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					FORM 10−K
INNOVO GROUP INC − INNO
Filed: February 27, 2004 (period: November 29, 2003)
Annual report which provides a comprehensive overview of the company for the past year
                  Table of Contents
PART I

ITEM 1.    BUSINESS
ITEM 2.    PROPERTIES
ITEM 3.    LEGAL PROCEEDINGS
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL
ITEM 9A. CONTROLS AND PROCEDURES


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT AND
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
            FORM 8−K
Item 7(a).
SIGNATURES
Item 15(a). These financial statements and schedule are the responsibility of

EX−10 (Material contracts)

EX−10 (Material contracts)

EX−10 (Material contracts)

EX−10 (Material contracts)

EX−10 (Material contracts)
EX−10 (Material contracts)

EX−10 (Material contracts)

EX−10 (Material contracts)

EX−14 (Code of Ethics and Business Conduct)

EX−21 (Subsidiaries of the registrant)

EX−23 (Consents of experts and counsel)

EX−31

EX−31

EX−32
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10−K

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

                   For the fiscal year ended November 29, 2003

                         Commission file number: 0−18926


                                INNOVO GROUP INC.

             (Exact name of registrant as specified in its charter)

             Delaware                            11−2928178
  (State or other jurisdiction of     (I.R.S. Employer Identification No.)
   incorporation or organization)

              5804 East Slauson Avenue, Commerce, California 90040
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (323) 725−5516

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

          Securities registered pursuant to Section 12 (g) of the Act:
                  Common Stock, $.10 par value (Title of Class)

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


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

Indicate by check mark whether the registrant is an         accelerated   filer (as
defined by Rule 12b−2 of the Act.) Yes [ ] No [ X ]

The aggregate market value of the voting and non−voting common stock held by
non−affiliates of the registrant based on the closing price of the registrant's
common stock on the NASDAQ Stock Market, Inc. as of May 30, 2003, was
approximately $43,267,092.

The number of shares of the registrant's common stock outstanding as of February
25, 2004 was 25,793,850.


Documents incorporated by reference: Portions of the registrant's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the end of the
fiscal year are incorporated by reference in Part III of this Annual Report on Form 10−K.
                                      INNOVO GROUP INC.

                                   FORM 10−K ANNUAL REPORT

                      FOR THE FISCAL YEAR ENDED NOVEMBER 29, 2003

                                      Table of Contents



Item
Number                                                                                   Page
−−−−−−                                                                                   −−−−
                                              PART I

Item   1.   Business                                                                         1
Item   2.   Properties                                                                      26
Item   3.   Legal Proceedings                                                               26
Item   4.   Submission of Matters to a Vote of Security Holders                             26

                                              PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder                   27
                Matters
Item 6.     Selected Consolidated Financial Data                                            29
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of      30
                Operations
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                      53
Item 8.     Financial Statements and Supplementary Data                                     54
Item 9.     Changes in and Disagreements With Accountants on Accounting and
                Financial Disclosure                                                        54
Item 9A.    Controls and Procedures                                                         54

                                              PART III

Item 10.    Directors and Executive Officers of the Registrant                              56
Item 11.    Executive Compensation                                                          56
Item 12.    Security Ownership of Certain Beneficial Owners and Management and
                Related Stockholder Matters                                                 56
Item 13.    Certain Relationships and Related Transactions                                  56
Item 14.    Principal Accountant Fees and Services                                          56

                                              PART IV

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8−K                57


Signature Page
                                     PART I

Forward−Looking Statements

Statements contained in this Annual Report on Form 10−K and in future filings
with the Securities and Exchange Commission, or the SEC, in our press releases
or in our other public or shareholder communications that are not purely
historical facts are forward−looking statements. Statements looking forward in
time are included in this Annual Report on Form 10−K pursuant to the "safe
harbor" provision of the Private Securities Litigation Reform Act of 1995. Such
forward−looking statements include, without limitation, any statement that may
predict, forecast,    indicate, or imply future results,       performance,   or
achievements, and may contain the words, "believe", "anticipate", "expect",
"estimate", "intend", "plan", "project", "will be", "will continue", "will
likely result", and any variations of such words with similar meanings. These
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict, therefore, actual results
may differ    materially    from those expressed or forecasted in any such
forward−looking statements.

Factors that would cause or contribute to such differences include, but are not
limited to, the risk factors contained or referenced under the headings
"Business," "Risk Factors" and "Managements Discussion and Analysis of Financial
Condition and Results of Operations" set forth in this Annual Report on Form
10−K. Since we operate in a rapidly changing environment, new risk factors can
arise and it is not possible for our management to predict all such risk
factors, nor can it assess the impact of all such risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward−looking
statements. Given these risks and uncertainties, readers are cautioned not to
place undue reliance on forward−looking statements that only speak as of the
date of this filing.


We undertake no obligation to publicly revise these forward−looking statements to reflect
events, circumstances or the occurrence of unanticipated events that occur subsequent to the
date of this Annual Report on Form 10−K. As used in this Annual Report on Form 10−K, the terms
"we", "us", "our", and "Innovo Group" refer to Innovo Group Inc. and our subsidiaries and
affiliates, unless the context indicates otherwise.


ITEM 1. BUSINESS

Our principal business activity involves the design, development and worldwide
marketing of high quality consumer products for the apparel and accessory
markets. We do not manufacture any apparel or accessory products but outsource
the manufacturing to third parties. We sell our products to a large number of
different retail, distributors and private label customers around the world.
Retail customers and distributors purchase finished goods directly from us.
Retail customers then sell the product through their retail stores and
distributors sell our products to retailers in the international market place.
Private label customers outsource the production and sourcing of their private
label products to us and then sell through their own distribution channels.
Private label customers are generally retail chains who desire to sell apparel
and accessory products under their own brand name. We work with our private
label customers to create their own brand image by custom designing products. In
creating a unique brand, our private label customers may provide samples to us
or may select styles already available in our showrooms. We believe we have
established a reputation among these private label buyers for the ability to
arrange for the manufacture of apparel and accessory products on a reliable,
expeditious and cost−effective basis. Our branded label products, which include
accessories and apparel, are designed, developed and marketed by us internally
pursuant to the license agreement under which we have licensed the brand and/or
mark. We then outsource the manufacturing and distribution of the branded
products. We sell our branded products to the retail customers or distributors.
We are then obligated to pay a certain percentage of royalties on our net sales
of the branded products to the licensor. We believe that we have established a
reputation for our ability to produce a quality branded product in the
marketplace.

We operate our consumer products business through three wholly−owned, operating
subsidiaries, Innovo, Inc., or Innovo, Joe's Jeans, Inc., or Joe's, and Innovo
Azteca Apparel, Inc., or IAA. Our products are currently manufactured by
independent contractors located in Los Angeles, California, Mexico and Asia,
including, Hong Kong, China, Korea, Vietnam and India. The products are then
distributed out of our warehouse facilities located in Los Angeles or directly
from the factory to the customer. For the fiscal year ended November 29, 2003,
or fiscal 2003, approximately 22% of our apparel and accessory products were
manufactured outside of North America. The rest of our accessory and apparel
products for fiscal 2003 were manufactured in the United States (approximately
21%) and Mexico (approximately 57%). All of our products manufactured in Mexico
are manufactured by Azteca Productions International, Inc., or Azteca, and/or
its affiliates, as discussed below. Azteca is controlled by two of our
significant stockholders, Hubert Guez and Paul Guez.


Our operations are comprised of two reportable segments: apparel and accessory, with the
operations of our Joe's and IAA subsidiaries representing the apparel segment and our Innovo
subsidiary conducting business in the accessory segment. Segment revenues are generated from the
sale of consumer products by Joe's, IAA and Innovo. Our corporate activities are represented by
the operations of Innovo Group Inc., our parent company, or IGI, and our real estate operations
are conducted through our wholly−owned subsidiaries, Leasall Management, Inc., or Leasall, and
Innovo Realty, Inc., or IRI. Our real estate operations do not currently require a substantial
allocation of our resources and are not a significant part of our management's daily
operational functions. Thus, our real estate

                                       1
operations are not currently defined as a distinct operating segment,    but are
classified as "other" along with our other corporate activities.

Strategic Relationship with two of our significant stockholders, Hubert Guez and
Paul Guez, and affiliated companies


Beginning in the summer of 2000, we entered into a series of transactions with two of our
significant stockholders, Hubert Guez and Paul Guez, and their affiliated companies, such as
Azteca and/or Commerce Investment Group LLC, or Commerce. The Guez brothers and their
affiliated companies have in the aggregate more than 50 years of experience in the apparel
industry with a specialty in denim apparel and related products. As discussed in greater detail
below, our strategic relationship with the Guez brothers and their affiliated companies has had
many tangible benefits for us.

Our relationship with the Guez brothers began in the summer of 2000, when the
Guez brothers through their affiliated company, Commerce, which the Guez
brothers control, invested in our company. Pursuant to a stock and warrant
purchase agreement, Commerce acquired 2,863,637 shares of our common stock and
3,300,000 common stock purchase warrants. An investor rights agreement also
provides Commerce with a contractual right to nominate three individuals to our
board of directors. Commerce has not exercised this right at this time. Based on
a Schedule 13D/A filed by Commerce, the Guez brothers and their affiliates with
the Securities and Exchange Commission on January 20, 2004, Commerce, the Guez
brothers and their affiliates own in the aggregate approximately 17.57% of our
common stock.


As part of Commerce's equity investment in our company, we entered into several other
arrangements with Commerce in order to reduce our manufacturing and distribution costs and to
increase the effectiveness and capacity of our distribution network. Pursuant to a supply
agreement and a distribution agreement with Commerce, we agreed to purchase all of our accessory
products, which at the time primarily consisted of denim tote bags and aprons, from Commerce and
to have Commerce distribute these products out of its Los Angeles distribution facility.
Commerce manufactures our accessory products out of its facilities located in Mexico. These
agreements were renewed in August 2002 for an additional two year term and are automatically
renewed for additional two year terms unless terminated by either party with 90 days notice. See
"Note 1 − Business Description − Restructuring of Operations" in the Notes to Consolidated
Financial Statements for a further discussion of the equity investment by and the terms of the
supply and distribution agreements with Commerce.

The strategic relationship entered into with Commerce allowed us to close our
domestic manufacturing and distribution facilities and to move forward with
diversifying our product mix and offerings to include apparel products as
opposed to only accessory products. In an effort to enter into the apparel
market quickly and efficiently we, through IAA, acquired Azteca's knit apparel
division in August 2001 in exchange for 700,000 shares of our common stock and
promissory notes in the amount of $3.6 million. See "Note 3 − Acquisitions −
Azteca   Production   International,   Inc. Knit Division" in the Notes to
Consolidated Financial Statements for a further discussion of this acquisition.


In February 2001, we continued to expand our apparel business by acquiring a ten−year license
for the "Joe's" and "Joe's Jean's" brands from JD Design, LLC and forming our Joe's subsidiary.
See "Business − License Agreements and Intellectual Property" for a further discussion of this
license agreement. Joe's has exploited this license agreement by creating, designing and
marketing high−end denim apparel products. Our strategic relationship with the Guez brothers
allowed us to quickly and efficiently exploit this license and enter into the denim apparel
market by outsourcing the manufacture and distribution of the denim apparel products created
pursuant to the license to Commerce and its affiliates.

During fiscal 2001 and 2002, the combined accessory and denim apparel products
purchased from and other services provided by Commerce and/or its affiliates
were approximately $5.7 million and $16.0 million, respectively, or 90% and 80%,
respectively, of our manufacturing and distribution costs for such periods.
During fiscal 2003, our dependence on Commerce and its affiliates decreased for
these services but still constituted 68% of our manufacturing and distribution
costs for fiscal 2003, or approximately $47.9 million of accessory, craft and
denim apparel products from and other services provided by Commerce and/or its
affiliates. While we now use additional suppliers to meet our needs, we intend
to continue to take advantage of Commerce's expertise with denim products so
long as we believe it is in our best interest.


On July 17, 2003, we, through IAA, entered into an asset purchase agreement, or Blue Concept
APA, with Azteca and the Guez brothers. Pursuant to the Blue Concept APA, we acquired Azteca's
Blue Concept division, or the Blue Concept Division, for a $21.8 million seven−year convertible
promissory note, subject to adjustment, or Blue Concept Note. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations − Recent Acquisitions and Licenses
and − Long Term Debt" and "Note 9 − Long Term Debt − Promissory Note to Azteca in connection
with Blue Concept Division Acquisition" in the Notes to Consolidated Financial Statement" for a
further discussion of certain terms of this acquisition and the Blue Concept Note. In
accordance with the APA and NASDAQ rules, we are conducting a special stockholders meeting on
March 5, 2004, to approve the conversion of approximately $12.5 million of the Blue Concept Note
into a maximum of 4,166,667 shares of our common stock. In addition, as part of the
transaction, we entered into another supply agreement with an Azteca affiliate to purchase
products to be sold by our Blue Concept Division. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations − Recent Acquisitions and Licenses" for a further
discussion of certain terms of this supply agreement.
2
We have continued to expand our denim product mix by entering into an assignment
with Blue Concept LLC, which is controlled by Paul Guez, for all the rights
benefits and obligations of a license agreement between Blue Concept LLC and
B.J. Vines, Inc., the owner of the Betsey Johnson(R) brand, for exclusive right
to design, market and distribute women's jeans and coordinating denim related
apparel, such as t−shirts and tops under the Betsey Johnson(R) brand name in the
United States, its territories and possessions, and Canada. We did not
compensate Paul Guez for this assignment.


During fiscal 2003, we moved our headquarters and principal executive offices
from 5900 S. Eastern Avenue, Suite 120, Commerce, California 90040 to 5804 East
Slauson Avenue, Commerce, California 90040. The 5804 East Slauson Avenue space
is utilized under a verbal agreement with Azteca, pursuant to which we pay to
Azteca a fee for allocated expenses associated with our use of office and
warehouse space and expenses incurred in connection with maintaining such office
and warehouse space. These allocated expenses include, but are not limited to:
rent, security, office supplies, machine leases and utilities. In addition, we
have verbal agreements with Azteca and/or its affiliates regarding the supply
and distribution of other apparel products we sell.

Other Third Party Manufacturers

As discussed above, historically, we have primarily used Commerce and its
affiliates for our manufacturing needs. In fiscal 2003, we significantly
diversified our apparel products to include a wider array of products,
including, but not limited to, denim products. These non−denim products,
however,   including some denim products, are purchased from third party
independent suppliers, including, Commerce and/or its affiliates. While we now
use numerous suppliers to meet our needs, we intend to continue to take
advantage of Commerce's and its affiliate's expertise with denim products if it
is in our best interest.

