by Gerard Guez, our Chairman and Interim Chief Executive  Officer,  and
Todd Kay, our Vice Chairman, and by our guarantee. The letter of credit facility
was increased to HKD 30 million (equivalent to US $3.9 million) in June 2004. As
of March 31,  2006,  $2.5  million  was  outstanding  under  this  facility.  In
addition,  $1.1 million of open letters of credit was  outstanding  and $294,000
was available for future borrowings as of March 31, 2006. In October 2005, a tax
loan for HKD 6.233 million  (equivalent  to US $804,000) was also made available
to our Hong Kong  subsidiaries.  As of March 31, 2006,  $478,000 was outstanding
under this tax loan.

         On October 1, 2004,  we amended and  restated our  previously  existing
debt facility with GMAC Commercial  Finance,  LLC ("GMAC CF") by entering into a
new factoring  agreement  with GMAC CF. The amended and restated  agreement (the
factoring  agreement)  extended the expiration date of the facility to September
30,  2007 and added as parties  our  subsidiaries  Private  Brands,  Inc and No!
Jeans,  Inc. In  addition,  in  connection  with the  factoring  agreement,  our
indirect  majority-owned  subsidiary PBG7, LLC entered into a separate factoring
agreement with GMAC CF. Pursuant to the terms of the factoring agreement, we and
our  subsidiaries  agree to assign and sell to GMAC CF, as factor,  all accounts
which arise from our sale of  merchandise  or rendition of service  created on a
going  forward  basis.  At our  request,  GMAC CF, in its  discretion,  may make
advances  to us up to the lesser of (a) up to 90% of our  accounts on which GMAC
CF has the risk of loss and (b) $40 million, minus in each case, any amount owed
by us to GMAC CF.  Pursuant to the terms of the PBG7 factoring  agreement,  PBG7
agreed to assign and sell to GMAC CF, as factor, all accounts,  which arise from
PBG7's sale of merchandise or rendition of services  created on a  going-forward
basis. At PBG7's request, GMAC CF, in its discretion,  may make advances to PBG7
up to the  lesser of (a) up to 90% of PBG7's  accounts  on which GMAC CF has the
risk of loss, and (b) $5 million minus in each case, any amounts owed to GMAC CF
by PBG7.  The facility bore interest at 7.8256% per annum and the facility under
PBG7,  LLC bore  interest at 8.25% per annum,  respectively,  at March 31, 2006.
Restrictive  covenants under the revised  facility  include a limit on quarterly
capital  expenses of $800,000  and tangible net worth of $25 million at December
31, 2005 and at the end of each fiscal quarter thereafter. As of March 31, 2006,
we  were in  compliance  with  the  covenants.  A total  of  $29.9  million  was
outstanding  with respect to receivables  factored under the GMAC CF facility at
March 31, 2006.

         In May 2005, we amended our factoring  agreement with GMAC CF to permit
our subsidiaries  party thereto and us, to borrow up to the lesser of $3 million
or 50% of the value of eligible inventory. In connection with this amendment, we
granted GMAC CF a lien on certain of our inventory located in the United States.
On January 23, 2006, we further amended our factoring  agreement with GMAC CF to
increase the amount we may borrow against  inventory to the lesser of $5 million
or 50% of the value of eligible inventory.  The $5 million limit will be reduced
to $4 million on April 1, 2006 and will be further reduced to $3 million on July
1, 2006. The maximum borrowing availability under the factoring agreement, based
on the borrowing  base formula  remains at $40 million.  A total of $4.5 million
was  outstanding  under the GMAC CF facility  at March 31, 2006 with  respect to
collateralized inventory.

         The credit facility with GMAC CF and the credit facility with UPS carry
cross-default  clauses.  A breach of a financial  covenant set by GMAC CF or UPS
constitutes an event of default under the other credit facility,  entitling both
financial  institutions  to demand  payment in full of all  outstanding  amounts
under their respective debt and credit facilities.

         The amount we can borrow under the new factoring  facility with GMAC CF
is  determined  based on a defined  borrowing  base formula  related to eligible
accounts receivable. A significant decrease in eligible accounts


                                       26



receivable  due to the aging of  receivables,  can have an adverse effect on our
borrowing capabilities under our credit facility, which may adversely affect the
adequacy of our working  capital.  In addition,  we have  typically  experienced
seasonal  fluctuations in sales volume.  These seasonal  fluctuations  result in
sales volume  decreases in the first and fourth quarters of each year due to the
seasonal fluctuations experienced by the majority of our customers. During these
quarters,  borrowing  availability  under our credit  facility may decrease as a
result of decrease in eligible accounts receivables generated from our sales.

         On December 14, 2004, we completed a $10 million  financing through the
issuance  of (i) 6%  Secured  Convertible  Debentures  ("Debentures")  and  (ii)
warrants  to  purchase  up to  1,250,000  shares of our common  stock.  Prior to
maturity,  the  investors may convert the  Debentures  into shares of our common
stock at a price of $2.00 per share.  The warrants have a term of five years and
an exercise price of $2.50 per share. The warrants were valued at $866,000 using
the  Black-Scholes  option  valuation  model  with  the  following  assumptions:
risk-free  interest rate of 4%; dividend yields of 0%; volatility factors of the
expected  market price of our common stock of 0.55; and an expected life of four
years. The Debentures bear interest at a rate of 6% per annum and have a term of
three  years.  We may elect to pay interest on the  Debentures  in shares of our
common stock if certain conditions are met, including a minimum market price and
trading volume for our common stock. The Debentures  contain customary events of
default and permit the holder  thereof to  accelerate  the  maturity if the full
principal  amount  together  with  interest  and other  amounts  owing  upon the
occurrence  of  such  events  of  default.  The  Debentures  are  secured  by  a
subordinated lien on certain of our accounts  receivable and related assets. The
closing  market price of our common  stock on the closing date of the  financing
was $1.96. The convertible debenture was thus valued at $8,996,000, resulting in
an effective  conversion  price of $1.799 per share.  The intrinsic value of the
conversion  option of $804,000 is being amortized over the life of the loan. The
value of the  warrants of $866,000  and the  intrinsic  value of the  conversion
option of $804,000 were netted from the $10 million presented as the convertible
debentures, net on our accompanying balance sheets at December 31, 2004.