Headquarters


As discussed above, our headquarters and principal executive offices are located at 5804 East
Slauson Avenue, Commerce, California 90040 and our telephone number at this location is (323)
725−5516. We also have operational offices and/or showrooms in Los Angeles, New York,
Knoxville, and Hong Kong and third party showrooms in New York, Los Angeles, Tokyo and Paris.

General Development of Business


Innovo, a Texas corporation, was formed in April 1987 to manufacture and domestically
distribute cut and sewn canvas and nylon consumer products for the utility, craft, sports
licensed and advertising specialty markets. In 1990, Innovo merged into Elorac Corporation, a
"blank check" company, which was renamed Innovo Group Inc., a Delaware corporation.

In 1991, we acquired the business of NASCO, Inc., or NASCO, a Tennessee
corporation, a manufacturer, importer and distributor of sports−licensed sports
bags, backpacks, and other sporting goods, located in Springfield, Tennessee.
NASCO, subsequently renamed Spirco, Inc., or Spirco, was also engaged in the
marketing of fundraising programs to school and youth organizations. The
fundraising programs involved the sale of magazines, gift wraps, food items and
seasonal gift items.


In 1992, we formed NASCO Products International, Inc., or NPII, a Tennessee corporation. NPII
was formed to focus on the distribution of Innovo Group's accessory products in the
international marketplace. NPII does not currently have any business activities and we are in
the process of dissolving NPII.

In 1993, we sold the youth and school fundraising business of Spirco to QSP,
Inc. During its fiscal year ending 1992, Spirco had incurred significant trade
debt from the losses it incurred in marketing fundraising programs and from
liabilities incurred by NASCO prior to its acquisition by us that were not
disclosed at that time. On August 27, 1993, Spirco filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Neither we, nor Innovo, nor NPII
were a party to such       bankruptcy   filing by Spirco.    Spirco's plan of
reorganization was confirmed by the court on August 5, 1994, and became
effective on November 7, 1994.


In 1994, we formed Leasall, a Tennessee corporation. Leasall acquired Spirco's equipment and
plant and assumed the related equipment and mortgage debt. Leasall still owns and leases to
third parties the plant purchased from Spirco, which served as our former headquarters in
Springfield, Tennessee. Subsequent to the bankruptcy reorganization, we merged Spirco into us.
This merger resulted in us acquiring direct ownership in the remaining assets of Spirco that
Leasall did not purchase. The Spirco claims, which we had guaranteed, received full payment
through the issuance of shares of our common stock.

In the latter part of 1998, we closed our domestic            manufacturing and
distribution facilities in Springfield, Tennessee and relocated our corporate
headquarters, manufacturing and distribution facilities to Knoxville, Tennessee.
We closed the Springfield facility based on our need for a more suitable
facility for our manufacturing needs as well as our need, at that particular
time, for a more skilled labor force to meet our production requirements.
Additionally, in 1998, we brought in additional investors and new management,
and these individuals resided in Knoxville, Tennessee.

                                       3
During fiscal 2000, we restructured our operations by closing our domestic
manufacturing and distribution facilities in Knoxville, Tennessee and realigning
our operational structure to focus on sales and marketing. We also raised
additional working capital and converted certain indebtedness into equity. The
restructuring was undertaken as a condition to the equity investment by
Commerce. In an effort to reduce product costs and increase gross profit, we
shifted our manufacturing to third−party foreign manufacturers, a majority of
which included Commerce's affiliates, and outsourced our distribution to
Commerce's affiliates in an effort to increase the effectiveness and capacity of
our distribution network. See "Business − Strategic Relationship with two of our
significant stockholders, Hubert Guez and Paul Guez, and affiliated companies"
and "Note 1 − Business Description − Restructuring of Operations" in our Notes
to Consolidated    Financial   Statements for a further      discussion of our
relationship with the Guez brothers and the equity investment by and the terms
of the supply and distribution agreements with Commerce.

In February of 2001, we acquired from JD Design LLC, or JD Design, the license
rights to the JD logo and the Joe's Jeans(R) mark for all apparel and accessory
products. In connection with this acquisition, in March of 2001, we formed Joe's
Jeans, Inc., or Joe's, a Delaware corporation, to focus on the design,
production and worldwide marketing of high fashion apparel products bearing the
"Joe's Jeans" brand. See "Note 3 − Acquisitions − Joe's Jeans License" in the
Notes to the Consolidated Financial Statements.

In August of 2001, we, through our newly formed wholly−owned subsidiary, IAA,
acquired Azteca's knit apparel division in order to enter into the apparel and
design business for the private label and retail market. See "Note 3 −
Acquisitions − Azteca Productions International, Inc. Knit Division" in the
Notes to the Consolidated Financial Statements.


In April 2002, we, through our newly formed wholly−owned subsidiary, IRI, to facilitate the
purchase of limited partnership interests, which limited partnerships were investing in real
estate apartment complexes located throughout the United States. See "Business−Real Estate
Transactions" for a further discussion of IRI's limited partnership interests.

In May 2002, Joe's formed Joe's Jeans Japan, Inc., or JJJ, a Japanese
corporation, to facilitate the distribution of the Joe's(R) and Joe's Jeans(R)
brand in Japan. On July 1, 2003, Joe's entered into a Master Distribution and
Licensing Agreement, or Distribution and Licensing Agreement, with Itochu
Corporation, or Itochu, pursuant to which Itochu obtained certain manufacturing
and licensing rights for the Joe's(R) and Joe's Jeans(R) marks. See "Business
−License Agreements and Intellectual Property" for a further discussion of the
Distribution and Licensing Agreement with Itochu.


Additionally, in May 2002, Innovo formed Innovo Hong Kong Limited, or IHK, a Hong Kong
corporation. IHK was formed to assist our accessory division with the design, development and
sourcing of accessory products out of East Asia. IHK also acts as the overseas base for apparel
sourcing by virtue of its location in Hong Kong.

On August 1, 2002, IAA entered into an exclusive 42−month worldwide agreement
for the Bow Wow license, granting IAA the right to produce and market products
bearing the mark and likeness of the popular stage and screen performer, Bow
Wow, formerly known as Lil' Bow Wow. See "Business −License Agreements and
Intellectual Property" for a further discussion of the Bow Wow License.


On February 13, 2003, IAA entered into a 44 month exclusive license agreement for the United
States, its territories and possessions with the recording artist and entertainer Eve for the
license of the Fetish(TM) mark for use with the production and distribution of apparel and
accessory products. See "Business −License Agreements and Intellectual Property" for a further
discussion of the Fetish(TM) license.

On July 17, 2003, IAA entered into the Blue Concept APA, with Azteca, Hubert
Guez and Paul Guez, whereby IAA acquired the Blue Concept Division from Azteca.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations − Recent Acquisitions and Licenses" and "Management's Discussion and
Analysis of Financial Conditions and Results of Operations − Long Term Debt" for
further discussion of the terms of the acquisition of the Blue Concept Division
from Azteca.

During fiscal   2003, we consummated five private placements of our common stock
resulting in     net proceeds of approximately $17,540,000,      after deducting
commissions.    See "Management's Discussion and Analysis of Financial Conditions
and Results     of Operations − Equity Financings" and Item 5 "Market for
Registrant's    Common Equity and Related Stockholder Matters" for a further
discussion of   the terms of our equity financings.


Due to our growth during the past three years, in addition to the five private placements of our
common stock discussed above, we entered into a series of transactions to provide us with
additional working capital. On June 1, 2001 and September 10, 2001, we, through our three main
operating subsidiaries, Joe's, Innovo, and IAA, entered into a financing agreement with CIT
Commercial Services, a unit of CIT Group, Inc., or CIT for the factoring of our account
receivables. In August 2002, Joe's and Innovo entered into inventory and security agreements
with CIT which established inventory based lines of credit for Joe's and Innovo. As a result of
the need for additional working capital, on or about June 10, 2003, we amended our existing
financing facilities, to be effective as of April 11, 2003, with CIT. We have also established a
letter of credit facility with CIT. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations−−Liquidity and Capital Resources" for further discussion of
our financing agreements with CIT.

                                       4
Summary of Significant Fiscal 2003 Developments

General Overview


Our net sales increased to $83,129,000 in fiscal 2003 from $29,609,000 in fiscal 2002, or a 181%
increase. This increase is primarily attributable to the following factors: (i) first time
sales of our Fetish(TM) and Shago(R) branded products; (ii) sales generated from the Blue
Concept Division that we acquired in July 2003; and (iii) continued growth in the developing,
sourcing and distributing of our existing products, such as Joe's Jeans, to new and existing
customers. Our significant net sales increase of 181% was substantially offset by the initial
expenses incurred for this growth, such as: (i) wages from new hiring needs to support the
development of the Fetish(TM) by Eve and Shago(R) by Bow Wow lines; (ii) increased payroll
expenses from the employees we absorbed in connection with the Blue Concept Division
acquisition; (iii) excess inventory purchased for Fetish(TM) and Shago(R) products; and (iv)
inventory writedowns within Joe's and Innovo caused by operational and distribution
inefficiencies. As a result of these and other costs, as well as the necessity to write off
excess inventory, the result was a net loss of $8,255,000 for fiscal 2003. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of
our financial performance in fiscal 2003.

Accessory

During fiscal 2003, Innovo, which is responsible for our accessory products,
grew its business significantly compared to fiscal 2002. The growth is a result
of Innovo's increased private label and craft sales, initial distribution of our
Fetish(TM) brand of accessories in November 2003. Prior to fiscal 2002, Innovo
did not produce fashion accessory products for the private label market. In
fiscal 2003, Innovo experienced an increase in net sales to $14,026,000 in
fiscal 2003 from     $12,072,000 in fiscal 2002, or a 16% increase.          See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion of Innovo's financial performance for fiscal
2003.

Apparel

          Joe's

During fiscal 2003, Joe's continued to establish domestic and international
brand recognition in the high−end fashion apparel industry. In fiscal 2003,
sales of Joe's products increased to $11,476,000 in fiscal 2003 from $9,179,000
in fiscal 2002, or a 25% increase. On July 1, 2003, Joe's entered into a
Distribution and Licensing Agreement with Itochu pursuant to which Itochu
obtained certain manufacturing and licensing rights for the Joe's(R) and Joe's
Jeans(R) marks. As a part of the transaction, Itochu agreed to purchase the
existing inventory of JJJ for approximately $1 million, assume the management
and operations of JJJ's showroom in Tokyo and employ certain employees of JJJ.
As of November 29, 2003, we continued to operate JJJ and will continue to do so
until all operations have ceased.       Upon the cessation of all operating
activities, we intend to dissolve the JJJ subsidiary. We will continue to sell
product in Japan through the Distribution and Licensing Agreement with Itochu.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations − Recent Acquisitions and Licenses." See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" for further
discussion of Joe's financial performance for fiscal 2003.

          IAA


IAA increased its sales to $57,627,000 in fiscal 2003 from $8,358,000 in fiscal 2002, or a 589%
increase. The growth is primarily a result of an increase in revenues from IAA's private label
division and in part from first time sales of Shago(R) and Fetish(TM) apparel products. See
"Business − License Agreements and Intellectual Property" for a further discussion of our
license agreements with Bravado International, Inc. for Shago(R) which we entered into in
October 2002, and with Blondie Rockwell, Inc. for Fetish(TM) which we entered into in February
2003. A substantial amount of the increase in the revenue from our private label business was a
result of our sales subsequent to our acquisition of the Blue Concept Division by IAA. See
"Management's Discussion and Analysis of Financial Conditions and Results of Operations −
Recent Acquisitions and Licenses. Additionally, on July 17, 2003, our IAA subsidiary entered
into an APA with Azteca, Hubert Guez and Paul Guez, whereby IAA acquired the Blue Concept
Division from Azteca. Pursuant to the terms of the APA, IAA paid $21.8 million for the Blue
Concept Division, subject to adjustment as discussed further in "Management's Discussion and
Analysis of Financial Conditions and Results of Operations − Recent Acquisitions and Licenses"
for a further discussion of the acquisition of the Blue Concept Division from Azteca. The
purchase price was paid through the issuance of the Blue Concept Note which is a seven−year
convertible promissory note. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations − Long Term Debt" for further discussion of the terms of the Blue
Concept Note. Also, see "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" for further discussion of IAA's financial performance for fiscal 2003.

                                       5
Principal Products and Revenue Sources


Our products are created and our revenues are derived through sales from our Innovo, IAA, and
Joe's subsidiaries in the accessory segment and apparel segment, respectively.

Our net sales by segment for the last three years are shown in the table below:

                                          2003    2002    2001

                  Accessories             17%     41%     61%
                  Apparel                 83%     59%     39%
                                          −−−−−−−−−−−−−−−−−−−−
                  Total                   100%    100%    100%
                                          −−−−−−−−−−−−−−−−−−−−


Accessory

         Innovo


Innovo, headquartered in Knoxville, Tennessee, designs, develops and markets accessory consumer
products such as fashion handbags, purses, wallets, backpacks, duffle bags, sports bags, belts,
hats and scarves for department stores, mass merchandisers, specialty chain stores and private
label customers. Additionally, Innovo markets craft products including tote bags and aprons to
mass merchandisers and craft specialty stores. Innovo's products generally are accompanied by
one of Innovo's own logos such as Daily Denim(TM), Dragon Fly Denim(TM), Clear Gear(TM),
Friendship(TM) and Tote Works(TM), the brand of a private label customer, or the brand of a
third party licensor such as Bongo(R), Shago(R) and Fetish(TM). Innovo's net sales in the
accessory segment increased to $14,026,000 in fiscal 2003 from $12,072,000 for fiscal 2002, or a
16% increase. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations − Net Sales" for a further discussion of Innovo's sales in the accessory segment.

In fiscal 2002, Innovo entered the private label accessory business. As of
November 29, 2003, Innovo produced private label products primarily for American
Eagle Outfitters, Inc. and Limited Brands, Inc.'s Express division. Private
label business accounted for approximately 35% of Innovo's net sales in fiscal
2003 compared to 27% in fiscal 2002. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a further discussion of
Innovo's accessory sales. Innovo anticipates continued growth in the private
label market as a result of Innovo's ability to provide quality accessory
products that are fashionably desirable at competitive prices; however, there
can be no assurances that Innovo will be able to increase its market share in
the private label business.


While Innovo initially obtained the license rights to the Bongo(R) mark in the second quarter
of fiscal 2001, in November 2002, Innovo solidified and extended its relationship with the
owner of the Bongo(R) brand, by signing a four−year license agreement with IP Holdings LLC for
the Bongo(R) mark. The agreement gives Innovo multi−year extension options based on certain
performance criteria for the bag and small pvc/leather goods categories. See "Business − License
Agreements and Intellectual Property" for a further discussion of the License Agreement for the
Bongo (R) mark. Since that time, Innovo has launched the Bongo(R) line to department stores and
specialty stores across the United States, including Sears, Roebuck and Co., Beall's, Inc.,
Hecht's, Foley's, and Robinsons−May. In fiscal 2003, Innovo's Bongo(R) accessory product line
experienced growing demand in the retail marketplace. Gross sales associated with the Bongo(R)
product line continued to grow significantly in fiscal 2003 and represented approximately 21%
of Innovo's total gross sales for fiscal 2003. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations − Net Sales" for a further discussion of Innovo's
net sales for its Bongo(R) product line.

Innovo's IHK subsidiary is headquartered in Hong Kong and assists Innovo with
the development, design and sourcing of the products sold by Innovo to its
customers. IHK allows Innovo to minimize the amount of time required to design,
develop and source its products, thus allowing Innovo to react quickly to
changing markets conditions and to deliver its products in a timely manner.


In addition, in fiscal 2003, as part of our license agreement for the license of the Fetish(TM)
brand, our Innovo subsidiary produced Fetish(TM) branded accessories such as purses and wallets.
The Fetish(TM) branded accessories accounted for a small percentage of Innovo's overall net
sales in fiscal 2003. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations − Net Sales" for a further discussion regarding sales associated with
Fetish(TM) products. See "Business − License Agreements and Intellectual Property" for further
discussion of this license agreement.

In fiscal 2003, Innovo experienced increased demand for its craft product lines
due to Innovo's ability to increase its business with its existing customers
such as Wal−Mart, Michaels Stores, Inc., A.C. Moore Arts & Crafts and added an
additional customer, Hobby Lobby. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations − Net Sales" for a further
discussion of Innovo's sales for its craft product line.

                                         6
The following are the principal products that Innovo distributes in the United
States to the accessory and craft market:

      FASHION ACCESSORY     GENERAL ACCESSORIES       CRAFTS
      −−−−−−−−−−−−−−−−−     −−−−−−−−−−−−−−−−−−−       −−−−−−
      Purses                Travel and Tote Bags      Tote Bags
      Hand Bags             Waist Packs               Adult and Children's Aprons
      Duffle Bags           Duffle Bags               Christmas Stockings
      Wallets               Stadium Totes/Cushions    Gourmet/BBQ Aprons
      Beach Bags            Insulated Lunch Bags
      Tote Bags             Soft Coolers
      Gloves                Pencil Cases
                            Backpacks
                            Waist Packs
                            Hats
                            Scarves

Apparel

          Joe's


Joe's, headquartered in Commerce, California was formed in 2001 to design, develop, and market
high−fashion apparel products under the Joe's(R) and Joe's Jeans(R) brand. Joe's products are
typically part of a collection that includes pants, denim jeans, shirts, sweaters, jackets and
other apparel products. In fiscal 2002, Joe's focused its efforts on establishing the Joe's
brand in both the domestic and international marketplace by continuing to offer its customers
and consumers a fashion forward, quality product. In fiscal 2002, Joe's created JJJ in an
effort to establish the Joe's brand in the Japanese marketplace. Additionally, in fiscal 2002,
Joe's successfully entered the Canadian and European markets through the use of international
distributors, and contributed to expand within these markets in fiscal 2003 and expanded
distribution to other countries such as Australia and Korea. On July 1, 2003, Joe's entered into
a Distribution and Licensing Agreement with Itochu ("Itochu Agreement"), pursuant to which
Itochu obtained certain manufacturing and licensing rights for the "Joe's" and "Joe's Jeans"
marks. As a part of the transaction, Itochu agreed to purchase the existing inventory of JJJ for
approximately $1 million, assume the management and operations of JJJ's showroom in Tokyo and
employ certain employees of JJJ. As of November 29, 2003, we continue to operate JJJ and will
continue to do so until all operations have ceased. Upon the cessation of all operating
activities, we intend to dissolve the JJJ subsidiary. We will continue to sell our products in
Japan through our Distribution and Licensing Agreement with Itochu. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations −Recent Acquisitions
and Licenses."

Joe's believes that it has developed a customer base upon which Joe's can grow
its business going forward. Joe's products are sold in the United States and
abroad to upscale retailers and boutiques such as Barneys New York, Inc.,
Bloomingdale's, Inc., Loehmann's, Inc., Nordstrom, Inc., Saks Incorporated,
Intermix and Fred Segal in the United States and other complimentary retailers
in the international market.


Joe's products are primarily marketed to retailers through third party showrooms located in New
York, Los Angeles, and Paris and through its own showroom in Tokyo. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations − Net Sales" for a
further discussion of Joe's sales.

Joe's product lines include, but are not limited to, the following:

                  WOMEN                       MEN
                  −−−−−                       −−−
                  Denim Jeans                 Denim Jeans
                  Denim Skirts                Knit Shirts
                  Denim Jackets
                  Leather Jackets
                  Knit Shirts
                  Sweaters
                  Handbags

                                         7
         IAA


IAA, headquartered in Commerce, California, was formed in August 2001 to focus on marketing
products to the private label apparel market. IAA has since diversified to focus not only on its
private label business but also the development of branded apparel products.

As of November 29, 2003, IAA's private label business primarily designed,
sourced and marketed denim jeans for Warnaco, Target Corporation's Mossimo
brand, and, as part of its acquisition of the Blue Concept Division, to American
Eagle Outfitters, Inc., or AEO. Through the Blue Concept Division, IAA sells
primarily denim jeans to AEO, a national retailer. IAA's sales increased to
$57,627,000 in fiscal 2003 from $8,358,000 in fiscal 2002, or a 589% increase. A
large portion of the increase in IAA's sales during fiscal 2003 is attributable
to sales generated from AEO since July 2003, the date of the Blue Concepts
Division acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations − Net Sales" for a further discussion of
IAA's sales.


IAA's private label product lines primarily consist of knit tops and denim bottoms for both the
men's and women's market. The branded sportswear product lines are focused around fashion
oriented tops and bottoms. The product lines include, but are not limited to the following:

                  TOPS                             BOTTOMS
                  −−−−                             −−−−−−−
                  Knit Fashion Shirts              Fleece Sweatpants
                  Fashion T−Shirts                 Knit Pants
                  Basic T−Shirts                   Denim Jeans
                  Fleece Sweatshirts               Velour Pants
                  Thermal Pullovers                Sweat Suits
                  Velour Shirts
                  Sports Jersey's
                  Dresses
                  Blouses


Since establishing IAA's branded division and through year ended November 29, 2003, IAA has
entered into license agreements with: (1) recording artist and entertainer Bow Wow for the
right to produce apparel and accessory products under the Shago(R) mark; (2) the recording
artist and entertainer Eve for the right to produce apparel and accessory products under the
Fetish(TM) mark; and (3) Mattel, Inc. for the right to produce apparel and accessory products
under the Hot Wheels(R) mark. IAA entered into the license agreement for the Bow Wow license in
October of fiscal 2002; the license agreement with Eve in February of 2003; and the license
agreement with Mattel in August of 2002. IAA began shipping its Shago(R) apparel and accessory
products in May 2003, and its Fetish(TM) apparel and accessory products in August 2003. To
date, IAA has not shipped any of its Hot Wheels apparel or accessory products, primarily in
response to feedback from retail buyers at the time of the line's launch in August 2003
suggesting that consumer demand for the proposed Hot Wheels(R) product line was insignificant.
Pursuant to these license agreements, IAA has the right to sublicense the accessory category to
its affiliated subsidiary Innovo. See "Business − License Agreements and Intellectual Property"
for a further discussion of the license agreements with Bow Wow, Eve, and Mattel, Inc.

Product Development and Sourcing

Accessory

         Innovo

Innovo develops the designs and artwork for all products through its in−house
design staff. Innovo's fashion and licensed accessory products are produced with
the logos or other designs licensed from licensors or produced bearing the
Innovo's own private brands such as Daily         Denim(TM),   Clear   Gear(TM),
Friendship(TM) and Tote Works(TM).      See "Business−License    Agreements and
Intellectual Property" for a further discussion of Innovo's fashion and licensed
accessory products.


Innovo markets its craft products, without artwork, to be sold for finishing by retail craft
customers. Innovo's craft products are purchased from Commerce or its affiliates. They
manufacture our craft products in Mexico and we also import some of our craft products from
China. Innovo is obligated, as defined in the supply agreement with Commerce, to purchase all
of its craft products from Commerce through August 2004. In fiscal 2003, Innovo purchased
approximately $2.7 million of craft products from Commerce.

Innovo's sourcing office, IHK, manages much of the design and development of its
products that are sourced out of East Asia. Innovo's products are distributed
out of Los Angeles through an agreement with an affiliate of Commerce or the
products may be shipped directly to Innovo's customers from the country of
origin of the manufactured products.


Innovo obtains its fashion accessory products from overseas suppliers located mainly in China
through short term manufacturing agreements. The independent contractors that manufacture our
products are responsible for obtaining the necessary supply of raw materials and for
manufacturing the products to our specifications. See "Business−Import and Import Restrictions"
for further discussion

                                        8
of supply of raw materials and manufacturing.


We primarily utilize overseas contractors that employ production facilities located in China.
As a result, our products are subject to certain restrictions imposed by the Chinese
government. To date, we have not been adversely affected by such restrictions; however, there
can be no assurance that future changes in such restrictions by the Chinese government would not
adversely affect us, even if only temporarily, while we shifted production to other countries
or regions such as Mexico, Korea, Taiwan or Latin America. As anticipated, in fiscal 2003, all
of our sales were derived from imported products that are subject to United States import
quotas, inspection or duties. See "Business−−Import and Import Restrictions."

Apparel

          Joe's


Joe's product development is managed internally by a team of designers led by Joe Dahan, which
is responsible for the creation, development and coordination of the product group offerings
within each collection. Joe's typically develops four collections per year for spring, summer,
fall and holiday, with certain basic styles offered throughout the year. Joe Dahan is an
instrumental part of Joe's design process. The loss of Joe Dahan could potentially have a
material adverse impact on Joe's. In the event of the loss of Joe Dahan, Joe's believes it
could find alternative sources for the development and design of Joe's products, although there
can be no assurances. See "Risk Factors−− The loss of the services of Mr. Joe Dahan could have a
material adverse effect on Joe's business."

Joe's products are sourced through Commerce or its affiliates or from domestic
contractors   generally   located in the Los Angeles area.        Joe's is not
contractually obligated to purchase its products from Commerce. Joe's staff,
however, controls the production schedules in order to ensure quality and timely
deliveries. Commerce is responsible for the acquisition of the raw materials
necessary for the production of Joe's goods. In the event that Commerce is
unable to acquire the necessary raw materials, Joe's believes that there are
alternative sources from which the raw materials could be acquired. We are
currently reviewing the option of sourcing products from international sources
and/or directly sourcing the products from domestic suppliers. During fiscal
2003, Joe's purchased approximately $2.2 million of goods from Commerce. See
"Business − Strategic Relationship with two of our significant stockholders,
Hubert Guez and Paul Guez, and affiliated companies" for a further discussion of
the supply agreement with Commerce. In fiscal 2003, Joe's changed its inventory
strategy from buying finished goods to buying raw materials and outsourcing the
manufacturing of its own goods as a result of no longer being able to purchase
finished goods from our domestic supplier. Joe's cost to buy raw materials and
outsource the manufacturing of its own goods was significantly higher than its
cost to buy finished goods. In the long term, Joe's believes that this
alteration in inventory strategy will be beneficial since this inventory
strategy should decrease the defects associated second quality goods, which have
a lower cost per unit than first quality goods. Sales of second quality goods
lead to lower gross margins.

While Joe's believes that there are currently alternative sources from which to
outsource the production of Joe's products, in the event the economic climate or
other factors resulted in significant reduction in the number of local
contractors in the Los Angeles area, Joe's business could be negatively
impacted. At this time, Joe's believes that it would be able to find alternative
sources for the production of its products if this was to occur, however, no
assurances can be given that a transition could be completed without a
disruption to Joe's business.

          IAA


IAA's private label product development is managed by IAA's internal design and merchandising
staff or in conjunction with the design teams of the customer. IAA's products are sourced from
Mexico through independent contractors, through Commerce and its affiliates or through
independent overseas contractors. During fiscal 2003, IAA purchased approximately $18.2 million
of goods from Commerce and its affiliates. See "Business − Strategic Relationship with two of
our significant stockholders, Hubert Guez and Paul Guez, and affiliated companies"

IAA's branded division's products are developed by its in−house design team or
through the use of independent freelance designers. IAA's branded division
sources a majority of its products from Mexico and the Far East, including
countries such as China, South Korea, Vietnam and India. IAA's purchases in the
international markets will be subject to the risks associated with the
importation    of these type    products.  See   "Business−Import   and Import
Restrictions."


IAA relies on Commerce and its affiliates' ability to source and supply its products. IAA
expects its reliance on Commerce and its affiliates to decrease in the future as it begins to
purchase more of its products from third party suppliers. During fiscal 2003, IAA purchased from
Commerce and its affiliates approximately $41.8 million, or 76%, of its products compared to
$16.0 million, or 80%, of its products in fiscal 2002.

IAA and AZT International SA de CV, a Mexico corporation and wholly−owned
subsidiary of Azteca, or AZT, entered into a two−year, renewable, non−exclusive
supply agreement, or Supply Agreement, for products to be sold by IIA through
the Blue Concept Division. Under the terms of the Supply Agreement, we have
agreed to market and sell the products to be purchased from AZT to certain of
our

      9
customers, more particularly IAA customers of the Blue Concept Division. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations − Recent Acquisitions and Licenses" for further discussion regarding
this supply agreement.


We generally purchase our products in U.S. dollars. However, as a result of
using overseas suppliers, the cost of these products may be affected by changes
in the value of the relevant currencies. See "Risk Factors − Our business is
exposed to domestic and foreign currency fluctuations."

Notwithstanding the supply agreement for craft products with Commerce, we do not
have any long−term supply agreements with independent overseas contractors, but
we believe that there are a number of overseas and domestic contractors that
could fulfill our requirements.      See "Item 1 − Business       Description −
Restructured Operations" in the Notes to the Consolidated Financial Statements
for a further discussion of the supply agreement with Commerce and its
affiliates.