         The placement  agent in the financing,  received  compensation  for its
services in the amount of $620,000 in cash and issuance of five year warrants to
purchase up to 200,000  shares of our common stock at an exercise price of $2.50
per share.  The  warrants to purchase  200,000  shares of our common  stock were
valued at  $138,000  using the  Black-Scholes  option  valuation  model with the
following  assumptions:  risk-free  interest rate of 4%;  dividend yields of 0%;
volatility factors of the expected market price of our common stock of 0.55; and
an  expected  life  of four  years.  The  $620,000  financing  cost  paid to the
placement agent and the value of the warrants to purchase  200,000 shares of our
common stock of $138,000 are included in the deferred financing cost, net on our
accompanying balance sheets and are amortized over the life of the loan.

         In June 2005, holders of our Debentures  converted an aggregate of $2.3
million of Debentures into 1,133,687 shares of our common stock. In August 2005,
holders of our Debentures  converted an aggregate of $820,000 of Debentures into
410,000 shares of our common stock.  The Debentures were converted at the option
of the holders at a price of $2.00 per share.  Debt discount of $248,000 related
to the intrinsic  value of the  conversion  option of $804,000 was expensed upon
the  conversion.  Of the $620,000  financing  cost paid to the placement  agent,
$191,000 was expensed upon the conversion. The intrinsic value of the conversion
option,  and the value of the warrant  amortized in the three months of 2005 was
$118,000.  Total  deferred  financing cost amortized in three months of 2006 was
$47,000.  Total  interest  paid to the  holders of the  Debentures  in the three
months of 2006 was $104,000. As of March 31, 2006, $6.1 million, net of $829,000
of debt discount, remained outstanding under the Debentures.

         On January 19, 2006, we borrowed  $4.0 million from Max Azria  pursuant
to the terms of a promissory  note,  which amount bears  interest at the rate of
5.5% per annum and is payable in weekly  installments  of $200,000  beginning on
March 1, 2006. This is an unsecured loan. As of March 31, 2006, $3.0 million was
outstanding under this loan.

         We had three equipment  loans  outstanding at December 31, 2005. One of
these equipment loans bore interest at 6% payable in installments  through 2009,
which we paid off in January  2006.  The second  loan  bears  interest  at 15.8%
payable in  installment  through 2007 and the third loan bears interest at 6.15%
payable  in  installment  through  2007.  As of  March  31,  2006,  $35,000  was
outstanding under the two remaining loans.

         From time to time, we open letters of credit under an uncommitted  line
of credit from Aurora Capital  Associates  which issues these letters of credits
out of Israeli Discount Bank. As of March 31, 2006, $1.5 million was outstanding
under this facility (classified above under import trade bills payable) and $3.2
million of letters of


                                       27



credit were open under this arrangement. We pay a commission fee of 2.25% on all
letters of credits issued under this arrangement.

         On May 12, 2006,  we entered into a commitment  letter with  Guggenheim
Corporate  Funding,  LLC with  respect to a $65  million  credit  facility.  The
commitment  letter  contemplates  that the credit  facility  will  consist of an
initial term loan of $30 million,  which will be used to repay certain  existing
indebtedness  and fund our general  operating and working  capital needs,  and a
second term loan of $35 million to be used,  if at all, to finance  acquisitions
acceptable  to  Guggenheim.  The  credit  facility  would be  secured  by all or
substantially  all of our  consolidated  assets.  Completion of the financing is
subject to customary conditions precedent,  including,  without limitation,  the
preparation and execution of definitive loan documents,  Guggenheim's completion
and  satisfaction  with its legal due  diligence  review  of us,  obtaining  all
necessary  consents and other third party  approvals,  and the  preparation  and
execution  of an  inter-creditor  agreement  between  the  lenders and our other
lenders.

         We are also in  negotiations  with GMAC CF, UPS and DBS  concerning our
credit facilities in effect with these lenders.

         We have  financed our  operations  from our cash flow from  operations,
borrowings  under our bank and other  credit  facilities,  issuance of long-term
debt, and sales of equity and debt security.  Our short-term funding relies very
heavily on our major customers, banks, and suppliers. From time to time, we have
had temporary over-advances from our banks. Any withdrawal of support from these
parties will have serious consequences on our liquidity.

         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, certain officers and principal shareholders, including Gerard Guez and
Todd Kay. See disclosure under "-Related Party Transactions" below.

         The Internal  Revenue  Service has proposed  adjustments to our Federal
income tax  returns to  increase  our income  tax  payable  for the years  ended
December 31, 1996 through 2001. This adjustment  would also result in additional
state taxes and  interest.  In  addition,  in July 2004,  the IRS  initiated  an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996  through  2001  federal  income tax  returns.  We believe  that we have
meritorious   defenses  to  and  intend  to  vigorously   contest  the  proposed
adjustments  made to our  federal  income tax  returns  for the years ended 1996
through 2002. If the proposed  adjustments are upheld through the administrative
and legal  process,  they could have a material  impact on our earnings  and, in
particular, cash flow. We may not have an adequate cash reserve to pay the final
adjustments resulting from the IRS examination.  As a result, we may be required
to arrange for payments over time or raise  additional  capital in order to meet
these  obligations.  We  believe  we have  provided  adequate  reserves  for any
reasonably  foreseeable  outcome  related to these  matters on the  consolidated
balance  sheets  included in the  consolidated  financial  statements  under the
caption  "Income  Taxes."  The  maximum  amount of loss in excess of the  amount
accrued in the financial  statements is $7.7 million. We do not believe that the
adjustments,  if any,  arising  from  the IRS  examination,  will  result  in an
additional  income tax  liability  beyond what is  recorded in the  accompanying
consolidated balance sheets.