While we attempt to mitigate our exposure to manufacturing, the use of
independent contractors does reduce our control over production and delivery and
exposes us to the other usual risks of sourcing products from independent
suppliers. Our transactions with our foreign manufacturers and suppliers are
subject to the risks of doing business abroad. Imports into the United States
are affected by, among other things, the cost of transportation and the
imposition of import duties and restrictions. The United States and the
countries in which our products are manufactured may, from time to time, impose
new quotas, duties, tariffs or other restrictions,         or adjust presently
prevailing quotas, duty or tariff levels, which could affect our operations and
our ability to import products at current or increased levels. We cannot predict
the likelihood or frequency of any such events occurring. See "Business − Import
and Import Restrictions."

License Agreements and Intellectual Property

Accessory

         Innovo


On March 26, 2001, Innovo entered into a two−year exclusive license agreement with Michael
Caruso & Company, the original owner of the rights to the Bongo(R) mark, pursuant to which
Innovo obtained the right to design, manufacture and distribute bags and small leather/pvc
goods bearing the Bongo(R) mark. According to the original terms of the license agreement, the
license was to expire on March 31, 2003. However, in November 2002, Innovo entered into an
amendment effective April 1, 2003 with IP Holdings LLC, the assignee of the Bongo(R) mark, to
extend the term of the license agreement to March 31, 2007. The extended agreement offers
Innovo the potential for multi−year extensions tied to certain performance criteria.

Innovo pays a five percent royalty and a two percent advertising fee on the net
sales of Innovo's goods bearing the Bongo(R) mark. Pursuant to the terms of the
license agreement, Innovo is required to pay minimum royalties in the amount of
$312,500 prior to the expiration of the license agreement. In accordance with
the terms of the agreement, Innovo has the exclusive right to sell, market,
distribute, advertise and promote the Bongo(R) products in the United States,
including its territories and possessions, Mexico, Central and South America and
Canada. The licensor has the right to terminate the agreement in the event
Innovo breaches any material terms of the agreement.


In fiscal 2003, Innovo's collegiate and Major League Baseball sports−licensed accessory products
were discontinued because we are placing more time and resources towards developing more fashion
oriented product lines that we believe will have greater potential in the marketplace. This
cancellation has not had a material adverse effect on Innovo's products or revenues for fiscal
2003, as they represented a small portion of products and revenues in prior years.

Due to the cancellation of its sports−licensed accessory products, Innovo has
placed more time and resources towards developing more fashion oriented product
lines that Innovo believes will have greater potential in the marketplace.
Innovo's craft line includes tote bags imprinted with the E.A.R.T.H. ("EVERY
AMERICAN'S RESPONSIBILITY TO HELP") BAG(R) mark. E.A.R.T.H. Bags(R) are marketed
as a reusable bag that represents an environmentally conscious alternative to
paper or plastic bags. Sales of E.A.R.T.H. Bags(R), while significant in
Innovo's early years, have not been significant in the last five years. Innovo
still considers the mark to be an asset.


Furthermore, pursuant to the license agreements entered into by IAA, Innovo, as a sublicensee,
has the right to produce accessories for the branded label market bearing the Shago(R),
Fetish(TM) and Hot Wheels(R) marks pursuant to the terms of those license agreements. See
"License Agreements and Intellectual Property − IAA" for a further discussion of the Shago(R),
Fetish(TM) and Hot Wheels(R) license agreements.

                                       10
Apparel

          Joe's

In February 2001, Joe's acquired the license rights to the JD logo and the Joe's
Jeans(R) mark for all apparel and accessory products. The license agreement with
JD Design, LLC, or JD Design, has a ten−year term with two ten−year renewal
periods upon there being no material default at the end of each period.
Additionally, pursuant to the terms of the agreements, Joe Dahan is to receive a
three percent royalty on the net revenues of sales of Joe's(R) and Joe's
Jeans(R) products, subject to additional royalty amounts in the event certain
sales and gross profit thresholds are met on an annual basis.


On July 1, 2003, Joe's entered into a Distribution and Licensing Agreement with Itochu, pursuant
to which Itochu obtained certain manufacturing and licensing rights for the "Joe's" and "Joe's
Jeans" marks. As a part of the transaction, Itochu agreed to purchase the existing inventory of
JJJ for approximately $1 million, assume the management and operations of JJJ's showroom in
Tokyo and employ certain employees of JJJ. As of November 29, 2003, we continue to operate JJJ
and will continue to do so until all operations have ceased. Upon the cessation of all operating
activities, we intend to dissolve the JJJ subsidiary. We will continue to sell product in Japan
through our Distribution and Licensing Agreement with Itochu. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations −Recent Acquisitions and Licenses"
for further discussion regarding this license and distribution agreement.

As the licensee and on behalf of JD Design, we have applied for protection with
the United States Patent and Trademark Office, as well as with various foreign
jurisdictions, such as Australia, Canada, the European Union, Japan, Korea and
New Zealand, for trademark protection for certain of "Joe's" logos and "Joe's
Jeans" marks for apparel and accessory products. As of November 29, 2003, two
trademark registrations have been issued in the United States and five trademark
registrations have been issued internationally. We continue to prosecute two
pending trademark applications in the United States and 24 pending trademark
applications internationally that we believe are necessary to protect these
trademarks fully.

IAA

On August 1, 2002, IAA entered into an exclusive 42−month worldwide agreement
for the Bow Wow license, granting IAA the right to produce and market products
bearing the Shago(R) mark and likeness of the popular stage and screen
performer. The IAA division has created and marketed a wide range of apparel for
boys and plans on doing the same for girls. The license agreement between IAA,
Bravado International Group, the agency with the master license and rights to
Bow Wow, and LBW Entertainment, Inc. calls for the performer to make at least
one public appearance every six months during the term of the agreement to
promote the Bow Wow products, as well as use his best efforts to promote and
market these products on a daily basis. Additional terms of the license
agreement allows IAA to market boys and girls products bearing the Bow Wow brand
to all distribution channels, the right of first refusal on all other Bow Wow
related product categories during the term of the license agreement, and the
right of first of refusal on proposed transactions by the licensor with third
parties upon the expiration of the agreement. The agreement calls for IAA to pay
an eight percent royalty on the nets sales of goods bearing Bow Wow related
marks. IAA is obligated to pay a minimum net royalty in the amount of $75,000 on
or before January 31, 2005. In the event IAA defaults upon any material terms of
the agreement, the licensor shall have the right to terminate the agreement.
Furthermore, IAA has the right to sublicense the accessory product's category to
Innovo.


On February 13, 2003, our IAA subsidiary entered into a 44 month exclusive license agreement for
the United States, its territories and possessions with the recording artist and entertainer Eve
for the license of the Fetish(TM) mark for use with the production and distribution of apparel
and accessory products. We have guaranteed minimum net sales obligations for apparel and
accessories of $8 million in the first 18 months of the agreement, $10 million in the following
12 month period and $12 million in the 12 month period following thereafter. According to the
terms of the agreement we are required to pay an eight percent royalty and a two percent
advertising fee on the nets sales of products bearing the Fetish(TM) logo. In the event we do
not meet the minimum guaranteed sales, we will be obligated to make royalty and advertising
payments equal to the minimum guaranteed sales multiplied by the royalty rate of eight percent
and the advertising fee of two percent. Such minimum royalty payments will equal $2.4 million
in the aggregate over the term of the license agreement. We also have the right of first refusal
with respect to the license rights for the Fetish(TM) mark in the apparel and accessories
category upon the expiration of the agreement, subject to us meeting certain sales performance
targets during the term of the agreement. Additionally, we have the right of first refusal for
the apparel and accessory categories in territories in which we do not currently have the
license rights for the Fetish(TM) mark.

In July 2002, IAA entered into a five−year license agreement with Mattel, Inc.
to produce Hot Wheels(R) branded adult apparel and accessories in the United
States, Canada and Puerto Rico to be targeted to men and women in the junior and
contemporary markets, or the Hot Wheels(R) License. IAA may terminate the Hot
Wheels(R) License in any year by paying the remaining balance of that year's
minimum royalty    guarantees   plus the subsequent     year's minimum royalty
guarantees. The total minimum royalties due for the entire 5 years term is $1.05
million in the aggregate. Royalties paid by IAA earned in excess of the minimum
royalty requirements for any one given year may be credited towards the
shortfall amount of the minimum required royalties in any subsequent period
during the term of the license agreement. According to the terms of the Hot
Wheels(R) License, IAA has the right to sublicense the accessory product's
category to Innovo. The Hot Wheels(R) License calls for a royalty rate of seven
percent royalty and a two percent advertising fee on the net sales of goods
bearing the Hot Wheels(R) mark. In the event IAA defaults upon any material
terms, the licensor shall have the right to terminate the agreement. In fiscal
2003, IAA had no sales under this license agreement. The absence of sales from
the Hot Wheels(R) License was primarily due to insignificant orders placed for
the product at the initial launch of the line at the MAGIC apparel trade show in
Las Vegas in August 2003 as a result of apparent interest in the consumer
marketplace. While, as of November 29, 2003, we are still contractually
obligated under the Hot Wheels(R) License, we have been in discussion with
Mattel regarding these and other concerns surrounding the consumer demand for
the product.

                                       11
The following sets forth certain information concerning the license agreements
currently held by us:

       Licensor/Mark        Types of Products               Geographical Areas            Minimum Royalties    Expiration Date
       −−−−−−−−−−−−−        −−−−−−−−−−−−−−−−−               −−−−−−−−−−−−−−−−−−            −−−−−−−−−−−−−−−−−    −−−−−−−−−−−−−−−

JD Design LLC            Apparel and accessories                Worldwide                        N/A               2/11/31
(Joe's Jeans)

Blondie Rockwell, Inc.   Apparel and accessories            United States, its           $2.4 million in the       7/31/06
(Eve, Fetish(TM))                                         Territories and possessions            aggregate

Bravado International    Apparel and accessories              United States               $75,000 prior to          2/1/06
Group, Inc.                                                                                    1/31/05
(Bow Wow, Shago(R))

IP Holdings LLC          Bags, small leather/pvc            United States, its            $312,500 prior to        3/31/07
(Bongo(R))                          goods                territories and possessions,          expiration
                                                        Mexico, Central and South
                                                             America, Canada

Mattel, Inc.             Apparel and accessories        United States, Canada and       $1.05 million in the       12/31/07
(Hot Wheels(R))                                                  Puerto Rico                    aggregate




We believe that we will continue to be able to obtain the renewal of all
material licenses; however, there can be no assurance that competition for an
expiring license from another entity, or other factors will not result in the
non−renewal of a license. As we continue to expand our business in the
international marketplace, our trademarks or the trademarks we license may not
be able to be adequately protected. See "Risk Factors −− Our trademark and other
intellectual property rights may not be adequately protected outside the United
States."

Customers

Accessory

            Innovo


During fiscal 2003, Innovo sold products to a mix of mass merchandisers, department stores,
craft chain stores and other retail accounts. We estimate that Innovo's products are carried by
over 548 customers in over 6,000 retail outlets in the United States. In marketing Innovo's
products, Innovo attempts to emphasize the competitive pricing and quality of its products, its
ability to assist customers in designing marketing programs, its short lead times and the high
success rate our customers have had with our products. Generally, Innovo's accounts are serviced
by Innovo's sales personnel working with marketing organizations that have sales representatives
that are compensated on a commission basis. Innovo's New York City showroom is used to showcase
all product lines developed by Innovo and to help facilitate sales for all accounts.

In fiscal 2003, Innovo sold its products to private label customers such as
American Eagle Outfitters, Inc., Claire's Stores, Inc. and Hot Topic. Innovo
currently sells it products to retailers such as Wal−Mart, Inc., A.C. Moore Arts
& Crafts, Hobby Lobby, Joanne's, Inc., Michaels Stores, Inc., Sears, Roebuck and
Co., 579 Stores, Beall's, Inc., The May Department Stores Company, which
includes, Hecht's, Foley's, and Robinsons−May, J. C. Penney Company, Inc.,
Claire's Stores, Inc., The Wet Seal, Inc., and Federated Department Stores,
Inc., which includes Macy's East and Macy's West.


For fiscal 2003, Innovo's three largest customers, American Eagle Outfitters, Inc., Wal−Mart,
Inc. and Michaels Stores, Inc. accounted for approximately 62% of its net sales. The loss of any
of these three customers would have a material adverse effect on Innovo.

Apparel

            Joe's


Joe's products are sold to consumers through high−end department stores and boutiques located
throughout the world. For Joe's domestic sales, Joe's has entered into sales agreements with
third party showrooms where retailers review the latest collections offered by Joe's and place
orders. The showrooms provide Joe's with purchase orders from the retailers. Joe's then
distributes the products from its Los Angeles distribution facility. Joe's currently has
domestic agreements with showrooms in Los Angeles and New York and these

                                                   12
showrooms have representatives throughout the United States.


Joe's products are sold in Japan through its subsidiary JJJ. JJJ operates a company−operated
showroom in Tokyo through which Joe's products are sold to retailers. On July 1, 2003, Joe's
entered into a Distribution and Licensing Agreement with Itochu, pursuant to which Itochu
obtained certain distribution and licensing rights for the "Joe's" and "Joe's Jeans" marks. We
will continue to sell product in Japan through our Distribution and Licensing Agreement with
Itochu. See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations −Recent Acquisitions and Licenses" for further discussion regarding this license and
distribution agreement. Additionally, Joe's is currently selling its products in Europe, Canada,
Australia and Korea through distributors who purchase the product directly from Joe's and then
distribute the product in to the local markets. Revenues generated by JJJ represented
approximately 26% of Joe's total net sales in fiscal 2003. See Management's Discussion and
Analysis of Financial Conditions and Results of Operations − Net Sales" for further discussion
of Joe's net sales.

We currently sell to domestic retailers such as Barneys New York, Inc., Saks
Incorporated, Federated Department Stores, Inc. which includes, Bloomingdale's,
Inc. and Macy's, Inc., Intermix, Fred Segal and Loehmann's and in Japan to
retailers such as Sanei International, Interplanet, Free's Shops, Isetan,
Mitsukoshi New York Runway and Barneys New York, Inc.


Also, on February 16, 2004, Joe's entered into a Master Distribution Agreement, or MDA, with
Beyond Blue, Inc., or Beyond Blue, whereby Joe's granted Beyond Blue exclusive distribution
rights for Joe's products outside the United States. The MDA provided for the continuation of
existing distribution agreements, such as the Itochu Agreement. The MDA was entered into in an
effort to capitalize upon Joe's international brand recognition, to utilize Beyond Blue's
experience in international distribution of high−end fashion denim apparel lines and to manage
international distribution through the use of sub−distributors and sales agents in foreign
markets. See "Business − Subsequent Events" for further discussion of the MDA between Joe's and
Beyond Blue.