         We may seek to  finance  future  capital  investment  programs  through
various methods, including, but not limited to, borrowings under our bank credit
facilities,  issuance of long-term debt, sales of equity securities,  leases and
long-term  financing  provided by the sellers of  facilities or the suppliers of
certain  equipment used in such  facilities.  To date,  there is no plan for any
major capital expenditure.

         We do not believe that the  moderate  levels of inflation in the United
States in the last  three  years have had a  significant  effect on net sales or
profitability.

RELATED PARTY TRANSACTIONS

         We lease our executive  offices in Los Angeles,  California from GET, a
corporation  which is owned by  Gerard  Guez (our  Chairman  and  Interim  Chief
Executive  Officer)  and  Todd  Kay  (our  Vice  Chairman),  both of  which  are
significant shareholders.  Additionally, we lease our warehouse and office space
in Hong Kong from Lynx  International  Limited,  a Hong Kong corporation that is
owned by Messrs. Guez and Kay. We paid $269,000 and


                                       28



$255,000  in  rent  in  the  three   months  ended  March  31,  2006  and  2005,
respectively,  for office and warehouse facilities.  Our Los Angeles offices and
warehouse  is leased on a month to month basis.  On January 1, 2006,  we renewed
our lease agreement with Lynx International Limited for our office space in Hong
Kong for one year.

         In August 2004,  we entered  into an  Agreement  for Purchase of Assets
with  affiliates  of  Mr.  Kamel  Nacif,  a  shareholder  at  the  time  of  the
transaction,  which  agreement  was  amended in October  2004.  Pursuant  to the
agreement,  as  amended,  on  November  30,  2004,  we  sold  to the  purchasers
substantially  all of our assets and real  property  in  Mexico,  including  the
equipment  and  facilities  we previously  leased to Mr.  Nacif's  affiliates in
October 2003, for an aggregate purchase price consisting of: a) $105,400 in cash
and  $3,910,000 by delivery of unsecured  promissory  notes bearing  interest at
5.5% per annum;  and b)  $40,204,000,  by delivery of secured  promissory  notes
bearing interest at 4.5% per annum, maturing on December 31, 2005 and every year
thereafter until December 31, 2014. The secured  promissory notes are payable in
partial or total amounts anytime prior to the maturity of each note. Included in
the $41.0 million notes receivable - related party on the  accompanying  balance
sheet as of March 31, 2006 was $1.3  million of Mexico  value added taxes on the
real property  component of this transaction.  Upon consummation of the sale, we
entered into a purchase  commitment  agreement with the purchasers,  pursuant to
which  we have  agreed  to  purchase  annually  over  the  ten-year  term of the
agreement,  $5 million of fabric  manufactured at our former facilities acquired
by the purchasers at negotiated  market prices.  We purchased $0 and $840,000 of
fabric from  Acabados y Terminados  in the three months ended March 31, 2006 and
2005,  respectively.  Net amount due from these parties as of March 31, 2006 was
$507,000.

         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, Mr. Guez.  The greatest  outstanding  balance of such  advances to Mr.
Guez in the first  quarter of 2006 was  approximately  $2,279,000.  At March 31,
2006,  the entire  balance due from Mr. Guez totaling $2.3 million is payable on
demand  and  has  been  shown  as  reductions  to  shareholders'  equity  in the
accompanying  financial  statements.  All advances to, and borrowings  from, Mr.
Guez bore interest at the rate of 7.75% during the period.  Total  interest paid
by Mr. Guez was $44,000  and $74,000 for the three  months  ended March 31, 2006
and 2005,  respectively.  Mr. Guez paid expenses on our behalf of  approximately
$67,000  and  $108,000  for the three  months  ended  March  31,  2006 and 2005,
respectively,  which  amounts  were  applied  to  reduce  accrued  interest  and
principal on Mr. Guez's loan.  These amounts  included fuel and related expenses
incurred by 477 Aviation,  LLC, a company owned by Mr. Guez, when our executives
used this company's aircraft for business  purposes.  Since the enactment of the
Sarbanes-Oxley Act in 2002, no further personal loans (or amendments to existing
loans) have been or will be made to our executive officers or directors.

         On July 1, 2001, we formed an entity to jointly  market,  share certain
risks and achieve economies of scale with Azteca Production International,  Inc.
("Azteca"),  a corporation  owned by the brothers of Gerard Guez,  our Chairman,
called  United  Apparel  Ventures,  LLC  ("UAV").  This  entity  was  created to
coordinate  the  production  of apparel  for a single  customer  of our  branded
business. UAV is owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary,  and
49.9% by Azteca. Results of the operation of UAV have been consolidated into our
results  since July 2001 with the  minority  partner's  share of gain and losses
eliminated through the minority interest line in our financial  statements.  Due
to the restructuring of our Mexico operations, we discontinued manufacturing for
UAV customers in the second quarter of 2004. UAV made purchases from two related
parties in Mexico, an affiliate of Azteca and Tag-It Pacific, Inc.