The Joe's Jeans website (www.joesjeans.com) has been built to advance the
brand's image and to allow consumers to review the latest collection of
products. Joe's currently uses both online and print advertising to create brand
awareness with customers as well as consumers.


For fiscal 2003, Joe's three largest customers accounted for approximately 21% of its net
sales. The loss of any of these customers would not have a material adverse affect on Joe's.

IAA


IAA develops apparel products for the private label and branded product markets. At year ended
November 29, 2003, IAA primarily distributed its private label products primarily to Target
Corporation's Mossimo division, or Target, and American Eagle Outfitters, Inc., or AEO.

During fiscal 2003, sales to Target Corporation, AEO, and Warnaco, which IAA
ceased selling products to in fiscal 2003, represented approximately 18%, 48%
and 10%, respectively, of IAA's net sales.


Pursuant to the license agreements for Shago(R), Fetish(TM) and Hot Wheels(R), IAA may sell
apparel and accessory products to certain agreed upon channels of distribution set forth in the
various license agreements. Currently, IAA distributes its Shago(R) apparel and accessory
products to Federated Department Stores, Inc., which includes Macy's East and Macy's West,
Jimmy Jazz and City Blues. IAA distributes its Fetish(TM) apparel and accessory products to
Federated Department Stores, Inc., which includes Macy's East and Macy's West, Robinsons−May,
Demo, Up Against the Wall, Epic and Man Alive.

We do not enter into long−term agreements with any of our customers. Instead, we
receive individual purchase order commitments from our customers. A decision by
the controlling owner of a group of stores or any other significant customer,
whether motivated by competitive      conditions,   financial   difficulties or
otherwise, to decrease the amount of merchandise purchased from us, or to change
their manner of doing business with us, could have a material adverse effect on
our financial condition and results of operations. See "Risk Factors−−A
substantial portion of our net sales and gross profit is derived from a small
number of large customers."

Our business has historically been seasonal by nature. While we believe that as
a result of our growing product lines and expanding business model, our business
should be less seasonal in future periods. Furthermore, a majority of our
revenues   are   generated   during   our third and     fourth   quarters.   See
"Business−Seasonality of Business and Working Capital" for further discussion of
the seasonality of our business.

Seasonality of Business and Working Capital


We have historically experienced and expect to continue to experience seasonal fluctuations in
sales and net earnings. Historically, a significant amount of our net sales and a majority of
our net earnings have been realized during the third and fourth quarter. In the second quarter
in order to prepare for peak sales that occur during the third quarter, we build inventory
levels, which results in higher
13
liquidity needs as compared to the other quarters in the fiscal year. If sales
were materially different from seasonal norms during the third quarter, our
annual operating results could be materially affected. Accordingly, our results
for the individual quarters are not necessarily indicative of the results to be
expected for the entire year.


Due to our growth during fiscal 2003, we entered into a series of transactions
to provide us with additional working capital. On June 1, 2001 and September 10,
2001, we, through our three main operating subsidiaries, Joe's, Innovo, and IAA,
entered into financing agreements with CIT Commercial Services, a unit of CIT
Group Inc, or CIT for the factoring of our account receivables. In August 2002,
Joe's and Innovo each entered into certain amendments to their respective
factoring agreements, which included inventory security agreements, to permit
each subsidiary to obtain advances of up to 50% of the eligible inventory up to
$400,000 each. As a result of necessity for additional working capital, on or
about June 10, 2003, the existing financing facilities with CIT for our
subsidiaries were amended, to be effective as of April 11, 2003, primarily to
remove the fixed aggregate cap of $800,000 on their inventory security
agreements to allow for Innovo and Joe's to borrow up to 50% of the value of
certain eligible inventory. In connection with these amendments, IAA entered
into an inventory security agreement with CIT based upon the same terms as Joe's
and Innovo. Cross guarantees were executed by and among the subsidiaries and we
also entered into a guarantee for our subsidiaries' obligations in connection
with the amendments to the existing credit facilities. We have also established
a letter of credit facility with CIT. As of November 29, 2003, we had a loan
balance with CIT of $8,786,000, the majority of which was collateralized against
non−recourse factored receivables. As of November 29, 2003, we had $8,536,000 of
factored receivables with CIT and an aggregate amount of $2,149,000 of unused
letters of credit outstanding. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations−−Liquidity and Capital Resources"
for further discussion of our financing agreements with CIT.


Additionally, in fiscal 2003, we consummated five private placements of our common stock
resulting in net proceeds of approximately $17,540,000, after deducting commissions. During our
first private placement completed on March 19, 2003 we issued 165,000 shares of our common
stock to 17 accredited investors at $2.65 per share, raising net proceeds of approximately
$407,000. During our second private placement completed on March 26, 2003, we issued 63,500
shares of our common stock to 5 accredited investors at $2.65 per share, raising net proceeds
of approximately $156,000. During our third private placement completed on July 1, 2003, we
issued 2,835,481 shares to 34 accredited investors at $3.33 per share, raising net proceeds of
approximately $8,751,000. As part of this private placement, and in addition to commissions
paid, warrants to purchase 300,000 shares of our common stock at $4.50 were issued to the
placement agent, Sanders Morris Harris, Inc. During our fourth private placement completed on
August 29, 2003, we issued 175,000 shares of our common stock to 5 accredited investors at
$3.62 per share, raising net proceeds of approximately $592,000. As part of this private
placement, and in addition to commissions paid, warrants to purchase 17,500 shares of our
common stock at $3.62 were issued to the placement agent, Pacific Summit Securities. During our
fifth private placement which was completely funded on or before November 29, 2003, but
completed on December 1, 2004, we issued 2,996,667 shares of our common stock to 14 accredited
investors at $3.00 per share, and warrants to purchase 599,333 shares of our common stock to
certain of these investors at $4.00 per share raising net proceeds of approximately
$10,704,000. See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations −Equity Financings" and "Risk Factors − Equity Financings" and Item 5 "Market for
Registrant's Common Equity and Related Stockholder Matters" for a further discussion of our
equity financings.

These equity financings and amended financing agreements with CIT were necessary
to support our growth in fiscal 2003. Such growth is associated with our
obligations pursuant to the license agreements for the Shago(R) and Fetish(TM)
marks, respectively. Based upon our historical growth, we may need to obtain
additional working capital in order to meet our operational needs in fiscal
2004. We believe that we will be able to address these needs by increasing the
availability of funds offered to us under our financing agreements with CIT or
other financial institutions or by obtaining additional capital through debt or
equity financing.    See "Managements Discussion and Analysis of Financial
Condition and Results of Operations−Liquidity and Capital Resources." We believe
that any additional capital, to the extent needed, may be obtained from the sale
of equity securities or through short−term working capital loans. However, there
can be no assurance that this or other financing will be available if needed.
The inability of us to be able to fulfill any interim working capital
requirements would force us to constrict our operations.

Backlog


Although we may, at any given time, have significant business booked in advance of ship dates,
customers' purchase orders are typically filled and shipped within two to six weeks. As of
November 29, 2003, there were no significant backlogs.

Competition


The industries in which we operate are fragmented and highly competitive in the United States
and on a worldwide basis. We compete for consumers with a large number of apparel and accessory
products similar to ours. We do not hold a dominant competitive position, and our ability to
sell our products is dependent upon the anticipated popularity of our designs, the brands our
products bear, the price and quality of our products and our ability to meet our customers'
delivery schedules.
We believe that we are competitive in each of the above− described segments with
companies producing goods of like quality and pricing, and that new product
development, product identity through marketing, promotions and low price points
will allow us to maintain our


                                       14
competitive position. However, many of our competitors possess substantially
greater financial, technical and other resources than us , including the ability
to implement more extensive marketing campaigns. Furthermore, the intense
competition and the rapid changes in consumer preferences constitute significant
risk factors in our operations. As we expand globally, we continue to encounter
additional   sources of competition.     See "Risk    Factors−−We face intense
competition in the worldwide apparel and accessory industry."


Imports and Import Restrictions

Our transactions with our foreign manufacturers and suppliers are subject to the
risks of doing business abroad. Imports into the United States are affected by,
among other things, the cost of transportation and the imposition of import
duties and restrictions.     The countries in which our products might be
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect our operations and our ability to import products at current
or increased levels. We cannot predict the likelihood or frequency of any such
events occurring. The enactment of any additional duties, quotas or restrictions
could result in increases in the cost of our products generally and might
adversely affect our sales and profitability.


Our import operations are subject to constraints imposed by bilateral textile agreements between
the United States and a number of foreign countries, including Hong Kong, China, Taiwan and
Korea. These agreements impose quotas on the amount and type of goods that can be imported into
the United States from these countries. Such agreements also allow the United States to impose,
at any time, restraints on the importation of categories of merchandise that, under the terms
of the agreements, are not subject to specified limits. Our imported products are also subject
to United States customs duties and, in the ordinary course of business, we are from time to
time subject to claims by the United States Customs Service for duties and other charges.

We monitor duty, tariff and quota−related developments and continually seek to
minimize its potential exposure to quota− related risks through, among other
measures,   geographical diversification of our manufacturing sources, the
maintenance of overseas     offices,  allocation of overseas     production to
merchandise categories where more quota is available and shifting of production
among countries and manufacturers.

Because our foreign manufacturers are located at greater geographic distances
from us than our domestic manufacturers, we are generally required to allow
greater lead time for foreign orders,       which reduces our    manufacturing
flexibility.   Foreign   imports   are also   affected by the high cost of
transportation into the United States.


In addition to the factors outlined above, our future import operations may be adversely
affected by political instability resulting in the disruption of trade from exporting
countries, any significant fluctuation in the value of the dollar against foreign currencies and
restrictions on the transfer of funds.

Human Resources

As of February 1, 2004, we had 201 full−time employees. IGI employed 11
individuals, Innovo employed 65 individuals, Joe's employed 38 individuals, and
IAA employed 87 individuals located in our various offices.

Real Estate Transactions

IRI

In April 2002, IRI acquired a 30% limited partnership interest in each of 22
separate partnerships. These partnerships simultaneously acquired 28 apartment
complexes at various locations throughout the United States consisting of
approximately 4,000 apartment units, or Properties. A portion of the aggregate
$98,080,000 purchase price was paid through the transfer of 195,295 shares of
our $100, 8% Series A Redeemable Cumulative Preferred Stock, or the Series A
Preferred Shares, to the sellers of the Properties. The balance of the purchase
price was paid by Metra Capital, LLC, or Metra Capital, in the amount of
$5,924,000, or the Metra Capital Contribution, and through proceeds from a Bank
of America loan, in the amount $72,625,000.


We had originally issued the Series A Preferred Shares to IRI in exchange for all shares of its
common stock. IRI then acquired a 30% limited partnership interest in each of the 22 separate
limited partnerships in exchange for the Series A Preferred Stock, which then transferred the
Series A Preferred Shares to the sellers of the Properties.

Some of our stockholders, including one of our substantial stockholders, Messrs.
Paul Guez, and Simon Mizrachi and their affiliates have invested in each of the
22 separate partnerships. Each of Messrs. Guez and Mizrachi, together with their
respective affiliates, own 50% of the membership interests of Third Millennium.
Third Millennium is the managing member of Metra Capital, which owns 100% of the
membership interest in each of the 22 separate limited liability companies, or
collectively, the General Partners and together with Metra Capital, the Metra
Partners, that hold a 1% general partnership interest in each of the 22 separate
limited partnerships that own the Properties. Metra Capital also owns 69% of the
limited partnership interest in each of the 22 separate limited partnerships.
Messrs. Guez and Mizrachi and their affiliates own 19% of the membership
interest of Metra Capital.   Based on the Schedule   13D/A filed by Messrs.


                                        15
Simon Mizrachi and Joseph Mizrachi on October 30, 2003, and the Schedule 13D/A
filed by Hubert Guez and Paul Guez on January 20, 2004, the Mizrachi's
beneficially owned approximately 1% of our shares and the Guez's beneficially
own 17.57% of our shares in the aggregate. Effective February 21, 2003, the
Mizrachi's ceased to be the beneficial owners of more than five percent of our
securities. Furthermore, in connection with investments made by (1) Commerce and
other investors affiliated with Hubert Guez and Paul Guez, or collectively, the
Commerce Group, and (2) Mr. Joseph Mizrachi and Simon Mizrachi through three
entities controlled by the Mizrachi's, in 2000, each of the Commerce Group and
Mr. Joseph Mizrachi have the right to designate three individuals or one
individual, respectively, for election to our board of directors.

Pursuant to each of the limited partnership agreements, the Metra Partners
receive at least quarterly (either from cash flow and/or property sale proceeds)
an amount sufficient to provide the Metra Partners (1) a 15% cumulative compound
annual rate of return on the outstanding         amount of the Metra Capital
Contribution that has not been previously returned to them through prior
distributions of cash flow and/or property sale proceeds and (2) a cumulative
annual amount of .50% of the average outstanding balance of the average
outstanding balance of the mortgage indebtedness secured by any of the
Properties. In addition, in the event of a distribution solely due to a property
sale proceeds after the above distributions have been made to the Metra
Partners, Metra Partners also receive an amount equal to 125% of the amount of
the Metra Capital Contribution allocated to the Property sold until the Metra
Partners   have   received   from all previous cash flow or property sale
distributions an amount equal to its Metra Capital Contribution.


Third Millennium receives on a quarterly basis from cash flows and/or property sale proceeds an
amount equal to $63,000 until it receives an aggregate of $252,000.

After the above distributions have been made, and if any cash is available for
distribution, IRI is to receive at least quarterly in the case of cash flow
distributions and at the time of property sale distributions an amount
sufficient for it to pay the 8% coupon on the Series A Preferred Shares and then
any remaining amounts left for distribution to redeem a portion or all of the
Series A Preferred Shares.


After all of the Series A Preferred Shares have been redeemed ($19.5 million), future
distributions are split between Metra Partners and IRI, with Metra Partners receiving 70% of
such distribution and IRI receiving the balance. In addition, IRI receives a quarterly sub−asset
management fee of $85,000.