         At March 31, 2006, Messrs.  Guez and Kay beneficially owned 590,000 and
1,003,500  shares,  respectively,  of  common  stock  of  Tag-It  Pacific,  Inc.
("Tag-It"),  collectively  representing  approximately  8.7% of Tag-It Pacific's
common stock.  Tag-It is a provider of brand identity  programs to manufacturers
and retailers of apparel and accessories. Starting from 1998, Tag-It assumed the
responsibility  for  managing  and  sourcing  all  trim  and  packaging  used in
connection with products  manufactured  by or on behalf of us in Mexico.  Due to
the  restructuring of our Mexico  operations,  Tag-It no longer manages our trim
and packaging  requirements.  We purchased $97,000 and $0 of trim inventory from
Tag-It in the three  months  ended  March 31,  2006 and 2005,  respectively.  We
purchased  $0 and  $135,000  of finished  goods and service  from Azteca and its
affiliates in the three months ended March 31, 2006 and 2005, respectively.  Our
total sales of fabric and service to Azteca in the three  months ended March 31,
2006 and 2005 were $9,000 and $63,000,  respectively.  Pursuant to the operating
agreement  for UAV,  two and one half percent of gross sales of UAV were paid to
each of the members of UAV as management fees. Net amount due from these related
parties as of March 31, 2006 was $5.6 million.


                                       29



         We  believe  that  each of the  transactions  described  above has been
entered into on terms no less favorable to us than could have been obtained from
unaffiliated  third  parties.  We have  adopted a policy  that any  transactions
between us and any of our affiliates or related parties, including our executive
officers,  directors,  the family members of those  individuals and any of their
affiliates,  must (i) be  approved  by a majority of the members of the Board of
Directors  and by a  majority  of the  disinterested  members  of the  Board  of
Directors  and (ii) be on terms no less  favorable  to us than could be obtained
from unaffiliated third parties.


                                       30



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         FOREIGN CURRENCY RISK. Our earnings are affected by fluctuations in the
value of the U.S. dollar as compared to foreign  currencies as a result of doing
business  in foreign  jurisdictions.  As a result,  we bear the risk of exchange
rate gains and losses  that may result in the  future.  At times we use  forward
exchange contracts to reduce the effect of fluctuations of foreign currencies on
purchases  and  commitments.   These  short-term   assets  and  commitments  are
principally  related to trade payables  positions.  We do not utilize derivative
financial  instruments for trading or other  speculative  purposes.  We actively
evaluate the  creditworthiness  of the financial  institutions  that are counter
parties to derivative  financial  instruments,  and we do not expect any counter
parties to fail to meet their obligations.

         INTEREST RATE RISK.  Because our  obligations  under our various credit
agreements  bear interest at floating  rates  (primarily  prime  rates),  we are
sensitive  to  changes in  prevailing  interest  rates.  Any major  increase  or
decrease in market  interest rates that affect our financial  instruments  would
have a material impact on earning or cash flows during the next fiscal year.

         Our interest  expense is  sensitive to changes in the general  level of
U.S.  interest  rates.  In this regard,  changes in U.S.  interest  rates affect
interest paid on our debt. A majority of our credit  facilities  are at variable
rates.

ITEM 4.  CONTROLS AND PROCEDURES.

         EVALUATION OF CONTROLS AND PROCEDURES

         Members of the our management,  including our Chief  Executive  Officer
and Chief Financial  Officer have evaluated the  effectiveness of our disclosure
controls  and  procedures,  as defined by  paragraph  (e) of Exchange  Act Rules
13a-15 or 15d-15,  as of March 31, 2006,  the end of the period  covered by this
report. Members of the our management, including our Chief Executive Officer and
Chief Financial  Officer,  also conducted an evaluation of our internal  control
over financial  reporting to determine  whether any changes  occurred during the
further quarter of 2006 that have materially affected,  or are reasonably likely
to materially affect, our internal control over financial reporting.  Based upon
that  evaluation,  the  Chief  Executive  Officer  and Chief  Financial  Officer
concluded that our disclosure controls and procedures are effective.

         CHANGES IN CONTROLS AND PROCEDURES

         There were no significant  changes in our internal controls or in other
factors that could  significantly  affect internal controls,  known to the Chief
Executive  Officer or the Chief  Financial  Officer  during the first quarter of
2006.


                                       31



                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         On or about April 6, 2006, we commenced an action  against the licensor
of the Jessica  Simpson  brands in the  Supreme  Court of the State of New York,
County of New York. The suit named Camuto Consulting Group, Inc., VCJS LLC, With
You, Inc. and Jessica  Simpson as  defendants,  and asserts that the  defendants
failed to provide promised  support in connection with our sublicense  agreement
for the Jessica Simpson brands.  The complaint  includes eight causes of action,
including two seeking a declaration  that the sublicense  agreement is exclusive
and remains in full force and  effect,  as well as claims for breach of contract
by Camuto,  breach of the duty of good  faith and fair  dealing  and  fraudulent
inducement  against  Camuto,  and a claim against With You, Inc. and Ms. Simpson
that we are an intended third party  beneficiary  of the licenses  between those
defendants and Camuto.  On our about April 26, 2006, Camuto served its answer to
our  complaint  and  included  a  counterclaim  against  us  for  breach  of the
sublicense  agreement and alleging  damages of no less than $100 million.  On or
about April 17, 2006, Ms. Simpson served a motion seeking dismissal of the cause
of  action  asserted  against  her.  We  intend to  vigorously  defend  Camuto's
counterclaim and vigorously oppose Ms. Simpson's motion.

         From time to time, we are involved in various routine legal proceedings
incidental to the conduct of our business.  Our management does not believe that
any of these  legal  proceedings  will  have a  material  adverse  impact on our
business, financial condition or results of operations, either due to the nature
of the claims,  or because our  management  believes that such claims should not
exceed the limits of the our insurance coverage.

ITEM 1A. RISK FACTORS.

         This Quarterly Report on Form 10-Q contains forward-looking statements,
which are subject to a variety of risks and  uncertainties.  Our actual  results
could  differ  materially  from  those  anticipated  in  these   forward-looking
statements as a result of various factors, including those set forth below.

RISKS RELATED TO OUR BUSINESS

WE DEPEND ON A GROUP OF KEY CUSTOMERS FOR A SIGNIFICANT  PORTION OF OUR SALES. A
SIGNIFICANT  ADVERSE  CHANGE  IN A  CUSTOMER  RELATIONSHIP  OR  IN A  CUSTOMER'S
FINANCIAL POSITION COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.

         Four  customers  accounted  for  approximately  49% of our net sales in
first three months of 2006. We believe that consolidation in the retail industry
has centralized  purchasing  decisions and given customers greater leverage over
suppliers,  like us, and we expect this trend to continue. If this consolidation
continues, our net sales and results of operations may be increasingly sensitive
to  deterioration in the financial  condition of, or other adverse  developments
with, one or more of our customers.

         While we have long-standing customer relationships, we generally do not
have  long-term   contracts  with  them.   Purchases   generally   occur  on  an
order-by-order  basis, and  relationships  exist as long as there is a perceived
benefit to both parties.  A decision by a major customer,  whether  motivated by
competitive considerations,  financial difficulties,  and economic conditions or
otherwise,  to decrease its  purchases  from us or to change its manner of doing
business with us, could adversely  affect our business and financial  condition.
In addition,  during  recent years,  various  retailers,  including  some of our
customers,  have experienced  significant  changes and  difficulties,  including
consolidation of ownership,  increased  centralization of purchasing  decisions,
restructurings, bankruptcies and liquidations.

         These and other financial problems of some of our retailers, as well as
general  weakness  in the retail  environment,  increase  the risk of  extending
credit  to  these  retailers.   A  significant  adverse  change  in  a  customer
relationship  or in a customer's  financial  position could cause us to limit or
discontinue  business with that customer,  require us to assume more credit risk
relating to that  customer's  receivables,  limit our ability to collect amounts
related to previous purchases by that customer, or result in required prepayment
of our  receivables  securitization  arrangements,  all of which  could harm our
business and financial condition.


                                       32



FAILURE OF THE  TRANSPORTATION  INFRASTRUCTURE TO MOVE SEA FREIGHT IN ACCEPTABLE
TIME FRAMES COULD ADVERSELY AFFECT OUR BUSINESS.

         Because the bulk of our  freight is  designed to move  through the West
Coast ports in  predictable  time frames,  we are at risk of  cancellations  and
penalties when those ports operate inefficiently creating delays in delivery. We
experienced  such  delays  from  June  2004  until  November  2004,  and  we may
experience  similar  delays  in  the  future  especially  during  peak  seasons.
Unpredictable  timing for  shipping  may cause us to utilize  air freight or may
result in customer  penalties for late  delivery,  any of which could reduce our
operating margins and adversely affect our results of operations.

UNPREDICTABLE  DELAYS  AS  THE  RESULT  OF  INCREASED  AND  INTENSIFIED  CUSTOMS
ACTIVITY.

         U.S.  Customs has stepped up efforts to  scrutinize  imports  from Hong
Kong in order to verify all details of  shipments  under the OPA rules  allowing
certain  processes to be performed in China without shipping under China country
of origin  documentation.  Such "detentions" are unpredictable and cause serious
interruption of normally expected freight movement timetables.

THE  OUTCOME OF  LITIGATION  IN WHICH WE ARE  INVOLVED IS  UNPREDICTABLE  AND AN
ADVERSE  DECISION IN ANY SUCH MATTER COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
FINANCIAL POSITION AND RESULTS OF OPERATIONS.

         We are  currently  in  litigation  with the  licensors  of the  Jessica
Simpson brands regarding our rights to sell apparel under these brands. See Part
II of this report, Item 1 "Legal Proceedings" for a detailed description of this
lawsuit.  The licensor has filed a counterclaim against us seeking damage. These
claims may divert  financial and management  resources  that would  otherwise be
used to benefit our  operations.  Although we believe  that we have  meritorious
defenses  to the claims  made  against  us, and  intend to contest  the  lawsuit
vigorously, no assurances can be given that the results of these matters will be
favorable to us. An adverse  resolution  of any of these  lawsuits  could have a
material  adverse  affect on our financial  position and results of  operations.
Additionally,  we have incurred  significant legal fees in this litigation,  and
unless the case is settled,  we will continue to incur  additional legal fees in
increasing amounts as the case accelerates to trial.

FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.

         Since our inception,  we have experienced  periods of rapid growth.  No
assurance can be given that we will be successful in  maintaining  or increasing
our sales in the  future.  Any future  growth in sales will  require  additional
working capital and may place a significant strain on our management, management
information systems,  inventory  management,  sourcing capability,  distribution
facilities and receivables  management.  Any disruption in our order processing,
sourcing or  distribution  systems  could cause orders to be shipped  late,  and
under  industry  practices,  retailers  generally can cancel orders or refuse to
accept goods due to late shipment.  Such  cancellations and returns would result
in a reduction in revenue,  increased  administrative  and shipping  costs and a
further burden on our distribution facilities.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

         We have experienced, and expect to continue to experience,  substantial
variations  in our net sales and operating  results from quarter to quarter.  We
believe that the factors which influence this  variability of quarterly  results
include  the  timing of our  introduction  of new  product  lines,  the level of
consumer  acceptance  of each new product  line,  general  economic and industry
conditions  that  affect  consumer   spending  and  retailer   purchasing,   the
availability of manufacturing  capacity, the seasonality of the markets in which
we participate,  the timing of trade shows,  the product mix of customer orders,
the timing of the placement or  cancellation  of customer  orders,  the weather,
transportation  delays, the occurrence of charge backs in excess of reserves and
the timing of  expenditures  in  anticipation  of increased sales and actions of
competitors.  Due to  fluctuations  in our revenue and  operating  expenses,  we
believe that period-to-period comparisons of our results of operations are not a
good  indication of our future  performance.  It is possible that in some future
quarter or quarters,  our operating  results will be below the  expectations  of
securities analysts or investors.  In that case, our stock price could fluctuate
significantly or decline.