The 8% Series A Preferred Shares coupon is funded entirely and solely through
partnership distributions as discussed above. If sufficient funds are not
available for the payment of a full quarterly 8% coupon, then partial payments
shall be made to the extent funds are available. Unpaid dividends accrue.
Partnership distribution amounts remaining after the payment of all accrued
dividends must be used by us to redeem outstanding the Series A Preferred
Shares. The Series A Preferred Shares have a redemption price of $100 per share.
In the event that the partnership distributions received by us are insufficient
to cover the 8% coupon or the redeem the Series A Preferred Shares, we will have
no obligation to cover any shortcomings so long as all distributions from the
partnership are properly applied to the payment of dividends and the redemption
of the Series A Preferred Shares. We may however be liable to the holders of the
Series A Preferred Shares for the breach of certain covenants, including, but
not limited to, if IRI fails (i) to deposit distributions from the partnerships
into a sinking fund which funds are to be distributed to the holders of the
Series A Preferred Shares as a dividend or redemption of the Series A Preferred
Shares or (ii) to enforce its rights to receive distributions from the limited
partnerships. If, after all of the Properties are sold and the proceeds of the
sale of the Properties and cash flow derived from such Properties have either
been applied to the payment of the 8% coupon and the redemption of the Series A
Preferred Shares or deposited into the sinking fund for that purpose, and the
total amount of funds remaining in the Sinking Fund is insufficient to pay the
full 8% coupon and the full Redemption Price for all then outstanding the Series
A Preferred Shares, then we, or IRI, must pay $1.00 in total into the Sinking
Fund and the Redemption Price will be adjusted so that it equals (x) the total
amount in the sinking fund available for distribution, minus (y) all direct
costs of maintaining the Sinking Fund and making distributions therefrom,
divided by (z) the number of then outstanding Preferred Shares. The adjusted
Redemption Price will represent full and final payment for the redemption of all
the Series A Preferred Shares.


We have not given accounting recognition to the value of our investment in the limited
partnerships, because we have determined that the asset is contingent and will only have value
to the extent that cash flow from the operations of the properties or from the sale of
underlying assets is in excess of the 8% coupon and redemption of the Series A Preferred
Shares. As discussed above, we are obligated to pay the 8% coupon and redeem the Series A
Preferred Shares from our partnership distributions, prior to us being able to recover the
underlying value of our investment. Additionally, we have determined that the Series A Preferred
Shares will not be accounted for as a component of equity as the shares are redeemable outside
of our control. No value has been ascribed to the Series A Preferred Shares for financial
reporting purposes as we are obligated to pay the 8% coupon or redeem the shares only if we
receive cash flow from the limited partnerships adequate to make the payments. We have included
the quarterly management fee paid to IRI in other income using the accrual basis of accounting.

During   fiscal   2003,   IRI had no   operations   or   transactions   other   than its
quarterly sub−asset management fee as discussed above.


                                       16
Financial Information about Geographical Areas


See "Note 13 − Segment Disclosures −Operations by Geographic Area" in the Notes to Consolidated
Financial Statements for further discussion of financial information about geographical areas.

Available Information

Our World Wide Web address is www.innovogroup.com, and we maintain a website at
that address. We make available on or through our World Wide Web website,
without charge, our Annual Report on Form 10−K, Quarterly Reports on Form 10−Q,
Current Reports on Form 8−K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after such reports are electronically
filed with or furnished to the SEC. Although we maintain a website at
www.innovogroup.com, we do not intend that the information available through our
website be incorporated into this Annual Report on Form 10−K. In addition, any
materials filed with, or furnished to, the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or
viewed on line at www.sec.gov. Information regarding the operation of the Public
Reference Room can be obtained by calling the SEC at 1−800−SEC−0330.

Executive Officers

The following   table sets forth   certain     information   regarding   our executive
officers:

Name                               Age        Position
−−−−                               −−−        −−−−−−−−
Samuel J. (Jay) Furrow, Jr......   30         Chief Executive Officer and Director
Patricia Anderson...............   43         President and Director
Marc B. Crossman................   32         Chief Financial Officer and Director
Shane Whalen....................   33         Chief Operating Officer



Samuel J. (Jay) Furrow, Jr. has served as our Chief Executive Officer since July 2002 and a
member of our Board of Directors since January 1999. Prior to that, Mr. Furrow served as our
President from December 2000 until July 2002, served as our Chief Operating Officer from April
1999 until July 2002, our Acting Chief Financial Officer from August 2000 until July 2002, and
our Vice−President for Corporate Development and In−House Counsel from August 1998 until April
1999.

Patricia Anderson has served as our President since July 2002 and a member of
our Board of Directors since August 1990. Ms. Anderson has also served as
President of Innovo since 1987. Prior to that, Ms. Anderson served as our Chief
Executive Officer from December 2000 until July 2002, our President from August
1990 until December 2000, and Chairman of our Board of Directors from August
1990 until August 1997.

Marc B. Crossman has served as our Chief Financial Officer since March 2003 and
a member of our Board of Directors since January 1999.

Shane Whalen has served as our Chief Operating Officer since April 2003.

Subsequent Events


On February 6, 2004, we, through IAA, entered into an assignment with Blue Concept LLC, which
is controlled by Paul Guez for all the rights benefits and obligations of a license agreement
between Blue Concept LLC and B.J. Vines, Inc., the licensor of the Betsey Johnson(R) apparel
brand. The license agreement provides for the exclusive right to design, market and distribute
women's jeans and coordinating denim related apparel, such as t−shirts and tops, under the
Betsey Johnson(R) brand name in the United States, its territories and possessions, and Canada.
The license agreement allows for an initial four−year term with a renewal option subject to
certain sales levels being met. We are required to pay royalties of eight percent on net sales
and spend two percent of net sales on advertising. The license agreement provides that certain
minimum guaranteed royalties and minimum net sales must be met in each annual period. The
minimum royalties to be paid in the aggregate are $1.28 million and minimum net sales range form
$2.5 million to $5.5 million. The agreement may be renewed upon expiration of the initial 4 year
term for an additional three years. We anticipate introducing the Betsey Johnson(R) products in
the third quarter of 2004.

On February 16, 2004, Joe's entered into a Master Distribution Agreement ("MDA")
with Beyond Blue, Inc., or Beyond Blue, whereby Joe's granted Beyond Blue
exclusive distribution rights for Joe's products outside the United States.
Beyond Blue, a Los Angeles−based company that specializes in international
consulting,   distribution and licensing for apparel products, secured an
exclusive right to distribute Joe's products outside the United States, subject
to current license agreements such as the license with Itochu and Joe's Canadian
distributor remaining in place. Under the MDA, Beyond Blue will be establishing
sub−distributors and sales agents in certain international markets through
sub−distribution agreements. These sub−distribution agreements shall govern, but
not be limited to, such items as: (i) minimum sample charges paid by each
sub−distributor; (ii) minimum advertising requirements to be borne by each
sub−distributor; and (iii) an assignment provision that allows Joe's to take
over the sub−distribution agreements in the event that Beyond


                                         17
Blue defaults under the MDA. The MDA also provides for the continuation of
existing distribution agreements, such as the Itochu Agreement. The term of the
MDA shall be for three years, subject to Beyond Blue purchasing certain minimum
amounts of product from Joe's during three annual periods, with the first annual
period being for 18 months.



                                          18


Certain Risk Factors


The following risk factors should be read carefully in connection with evaluating our business
and the forward−looking statements contained in this Annual Report on Form 10−K. Any of the
following risks could materially adversely affect our business, our operating results, our
financial condition and the actual outcome of matters as to which forward−looking statements are
made in this Annual Report on Form 10−K.

Risk Factors Relating to our Common Stock

We do not   anticipate   paying   dividends on our common stock in the   foreseeable
future.


We have not paid any dividends nor do we anticipate paying any dividends on our common stock in
the foreseeable future. We intend to retain earnings, if any, to fund our operations and to
develop and expand our business.

We have a substantial number of authorized common and preferred shares available
for future issuance that could cause dilution of our stockholder's interest and
adversely impact the rights of holders of our common stock.

We have a total of 40,000,000 shares of common stock and 5,000,000 shares of
"blank check" preferred stock authorized for issuance. As of February 25, 2004,
we had 14,135,150 shares of common stock and 4,806,000 shares of preferred stock
available for issuance. In fiscal 2003, we raised net proceeds of $17,540,000
through the sale of 6,235,648 shares of our common stock and 916,833 shares of
common stock purchase warrants in private placement transactions. On March 5,
2004, we are holding a special meeting of our stockholders to approve the
conversion of $12.5 million in principal amount of indebtedness from a
convertible promissory note issued in connection with the purchase of the Blue
Concepts Division from Azteca into a maximum of 4,166,667 shares of our common
stock. We expect to continue to seek financing which could result in the
issuance of additional shares of our capital stock and/or rights to acquire
additional shares of our capital stock. Those additional issuances of capital
stock would result in a reduction of your percentage            interest in us.
Furthermore, the book value per share of our common stock may be reduced. This
reduction would occur if the exercise price of the options or warrants or the
conversion ratio of the preferred stock was lower than the book value per share
of our common stock at the time of such exercise or conversion.

The addition of a substantial number of shares of our common stock into the
market or by the registration of any of our other securities under the
Securities Act may significantly and negatively affect the prevailing market
price for our common stock. The future sales of shares of our common stock
issuable upon the exercise of outstanding warrants and options may have a
depressive effect on the market price of our common stock, as such warrants and
options would be more likely to be exercised at a time when the price of our
common stock is greater than the exercise price.

Our board of directors has the power to establish the dividend rates,
preferential payments on any liquidation,       voting rights, redemption and
conversion terms and privileges for any series of our preferred stock. The sale
or issuance of any shares of our preferred stock having rights superior to those
of our common stock may result in a decrease in the value or market price of our
common stock. The issuance of preferred stock could have the effect of delaying,
deferring or preventing a change of ownership without further vote or action by
our stockholders and may adversely affect the voting and other rights of the
holders of our common stock.

We are controlled by our management and other related parties.

As of February 4, 2004, our executive officers and directors beneficially owned
approximately 24.82% of our outstanding securities. Furthermore, in connection
with investments made by (1) Commerce and other investors affiliated with Hubert
Guez and Paul Guez, or collectively, the Commerce Group, and (2) Mr. Joseph
Mizrachi in fiscal 2000, both Commerce Group and Mr. Mizrachi each have the
right to designate three individuals and one individual respectively, for
election to the board of directors. If any or all of the Commerce Group or
Mizrachi designated directors are elected, then the Board has the obligation to
appoint at least one Commerce and/or Mizrachi designated director to each of its
committees. Based on the Schedule 13D/A filed by Messrs. Simon Mizrachi and
Joseph Mizrachi on October 30, 2003, the Mizrachi's          beneficially owned
approximately 1.2% of our shares and the Schedule 13D/A filed by Messrs. Hubert
Guez and Paul Guez on January 20, 2004, the Guez's beneficially owned
approximately 17.56% of our shares in the aggregate. As of February 21, 2003,
the Mizrachi's ceased to be the beneficial owners of more than 5% of our
securities. In the event that our stockholders approve the conversion of the
Blue Concept Note into a maximum of 4,166,667 shares of our common stock at the
special meeting of stockholders that we are holding on March 5, 2004, as
discussed above in "Business − Strategic        Relationship with two of our
significant stockholders, Hubert Guez and Paul Guez, and affiliated companies,"
then the Guez's will beneficially own approximately 33.73% of our common stock
in the aggregate. We are unable to predict the effect that sales into the market
of 4,166,667 shares may



                                       19
have on the then prevailing market price of our common stock. On February 25,
2004, the last reported sale price of our common stock on the Nasdaq SmallCap
Market was $2.85. During the four week period prior to February 25, 2004, the
average daily trading volume of our common stock was 80,755 shares. It is likely
that market sales of the 4,166,667 shares offered for sale (or the potential for
those sales even if they do not actually occur) may have the effect of
depressing the market price of our common stock. As a result, the potential
resale and possible fluctuations in trading volume of such a substantial amount
of our stock may affect the share price negatively beyond our control.


Because of their stock ownership and/or positions with us, these persons have been and will
continue to be in a position to greatly influence the election of directors, and thus, control
our affairs. Additionally, our bylaws limit the ability of stockholders to call a meeting of the
stockholders. These bylaw provisions could have the effect of discouraging a takeover of us,
and therefore may adversely affect the market price and liquidity of our securities. We are also
subject to a Delaware statute regulating business combinations that may hinder or delay a
change in control. The anti−takeover provisions of the Delaware statute may adversely affect the
market price and liquidity of our securities.

Our common stock price is extremely volatile and may decrease rapidly.


The trading price and volume of our common stock has historically been subject to wide
fluctuation in response to variations in actual or anticipated operating results, announcements
of new product lines or by us or our competitors, and general conditions in the apparel and
accessory industry. In the 52 week period prior to November 29, 2003, the closing price of our
common stock has ranged from $2.33 − $7.80. In addition, stock markets generally have
experienced extreme price and volume trading volatility in recent years. This volatility has had
a substantial effect on the market prices of securities of many companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market
fluctuations may significantly and negatively affect the market price of our common stock.

If we cannot meet the Nasdaq SmallCap Market maintenance requirements and Nasdaq
Rules, Nasdaq may delist our common stock which could negatively affect the
price of the common stock and your ability to sell the common stock.


In the future, we may not be able to meet the listing maintenance requirements of the Nasdaq
SmallCap Market and Nasdaq rules, which require, among other things, minimum net tangible
assets of $2 million, a minimum bid price for our common stock of $1.00, and stockholder
approval prior to the issuance of securities in connection with a transaction involving the sale
or issuance of common stock equal to 20 percent or more of a company's outstanding common stock
before the issuance for less than the greater of book or market value of the stock. If we are
unable to satisfy the Nasdaq criteria for maintaining listing, our common stock would be subject
to delisting. Trading, if any, of our common stock would thereafter be conducted in the
over−the−counter market, in the so−called "pink sheets" or on the National Association of
Securities Dealers, Inc., or NASD, "electronic bulletin board." As a consequence of any such
delisting, a stockholder would likely find it more difficult to dispose of, or to obtain
accurate quotations as to the prices, of our common stock.

If Nasdaq delists our common stock you would need to comply with the penny stock
regulations which could make it more difficult to sell your common stock.


In the event that our securities are not listed on the Nasdaq SmallCap Market, trading of the
common stock would be conducted in the "pink sheets" or through the NASD's Electronic Bulletin
Board and covered by Rule 15g−9 under the Securities Exchange Act of 1934. Under such rule,
broker/dealers who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for the subscriber
and receive the subscriber's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.

The Securities and Exchange Commission adopted regulations that generally define
a penny stock as any equity security that has a market price of less than $5.00
per share, with certain exceptions. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. If our common stock were considered a penny stock, the
ability of broker/dealers to sell our common stock and the ability of our
stockholders to sell their securities in the secondary market would be limited.
As a result, the market liquidity for our common stock would be severely and
adversely affected. We cannot assure you that trading in our securities will not
be subject to these or other regulations in the future which would negatively
affect the market for such securities.

Risk Factors Relating to our Operations

Due to our negative cash flows we could be required to cut          back or stop
operations if we are unable to raise or obtain needed funding.


Our ability to continue operations will depend on our positive cash flow, if any, from future
operations and on our ability to raise additional funds through equity or debt financing. As of
November 29, 2003, we have raised net proceeds of approximately $17,540,000, in the aggregate
through the sale of shares of 6,235,648 our common stock and 916,833 shares of common stock
purchase warrants in five private placement transactions and had an outstanding loan balance of
$8,786,000 with CIT with whom we have entered into
20
financing agreements. These sources of financing are used to fund our continuing
operations and for working capital. As of November 29, 2003, we had $8,536,000
of factored receivables with CIT and $2,149,000 of unused letter of credit
outstanding in the aggregate. While we had a $332,000 liability with CIT as of
November 29, 2003 due to the amount of factored receivables, our financial
position may change such that there may be the need for us to continue to raise
needed funds through a mix of equity and debt financing to fund its operations
and working    capital.   Equity financing will usually result in existing
stockholders becoming "diluted" or owning a smaller percentage of the total
shares outstanding as of the date of such dilution. A high degree of dilutions
can make it difficult for the price of our common stock to rise rapidly, among
other things. Dilution also lessens a stockholder's voting power.


We do not know if we will be able to continue to raise additional funding or if
such funding will be available on favorable terms. We could be required to cut
back or stop operations if we are unable to raise or obtain needed funding.

Our cash requirements   to run our   business   have been and will    continue to be
significant.

Since 1997, our negative operating       cash   flow and   losses   from   continuing
operations have been as follows:

                           (Negative) positive Cash
                                     Flow
                                 from Operating                (Losses) income
                                 Activities of                      from
                             Continuing Operations          Continuing Operations
                             −−−−−−−−−−−−−−−−−−−−−          −−−−−−−−−−−−−−−−−−−−−
Fiscal Year Ended:
−−−−−−−−−−−−−−−−−−
November 29, 2003                     ($ 9,857,000)                   ($8,317,000)
November 30, 2002                        $1,504,000                     $ 572,000
December 1, 2001                      ($   632,000)                  ($   618,000)
November 30, 2000                     ($ 4,598,000)                  ($ 5,056,000)
November 30, 1999                     ($ 2,124,000)                  ($ 1,340,000)
November 30, 1998                     ($ 1,238,000)                  ($ 2,267,000)
November 30, 1997                     ($ 1,339,000)                  ($ 1,729,000)



Since November 30, 1997, we have experienced negative cash flow from our operating activities
except for the year ending November 30, 2002. As of November 29, 2003, we had an accumulated
deficit of approximately $41,824,000.

Although we have undertaken numerous measures to increase sales and operate more
efficiently, we may experience further losses and negative cash flows. We can
give you no assurance that we will in fact operate profitably in the future.


We must expand sales of our existing products and successfully introduce new products that
respond to constantly changing fashion trends and consumer demands to increase revenues and
attain profitability.

Our success will depend on our ability to expand sales of our current products
to new and existing customers, as well as the development or acquisition of new
product designs and the acquisition of new licenses that appeal to a broad range
of consumers. We have little control over the demand for our existing products,
and we cannot assure you that the new products we introduce will be successfully
received by consumers. For example, in the past year, we have acquired licenses
to design and market apparel and accessory products for the recording artists
and entertainers known as "Bow Wow" and "Eve", respectively. Each artist's
apparel is sold under the Shago(R) and Fetish(TM) brand. We have spent
considerable resources to develop and market each of these brands. We believe,
but there can be no assurance, that there will be demand for products such as
apparel and accessories associated with "Bow Wow" or "Eve." See "Business −
License Agreements" for further discussion of our license agreements for
Shago(R) and Fetish(TM).


Any failure on our part to anticipate, identify and respond effectively to changing consumer
demands and fashion trends could adversely affect the acceptance of our products and leave us
with a substantial amount of unsold inventory or missed opportunities. If that occurs, we may
be forced to rely on markdowns or promotional sales to dispose of excess, slow−moving
inventory, which may negatively affect our ability to achieve profitability. At the same time,
our focus on tight management of inventory may result, from time to time, in our not having an
adequate supply of products to meet consumer demand and may cause us to lose sales.

A substantial portion of our net sales and gross profit is derived from a small
number of large customers.


Our 10 largest customers accounted for approximately 52% and 67% of our gross sales during
fiscal 2002 and fiscal 2003, respectively. We do not enter into any type of long−term
agreements with any of our customers. Instead, we enter into a number of individual purchase
order commitments with our customers. A decision by the controlling owner of a group of stores
or store or any other significant customer, whether motivated by competitive conditions,
financial difficulties or otherwise, to decrease the amount of merchandise purchased from us,
or to change their manner of doing business with us, could have a material adverse effect on
our

      21
financial condition and results of operations.

We are dependent on certain contractual relationships to generate revenues.

Our sales are dependent to a significant         degree upon the    contractual
relationships we can establish with licensors to exploit, on generally a
non−exclusive   basis,   proprietary rights in well−known logos, marks and
characters. Although we believe we will continue to meet all of our material
obligations under such license agreements, there can be no assurance that such
license rights will continue or will be available for renewal on favorable
terms. Failure to obtain new licenses or extensions on current licenses or to
sell such products, for any reason, could have a significant negative impact on
our business. As of November 30, 2002 and November 29, 2003, $61,938,000 (or
75%) and $16,092,000 (or 54%), respectively, of our gross revenues were
generated from licensed apparel and accessory products.


We are primarily dependent upon revenues from a certain number of licenses, namely our licenses
to produce the Joe's Jeans(R), Bongo(R), Fetish(TM) and Shago(R) accessory and apparel products.
As of November 29, 2003, we recorded $5,917,000 in sales of products under our Shago(R) and
Fetish(TM) licenses. Our first product line to ship under the Shago(R) license was delivered to
retailers during August 2003, making the fall product line our first line under the Shago(R)
license. Our first product line to ship under the Fetish(TM) license was delivered to retailers
during May 2003, making the summer product line our first line under the Shago(R) license.
During that same period, we recorded $2,534,000 and $11,476,000 in sales of product under our
Bongo(R) license and Joe's Jeans(R) license, respectively. See "Business − License Agreements
and Intellectual Property" for further discussion of our license agreements.

We are currently dependent on supply and distribution arrangements with Commerce
Investment Group, LLC, or Commerce, and its related entities to generate a
substantial portion of our revenues.

During fiscal 2000, we entered into supply and distribution arrangements with
Commerce and its affiliated entities, whom collectively, we will refer to as the
Commerce Group. Under the terms of the distribution arrangements, Commerce
purchased our equity securities and we became obligated to manufacture and
distribute all of our craft products with the Commerce Group for a two−year
period. The distribution arrangements contained an automatic renewal for an
additional two−year term. In fiscal 2002, we renewed these arrangements for
another two years. In July 2003, we entered into another supply agreement with
an Azteca affiliate, AZT International SA de CV, a Mexico corporation, or AZT.
Pursuant to this agreement, we are obligated to purchase certain products,
particularly the products that are sold by us under our division known as Blue
Concept Division acquired on July 17, 2003 from AZT. In addition, we have verbal
agreements   with Azteca and/or its affiliates       regarding the supply and
distribution of our other apparel products, including certain denim products for
our Fetish(TM) and Shago(R) branded accessory and apparel lines. We utilize
warehouse space in Los Angeles from Azteca. The loss of our supply and
distribution arrangements with the Commerce Group could adversely affect our
current supply and distribution responsibilities, primarily because if we, due
to unforeseen circumstances that may occur in the future, are unable to utilize
the services for manufacturing, warehouse and distribution provided by the
Commerce Group, such inability may adversely affect our operations until we are
able to secure manufacturing, warehousing and distribution arrangements with
other suppliers that could provide the magnitude of services to us that the
Commerce Group currently provide.


Commerce is an entity controlled by Hubert Guez and Paul Guez, whom we will refer to as the Guez
Brothers, who are affiliates of us. Based on a Schedule 13D/A filed by the Guez brothers with
the SEC on January 20, 2004, the Guez Brothers beneficially own approximately 17.57% of our
outstanding common stock in the aggregate. In the event of the conversion of the promissory note
at the March 5, 2004 special stockholders meeting into a maximum of 4,166,667 shares, we believe
that the Guez brothers will beneficially own approximately 33.73% of our outstanding common
stock in the aggregate. See Business − Strategic Relationship with two of our significant
stockholders, Hubert Guez and Paul Guez, and affiliated companies" for a further discussion of
our relationship with the Guez brothers.

We outsource a substantial amount of our products to be manufactured to
Commerce. In fiscal 2002, we purchased approximately $16 million in goods and
services from Commerce Group or approximately 80% of our manufacturing and
distribution costs. As of November 29, 2003, we purchased approximately $47.9
million in goods and services from Commerce Group, or 68% of our manufacturing
and distribution costs.


Should we, due to unforeseen circumstances that may occur in the future, be unable to utilize
the services for manufacturing, warehouse and distribution provided by Commerce Group, such
inability may adversely affect our operations until we are able to secure manufacturing,
warehousing and distribution agreements with other suppliers that could provide the magnitude
of services that Commerce Group currently provides to us.

The seasonal nature of our business makes management more difficult, severely
reduces cash flow and liquidity during parts of the year and could force us to
curtail our operations.


Our business is seasonal. The majority of our marketing and sales activities take place from
late fall to early spring. Our greatest volume of shipments and sales occur from late spring
through the summer, which coincides with our second and third fiscal quarters. Our cash flow is
strongest in the third and fourth fiscal quarters. Unfavorable economic conditions affecting
retailers during the fall and holiday

                                       22
seasons in any year could have a material adverse effect on our results of
operations for the year. We are likely to experience periods of negative cash
flow throughout each year and a drop−off in business commencing each December,
which could force us to curtail operations if adequate liquidity is not
available. We cannot assure you that the effects of such seasonality will
diminish in the future.

The loss of the services of key personnel   could have a material    adverse effect
on our business.


Our executive officers have substantial experience and expertise in our business and have made
significant contributions to our growth and success. The unexpected loss of services of one or
more of these individuals could also adversely affect us. We are currently not protected by a
key−man or similar life insurance covering any of our executive officers, nor do we have written
employment agreements with our Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer or President. If, for example, any one of these executive officers should leave us, his
or her services would likely have a substantial impact on our ability to operate, on a daily
basis because we would be forced to find and hire similarly experienced personnel to fill one
or more of those positions, and daily operations may suffer temporarily as a result.

Furthermore, with respect to Joe's, while we maintain an employment agreement
with Joe Dahan, its president, should Mr. Dahan, leave Joe's, his experience,
design capabilities, and name recognition in the apparel and accessory industry
could materially adversely affect the operations of Joe's, since Joe's relies
heavily on his capabilities to design, direct and produce product for the Joe's
brand.

Our business could be negatively     impacted by the   financial    instability   or
consolidation of our customers.

We sell our product primarily to retail, private label and distribution
companies around the world based on pre−qualified payment terms. Financial
difficulties of a customer could cause us to curtail business with that
customer. We may also assume more credit risk relating to that customer's
receivables. Our inability to collect on our trade accounts receivable from any
one of these customers could have a material adverse effect on our business or
financial condition. More specifically, we are dependent primarily on lines of
credit that we establish from time to time with customers, and should a
substantial number of customers become unable to pay their respective debts as
they become due, we may be unable to collect some or all of the monies owed by
those customers.

Our current practice is to extend credit terms to a majority of our customers,
which is based on such factors as past credit history with us, reputation of
creditworthiness within our industry, and timelines of payments made to us. A
small percentage of our customers are required to pay by either credit card or
C.O.D., which is also based on such factors as lack of credit history,
reputation (or lack thereof) within our industry and/or prior negative payment
history. For these customers to whom we extend credit, typical terms are net 30
to 60 days. Our management exercises professional judgment in determining which
customers will be extended credit, which is based on industry practices
applicable to our business, financial awareness of the customers with whom we
conduct business, and business experience of our industry. As of November 29,
2003, we had $3,388,000 in accounts receivable from our customers.


Furthermore, in recent years, the retail industry has experienced consolidation and other
ownership changes. Some of our customers have operated under the protection of the federal
bankruptcy laws. While to date these changes in the retail industry not had a material adverse
effect on our business or financial condition, our business could be materially affected by
these changes in the future.

Our business could suffer as a result of manufacturer's inability to produce our
goods on time and to our specifications.

We do not own or operate any manufacturing facilities and therefore depend upon
independent third parties for the manufacture of all of our products. Our
products are    manufactured to our     specifications   by both domestic and
international manufacturers. During fiscal 2002, approximately 24% of our
products were manufactured in the United States and approximately 76% of our
products were manufactured in foreign countries compared to 13% and 87%,
respectively, as of November 29, 2003. The inability of a manufacturer to ship
orders of our products in a timely manner or to meet our quality standards could
cause us to miss the delivery date requirements of our customers for those
items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect on our financial condition and results of operations. Because of
the seasonality of our business, and the apparel and fashion business in
particular, the dates on which customers need and require shipments of products
from us are critical, as styles and consumer tastes change so rapidly in the
apparel and fashion business, particularly from one season to the next. Further,
because quality is a leading factor when customers and retailers accept or
reject goods, any decline in quality by our third−party manufacturers could be
detrimental not only to a particular order, but also to our future relationship
with that particular customer.

Our business could suffer if we need to replace manufacturers.

We compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if an existing manufacturer of ours must be replaced, we
may have to expand our third−party manufacturing capacity. We cannot assure you
that this additional capacity will be available when required on terms that are
acceptable to us or similar to existing terms which we have with our
manufacturers, either from a production

                                      23
standpoint or a financial standpoint. We enter into a number of purchase order
commitments each season specifying a time for delivery, method of payment,
design and quality specifications and other standard industry provisions, but do
not have long−term contracts with any manufacturer. None of the manufacturers we
use produces our products exclusively.


Should we be forced to replace one or more of our manufacturers, particularly a
manufacturer that we may rely upon for a substantial portion of its production
needs, such as Commerce, then we may experience an adverse financial impact, or
an adverse operational impact, such as being forced to pay increased costs for
such replacement manufacturing or delays upon distribution and delivery of our
products to our customers, which could cause us to loose customers or loose
revenues because of late shipments.

If an independent manufacturer or license partner        of   ours   fails   to   use
acceptable labor practices, our business could suffer.