                                       33



WE DEPEND ON OUR COMPUTER AND COMMUNICATIONS SYSTEMS.

         As  a  multi-national   corporation,   we  rely  on  our  computer  and
communication  network to operate efficiently.  Any interruption of this service
from power loss,  telecommunications  failure, weather, natural disasters or any
similar  event  could  have  a  material  adverse  affect  on our  business  and
operations. Additionally, hackers and computer viruses have disrupted operations
at many major companies. We may be vulnerable to similar acts of sabotage, which
could have a material adverse effect on our business and operations.

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.

         We may not be able to fund our  future  growth or react to  competitive
pressures if we lack sufficient funds.  Currently, we believe we have sufficient
cash on hand and cash available through our bank credit facilities,  issuance of
long-term  debt and equity  securities,  and proceeds from the exercise of stock
options to fund existing operations for the foreseeable future.  However, in the
future we may need to raise  additional  funds through equity or debt financings
or collaborative relationships. This additional funding may not be available or,
if  available,  it may not be available on  economically  reasonable  terms.  In
addition,  any additional funding may result in significant dilution to existing
shareholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through  collaborative  partners that may require
us to release material rights to our products.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.

         Substantially  all of our  import  operations  are  subject  to tariffs
imposed on imported  products,  safeguards and growth  targets  imposed by trade
agreements. In addition, the countries in which our products are manufactured or
imported may from time to time impose  additional  new duties,  tariffs or other
restrictions on our imports or adversely modify existing  restrictions.  Adverse
changes in these import costs and  restrictions,  or our  suppliers'  failure to
comply with customs or similar laws,  could harm our business.  We cannot assure
that future trade  agreements will not provide our competitors with an advantage
over us, or increase our costs,  either of which could have an adverse effect on
our business and financial condition.

         Our operations are also subject to the effects of  international  trade
agreements and regulations such as the North American Free Trade Agreement,  and
the activities and regulations of the World Trade Organization. Generally, these
trade  agreements  benefit our  business by reducing or  eliminating  the duties
assessed  on products  manufactured  in a  particular  country.  However,  trade
agreements can also impose requirements that adversely affect our business, such
as limiting the  countries  from which we can purchase raw materials and setting
duties or  restrictions  on products that may be imported into the United States
from a  particular  country.  In  addition,  the World  Trade  Organization  may
commence a new round of trade  negotiations  that  liberalize  textile  trade by
further  eliminating  or reducing  tariffs.  The  elimination of quotas on World
Trade Organization  member countries in 2005 has resulted in explosive growth in
textile imports from China, and subsequent  safeguard measures including embargo
of  certain  China  country of origin  products.  Actions  taken to avoid  these
measures caused  disruption,  and a negative impact on margins.  Such disruption
may continue to affect us to some extent in the future.

OUR DEPENDENCE ON INDEPENDENT  MANUFACTURERS  REDUCES OUR ABILITY TO CONTROL THE
MANUFACTURING  PROCESS,  WHICH  COULD HARM OUR  SALES,  REPUTATION  AND  OVERALL
PROFITABILITY.

         We depend on independent contract  manufacturers to secure a sufficient
supply of raw  materials  and  maintain  sufficient  manufacturing  and shipping
capacity in an environment  characterized by declining  prices,  labor shortage,
continuing  cost  pressure  and  increased  demands for product  innovation  and
speed-to-market.  This  dependence  could  subject us to difficulty in obtaining
timely delivery of products of acceptable quality.  In addition,  a contractor's
failure  to ship  products  to us in a timely  manner  or to meet  the  required
quality  standards could cause us to miss the delivery date  requirements of our
customers.  The failure to make timely  deliveries  may cause our  customers  to
cancel  orders,  refuse  to accept  deliveries,  impose  non-compliance  charges
through  invoice  deductions or other  charge-backs,  demand  reduced  prices or
reduce future orders, any of which could harm our sales,  reputation and overall
profitability.  We do not  have  material  long-term  contracts  with any of our
independent  contractors and any of these contractors may unilaterally terminate
their  relationship with us at any time. To the extent we are not able to secure
or maintain relationships with independent  contractors that are able to fulfill
our requirements, our business would be harmed.


                                       34



         We have  initiated a factory  compliance  agreement with our suppliers,
and monitor our independent  contractors' compliance with applicable labor laws,
but we do not control our contractors or their labor practices. The violation of
federal,  state or foreign labor laws by one of the our contractors could result
in our being subject to fines and our goods that are  manufactured  in violation
of such laws being seized or their sale in interstate commerce being prohibited.
From  time to  time,  we  have  been  notified  by  federal,  state  or  foreign
authorities that certain of our contractors are the subject of investigations or
have been found to have  violated  applicable  labor laws.  To date, we have not
been subject to any sanctions that, individually or in the aggregate, have had a
material  adverse  effect on our business,  and we are not aware of any facts on
which any such  sanctions  could be based.  There can be no assurance,  however,
that in the future we will not be subject to sanctions as a result of violations
of applicable  labor laws by our  contractors,  or that such  sanctions will not
have a material  adverse  effect on our business and results of  operations.  In
addition,  certain of our customers,  require strict compliance by their apparel
manufacturers, including us, with applicable labor laws and visit our facilities
often.  There can be no assurance that the violation of applicable labor laws by
one  of  our  contractors  will  not  have  a  material  adverse  effect  on our
relationship with our customers.

         OUR DEPENDENCE ON THIRD PARTIES FOR BRANDED  APPAREL  PRODUCTS  REDUCES
OUR  ABILITY TO  CONTROL  THE  MARKETING  PROCESS,  WHICH  COULD HARM OUR SALES,
REPUTATION AND OVERALL PROFITABILITY.

         For certain branded apparel lines, in particular  celebrity  brands, we
depend on the cooperation and efforts of the celebrity personality and/or master
licensor to support our design and  marketing  efforts for apparel  products.  A
celebrity's  failure to adequately support our marketing efforts could adversely
affect the sales for new products and lines. In addition,  we are subject to the
terms of our agreements  with the master licensor for licensed  brands,  and our
rights to exploit certain brands may therefore be limited. Further, we may, from
time to time,  become involved in disputes with the master licensor with respect
to our  contractual  relationship.  To the  extent  we are not  able to  receive
adequate  support from the master  licensor  and/or  celebrity or maintain  good
working relationships with master licensors, our business would be harmed.

OUR  BUSINESS IS SUBJECT TO RISKS OF  OPERATING  IN A FOREIGN  COUNTRY AND TRADE
RESTRICTIONS.

         Approximately  90% of our products  were imported from outside the U.S.
in fiscal 2005. We are subject to the risks  associated  with doing  business in
foreign  countries,  including,  but not limited to,  transportation  delays and
interruptions,  political instability,  expropriation, currency fluctuations and
the imposition of tariffs, import and export controls, other non-tariff barriers
and cultural  issues.  Any changes in those countries' labor laws and government
regulations may have a negative effect on our profitability.

RISK ASSOCIATED WITH OUR INDUSTRY

OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.

         Apparel  is a cyclical  industry  that is  heavily  dependent  upon the
overall level of consumer spending.  Purchases of apparel and related goods tend
to be highly  correlated with cycles in the disposable  income of our consumers.
Our customers  anticipate and respond to adverse changes in economic  conditions
and uncertainty by reducing  inventories and canceling orders. As a result,  any
substantial deterioration in general economic conditions,  increases in interest
rates,  acts of war,  terrorist  or  political  events  that  diminish  consumer
spending and confidence in any of the regions in which we compete,  could reduce
our sales and adversely affect our business and financial condition.

OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING PATTERNS.

         The  apparel  industry  is highly  competitive.  We face a  variety  of
competitive challenges including:

         o        anticipating  and  quickly  responding  to  changing  consumer
                  demands;

         o        developing innovative,  high-quality products in sizes, colors
                  and styles that appeal to  consumers of varying age groups and
                  tastes;

         o        competitively  pricing our  products  and  achieving  customer
                  perception of value; and


                                       35



         o        the need to provide strong and effective marketing support.

WE MUST SUCCESSFULLY  GAUGE FASHION TRENDS AND CHANGING CONSUMER  PREFERENCES TO
SUCCEED.

         Our success is largely  dependent upon our ability to gauge the fashion
tastes of our customers and to provide  merchandise  that  satisfies  retail and
customer demand in a timely manner. The apparel business fluctuates according to
changes in consumer  preferences  dictated in part by fashion and season. To the
extent we misjudge  the market for our  merchandise;  our sales may be adversely
affected.  Our ability to anticipate and effectively respond to changing fashion
trends depends in part on our ability to attract and retain key personnel in our
design,  merchandising  and marketing staff.  Competition for these personnel is
intense,  and we  cannot be sure that we will be able to  attract  and  retain a
sufficient number of qualified personnel in future periods.

OUR BUSINESS IS SUBJECT TO SEASONAL TRENDS.

         Historically,  our  operating  results  have been  subject to  seasonal
trends when measured on a quarterly  basis.  This trend is dependent on numerous
factors,  including the markets in which we operate,  holiday seasons,  consumer
demand,  climate,  economic  conditions  and numerous  other factors  beyond our
control.  There can be no assurance  that our historic  operating  patterns will
continue in future  periods as we cannot  influence  or  forecast  many of these
factors.

OTHER RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

THE ULTIMATE RESOLUTION OF THE INTERNAL REVENUE SERVICE'S EXAMINATION OF OUR TAX
RETURNS MAY REQUIRE US TO INCUR AN EXPENSE  BEYOND WHAT HAS BEEN RESERVED FOR ON
OUR BALANCE SHEET OR MAKE CASH PAYMENTS BEYOND WHAT WE ARE THEN ABLE TO PAY.

         In January 2004, the Internal Revenue Service  proposed  adjustments to
increase  our federal  income tax payable for the years ended  December 31, 1996
through  2001.  This  adjustment  would also result in  additional  state taxes,
penalties  and  interest.  In  addition,  in July  2004,  the IRS  initiated  an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996  through  2001  federal  income tax  returns.  We believe  that we have
meritorious   defenses  to  and  intend  to  vigorously   contest  the  proposed
adjustments  made to our  federal  income tax  returns  for the years ended 1996
through 2002. If the proposed  adjustments are upheld through the administrative
and legal  process,  they could have a material  impact on our earnings and cash
flow.  We  believe  we  have  provided  adequate  reserves  for  any  reasonably
foreseeable outcome related to these matters on the consolidated  balance sheets
included in the Consolidated Financial Statements. The maximum amount of loss in
excess of the amount accrued in the financial statements is $7.7 million. If the
amount  of any  actual  liability,  however,  exceeds  our  reserves,  we  would
experience an immediate adverse earnings impact in the amount of such additional
liability,  which  could  be  material.  Additionally,  we  anticipate  that the
ultimate  resolution of these matters will require that we make significant cash
payments to the taxing authorities.  Presently we do not have sufficient cash or
borrowing ability to make any future payments that may be required. No assurance
can be given that we will have  sufficient  surplus cash from operations to make
the required payments.  Additionally,  any cash used for these purposes will not
be available for other corporate  purposes,  which could have a material adverse
effect on our financial condition and results of operations.

INSIDERS OWN A SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD LIMIT OUR
SHAREHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.

         As of March 31, 2006,  our  executive  officers and directors and their
affiliates  owned  approximately  43% of the  outstanding  shares of our  common
stock.  Gerard Guez, our Chairman and Interim Chief Executive Officer,  and Todd
Kay, our Vice Chairman, alone own approximately 33.1% and 8.4%, respectively, of
the outstanding shares of our common stock at March 31, 2006.  Accordingly,  our
executive  officers and directors  have the ability to affect the outcome of, or
exert considerable  influence over, all matters requiring  shareholder approval,
including the election and removal of directors and any change in control.  This
concentration of ownership of our common stock could have the effect of delaying
or preventing a change of control of us or otherwise  discouraging or preventing
a potential  acquirer from  attempting  to obtain  control of us. This, in turn,
could have a negative effect on the market


                                       36



price of our common stock. It could also prevent our shareholders from realizing
a premium over the market prices for their shares of common stock.

WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.

         Our shareholders rights plan, our ability to issue additional shares of
preferred stock and some provisions of our articles of incorporation  and bylaws
could make it more difficult for a third party to make an  unsolicited  takeover
attempt of us. These anti-takeover  measures may depress the price of our common
stock by making it more difficult for third parties to acquire us by offering to
purchase  shares of our stock at a premium to its market price without  approval
of our board of directors.

OUR STOCK PRICE HAS BEEN VOLATILE.

         Our common stock is quoted on the NASDAQ  National  Market System,  and
there can be substantial volatility in the market price of our common stock. The
market  price of our common  stock has been,  and is likely to  continue  to be,
subject  to  significant  fluctuations  due to a variety of  factors,  including
quarterly variations in operating results, operating results which vary from the
expectations  of  securities  analysts  and  investors,   changes  in  financial
estimates,  changes in market valuations of competitors,  announcements by us or
our competitors of a material nature,  loss of one or more customers,  additions
or  departures of key  personnel,  future sales of common stock and stock market
price and volume  fluctuations.  In  addition,  general  political  and economic
conditions such as a recession,  or interest rate or currency rate  fluctuations
may adversely affect the market price of our common stock.

         In addition,  the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price of our common stock.
Often, price fluctuations are unrelated to operating performance of the specific
companies whose stock is affected.  In the past, following periods of volatility
in the market price of a company's stock, securities class action litigation has
occurred  against  the  issuing  company.  If we were  subject  to this  type of
litigation in the future,  we could incur  substantial  costs and a diversion of
our  management's  attention and resources,  each of which could have a material
adverse effect on our revenue and earnings.  Any adverse  determination  in this
type of litigation could also subject us to significant liabilities.

ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.

         Some investors  favor  companies that pay  dividends,  particularly  in
general  downturns  in the stock  market.  We have not declared or paid any cash
dividends on our common stock. We currently intend to retain any future earnings
for funding growth, and we do not currently  anticipate paying cash dividends on
our  common  stock  in the  foreseeable  future.  Additionally,  we  cannot  pay
dividends on our common stock unless the terms of our bank credit facilities and
outstanding  preferred  stock,  if any,  permit the payment of  dividends on our
common stock.  Because we may not pay dividends,  your return on this investment
likely depends on your selling our stock at a profit.


                                       37



ITEM 6.  EXHIBITS.

         EXHIBIT
         NUMBER            DESCRIPTION
         -------           -----------------------------------------------------

         10.8.2            Amendment to Factoring  Agreement dated as of January
                           23, 2006 by and among GMAC Commercial Finance LLC and
                           Tarrant Apparel Group,  Fashion Resource (TCL), Inc.,
                           TAG Mex, Inc., United Apparel Ventures,  LLC, Private
                           Brands, Inc. and NO! Jeans, Inc.

         10.16.24          Sixteenth  Deed of Variation to Syndicated  Letter of
                           Credit  Facility  effective  as of January  31,  2006
                           among Tarrant  Company  Limited,  Marble  Limited and
                           Trade Link  Holdings  Limited and UPS Capital  Global
                           Trade Finance Corporation.

         10.34             Promissory Note in the principal amount of $4,000,000
                           dated as of  January  19,  2006,  issued  by  Tarrant
                           Apparel Group in favor of Max Azria.

         31.1              Certificate of Chief  Executive  Officer  pursuant to
                           Rule 13a-14(a)  under the Securities and Exchange Act
                           of 1934, as amended.

         31.2              Certificate of Chief  Financial  Officer  pursuant to
                           Rule 13a-14(a)  under the Securities and Exchange Act
                           of 1934, as amended.

         32.1              Certificate of Chief  Executive  Officer  pursuant to
                           Rule 13a-14(b)  under the Securities and Exchange Act
                           of 1934, as amended.

         32.2              Certificate of Chief  Financial  Officer  pursuant to
                           Rule 13a-14(b)  under the Securities and Exchange Act
                           of 1934, as amended.


                                       38



                                   SIGNATURES


         Pursuant to the  requirements  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.

                                         TARRANT APPAREL GROUP

Date:    May 15, 2006                    By:          /s/    Corazon Reyes
                                                 -------------------------------
                                                         Corazon Reyes,
                                                     Chief Financial Officer


Date:    May 15, 2006                    By:       /s/    Gerard Guez
                                                 -------------------------------
                                                          Gerard Guez,
                                                 Interim Chief Executive Officer


                                       39