While we require our independent manufacturers to operate in compliance with applicable laws and
regulations, we have no control over the ultimate actions of our independent manufacturers.
While our internal and vendor operating guidelines promote ethical business practices and our
staff periodically visits and monitors the operations of our independent manufacturers, we do
not control these manufacturers or their labor practices. The violation of labor or other laws
by an independent manufacturer of ours, or by one of our license partners, or the divergence of
an independent manufacturer's or license partner's labor practices from those generally accepted
as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished
products to us or damage our reputation. Any of these, in turn, could have a material adverse
effect on our financial condition and results of operations. In particular, the laws governing
garment manufacturers in the State of California impose joint liability upon us and our
independent manufacturers for the labor practices of those independent manufacturers. As a
result, should one of our independent manufacturers be found in violation of state labor laws,
we could suffer financial or other unforeseen consequences.

Our trademark and other intellectual     property   rights may not be    adequately
protected outside the United States.

We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully       resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States.

We cannot assure the successful implementation of our growth strategy.


As part of our growth strategy, we seek to expand our geographic coverage, strategically
acquiring select licensees and enhancing our operations. We may have difficulty hiring and
retaining qualified key employees or otherwise successfully managing the required expansion of
our infrastructure in our current United States market and other international markets we may
enter. Furthermore, we cannot assure you that we will be able to successfully integrate the
business of any licensee that we acquire into our own business or achieve any expected cost
savings or synergies from such integration.

Our business is exposed to domestic and foreign currency fluctuations.

We generally purchase our products in U.S. dollars. However, we source most of
our products overseas and, as such, the cost of these products may be affected
by changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which we and our foreign
competitors sell products in the same market. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We cannot assure you
that foreign currency fluctuations will not have a material adverse impact on
our financial condition and results of operations. For example, we are subject
to currency fluctuations in Japan and Hong Kong. In fiscal 2002, our earnings
were negatively impacted by $41,000 due to currency fluctuations in Japan and
Hong Kong. As of November 29, 2003, our earnings were positively impacted by
$154,000 due to currency fluctuations in Japan and Hong Kong.

Our ability to conduct business in international       markets may be affected by
legal, regulatory, political and economic risks.


Our ability to capitalize on growth in new international markets and to maintain the current
level of operations in our existing international markets is subject to risks associated with
international operations. Some of these risks include:

      −     the burdens of complying with a variety of foreign laws and
            regulations,

      −     unexpected changes in regulatory requirements, and
24
      −     new tariffs or other barriers to some international markets.

We are also subject to general political and economic risks associated with
conducting international business, including:

      −     political instability,

      −     changes in diplomatic and trade relationships, and

      −     general economic fluctuations in specific countries or markets.

We cannot predict whether quotas, duties, taxes, or other similar restrictions
will be imposed by the United States, the European Union, Canada, China, Japan,
India, Korea or other countries upon the import or export of our products in the
future, or what effect any of these actions would have on our business,
financial   condition or results of      operations.   Changes in    regulatory,
geopolitical policies and other factors may adversely affect our business in the
future or may require us to modify our current business practices.

We face intense competition in the worldwide apparel and accessory industry.

We face a variety of competitive challenges from other domestic and foreign
fashion−oriented   apparel and accessory producers,      some of whom may be
significantly larger and more diversified and have greater financial and
marketing resources than we have. We do not currently hold a dominant
competitive position in any market. We compete with competitors such as
Kellwood, Jones Apparel Group, and VF Corp. primarily on the basis of:

     −    anticipating   and responding to changing   consumer demands in a timely
          manner,

     −    maintaining favorable brand recognition,

     −    developing innovative, high−quality      products   in sizes,   colors and
          styles that appeal to consumers,

     −    appropriately pricing products,

     −    providing strong and effective marketing support,

     −    creating an acceptable value proposition for retail customers,

     −    ensuring product availability and optimizing supply chain efficiencies
          with manufacturers and retailers, and

     −    obtaining sufficient retail floor space and effective     presentation of
          our products at retail.

A downturn in the economy may affect consumer purchases of discretionary      items,
which could adversely affect our sales.


The fashion apparel and accessory industry in which we operate is cyclical. Many factors affect
the level of consumer spending in the apparel, accessories and craft industries, including,
among others:

      −     general business conditions,

      −     interest rates,

      −     the availability of consumer credit,

      −     taxation, and

      −     consumer confidence in future economic conditions.


Consumer purchases of discretionary items, including accessory and apparel products, including
our products, may decline during recessionary periods and also may decline at other times when
disposable income is lower. A downturn in the economies in which we sell our products, whether
in the United States or abroad, may adversely affect our sales.

                                       25
Impact of potential future acquisitions.


From time to time, we have pursued, and may continue to pursue, acquisitions. Most recently, we
acquired our Blue Concept Division from Azteca Production International, Inc., which is owned
by our affiliates, Mr. Hubert Guez and Mr. Paul Guez. We issued a $21.8 million convertible note
for the acquisition, which has increased our long−term debt by over 600%. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations − Long−Term Debt" for
further discussion regarding our long−term debt. Additional acquisitions may result in us
becoming substantially more leveraged on a consolidated basis, and may adversely affect our
ability to respond to adverse changes in economic, business or market conditions.


ITEM 2.   PROPERTIES


Our headquarters for   our Innovo subsidiary is located in approximately 5,000 square feet of
office space located   near downtown Knoxville, Tennessee. The space leased in Knoxville is owned
by an entity that is   controlled by the Chairman of Innovo Group's Board of Directors, Sam
Furrow. See "Certain   Relationships and Related Transactions−New Facility Lease Arrangements."

Our Los Angeles offices are located in an office complex in Commerce,
California. We utilize office space and office equipment under a cost sharing
arrangement with Commerce and its affiliates. Under the terms of the verbal
agreement, we are allocated a portion of costs incurred by Commerce and its
affiliates for rent, security, office supplies, machine leases and utilities. In
fiscal 2003, IAA recorded $318,000 for such expenses.

We currently lease office space for our accessory showroom in New York City, New
York on an annual basis.


Joe's products are displayed in showrooms in New York City and Los Angeles through a sales
representation arrangement. Therefore, we do not lease or own the space in which Joe's products
are sold in the United States.

Our Joe's Jeans Japan subsidiary currently rents office/showroom space located
in Tokyo, Japan. Under the arrangement, JJJ paid for the entire year in advance.
On June 30, 2003, JJJ terminated its former lease for two additional spaces that
served as JJJ's operational office and the other served as a showroom to market
Joe's products and consolidated into one space.


In July, 2003, we entered into a sublease for approximately 10,886 square feet of office space
in New York City, New York located at 512 7th Avenue, 23rd Floor, New York, New York. This
sublease expires on July 31, 2009. We may elect to renew this lease for an additional period
that ends on February 28, 2015. We believe that there will be suitable facilities available to
us should additional space be needed in any or all of our facilities.

Our previous    headquarters and manufacturing     facilities were located in
Springfield, Tennessee. The Springfield facilities are currently owned by
Leasall. The main Springfield complex is situated on seven acres of land with
approximately 220,000 square feet of usable space, including 30,000 square feet
of office space and 35,000 square feet of cooled manufacturing area. The
Springfield facilities are currently being leased to third party tenants. As of
February 18, 2004, approximately 28.2% of the facilities were leased to a third
party, for an aggregate monthly income of approximately $4,500. During fiscal
2002, Innovo Group made several capital improvements to the Springfield
facility, including but not limited to, putting a new roof on the facility.
While the rental income during the year decreased as a result of the
renovations, we are anticipating an increase in demand for rental space within
the facility.

On April 5, 2002, we, through IRI, we closed on a transaction pursuant to which
IRI   purchased   limited   partner   interests in 22 limited     partnerships.
Subsequently,   the limited partnerships     purchased 28 apartment buildings
consisting of approximately 4,000 apartment units located in various states
throughout the United States. See "Business − Real Estate Transactions" for a
further discussion of this real estate transaction.



ITEM 3. LEGAL PROCEEDINGS

We are a party to lawsuits and other contingencies in the ordinary course of our
business. We do not believe that it is probable that the outcome of any
individual action would have a material adverse effect in the aggregate on our
financial condition. We do not believe that it is likely that an adverse outcome
of individually insignificant actions in the aggregate would be sufficient
enough, in number or magnitude, to have a material adverse effect in the
aggregate on our financial condition.



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

None.

                                         26
                                     PART II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Our common stock is currently traded under the symbol "INNO" on The Nasdaq SmallCap Market
maintained by The Nasdaq Stock Market, Inc., or Nasdaq. The following sets forth the high and
low bid quotations for our common stock in such market for the periods indicated. This
information reflects inter−dealer prices, without retail mark−up, mark−down or commissions, and
may not necessarily represent actual transactions. No representation is made by us that the
following quotations necessarily reflect an established public trading market in our common
stock:

                Fiscal 2003               High     Low
                First Quarter            $3.53   $2.33
                Second Quarter           $3.06   $2.55
                Third Quarter            $5.90   $2.63
                Fourth Quarter           $7.80   $3.18

                Fiscal 2002               High     Low
                First Quarter            $2.67   $1.63
                Second Quarter           $2.25   $1.43
                Third Quarter            $3.09   $1.85
                Fourth Quarter           $4.00   $2.40

                Fiscal 2001               High     Low
                First Quarter            $1.16   $0.81
                Second Quarter           $1.12   $1.03
                Third Quarter            $2.06   $1.23
                Fourth Quarter           $2.67   $2.25



As of February 4, 2004, there were approximately 1,016 record holders of our common stock.
Although we will continually use our best efforts to maintain our listing on The Nasdaq SmallCap
Market, there can be no assurance that we will be able to do so. If in the future, we are
unable to satisfy the Nasdaq criteria for maintaining our listing, our securities would be
subject to delisting, and trading, if any, of our securities would thereafter be conducted in
the over−the−counter market, in the so−called "pink sheets" or on the National Association of
Securities Dealers, Inc., or NASD, "Electronic Bulletin Board." As a consequence of any such
delisting, a stockholder would likely find it more difficult to dispose of, or to obtain
accurate quotations as to the prices, of our common stock. See "Risk Factors − If we cannot meet
the Nasdaq SmallCap Market maintenance requirements and Nasdaq Rules, Nasdaq may delist our
common stock which could negatively affect the price of the common stock and your ability to
sell the common stock."

We have never declared or paid a cash dividend and do not anticipate paying cash
dividends on our common stock in the foreseeable future. In deciding whether to
pay dividends on our common stock in the future, our board of directors will
consider such factors they may deem relevant, including our earnings and
financial condition and our capital expenditure requirements.

For the year ended November 29, 2003, we consummated five private placements of
our common stock to a limited number of "accredited investors" pursuant to Rule
506 of Regulation D under the Securities Act of 1933, as amended, or the
Securities Act, resulting in net proceeds of approximately $17,540,000, after
all commissions and expenses (including legal and accounting) to us. Our first
private placement, completed on March 19, 2003 to 17 accredited investors,
raised net proceeds of approximately $407,000 at $2.65 per share. Our second
private placement, completed on March 26, 2003 to 5 accredited investors, raised
net proceeds of approximately $156,000 at $2.65 per share. Our third private
placement, completed on July 1, 2003 to 34 accredited investors, raised net
proceeds of approximately $8,751,000 at $3.33 per share. Our fourth private
placement was completed on August 29, 2003 to 5 accredited investors, and raised
net proceeds of approximately $592,000 at $3.62 per share. Our fifth private
placement was completely funded on or before November 29, 2003, but not
completed until December 1, 2003, to 14 accredited investors, and raised net
proceeds of approximately $10,704,000 at $3.00 per share and warrants at $4.00
per share. We issued 165,000 shares, or the I Shares, as a result of the first
private placement. Capital Wealth Management, LLC or Capital Wealth, acted as
the placement agent on a best efforts basis for the first private placement. In
consideration of the services rendered by Capital Wealth, they were paid 7% of
the gross proceeds, plus expenses, for a total of approximately $31,000. We
issued 63,500 shares, or the II Shares, as a result of the second private
placement. Capital Wealth acted as the placement agent on a best efforts basis
for the second private placement. In consideration of the services rendered,
Capital Wealth was paid 7% of the gross proceeds, plus expenses, for a total of
approximately $12,000. We issued 2,835,481 shares, or the III Shares, as a
result of the third private placement. Sanders Morris Harris, Inc., or SMH,
acted as the placement agent on a best efforts basis for the third private
placement. In consideration of the services rendered by SMH, SMH was paid 7% of
the gross proceeds, plus expenses, for a total of approximately $691,000, and
also received a five year warrant entitling SMH to purchase 300,000 shares of
common stock at $4.50 per share which is exercisable on January 1, 2004. We
issued 175,000 shares, or the IV Shares, as a result of

                                       27
the fourth private placement. Pacific Summit Securities, Inc., or PSS, acted as
the placement agent on a best efforts basis for the fourth private placement. In
consideration of the services rendered by PSS, PSS was paid 6% of gross
proceeds, plus expenses, for a total of approximately $42,000, and also received
a warrant entitling PSS to purchase 17,500 shares of our common stock at $3.62
per share which is exercisable on January 1, 2004. We issued 2,996,667 shares
and warrants to purchase an additional 599,333 shares of common stock to these
certain investors at $4.00 per share, or the V Shares, and together with the I
Shares, the II Shares, the III Shares and the IV Shares, we will refer to them
as the 2003 Placement Shares, as a result of the fifth private placement.
SunTrust Robinson Humphrey Capital Markets Division, or SunTrust, acted as the
placement agent on a best efforts basis for the fifth private placement. In
consideration of the services rendered by SunTrust, SunTrust was paid 6% of
gross proceeds, plus expenses, for a total of approximately $683,000. Each of
the warrants issued to SMH and PSS includes a cashless exercise option, pursuant
to which the holder thereof can exercise the warrant without paying the exercise
price in cash. If the holder elects to use this cashless exercise option, it
will receive a fewer number our shares than it would have received if the
exercise price were paid in cash. The number of shares of common stock a holder
of the warrant would receive in connection with a cashless exercise is
determined in accordance with a formula set forth in the applicable warrant. We
intend to use the proceeds from the transactions for general corporate purposes.


The buyers of the 2003 Placement Shares have represented to us that they purchased the 2003
Placement Shares for their own account, with the intention of holding the 2003 Placement Shares
for investment and not with the intention of participating, directly or indirectly, in any
resale or distribution of the 2003 Placement Shares. The 2003 Placement Shares were offered and
sold to the buyers in reliance upon Regulation D, which provides an exemption from registration
under Section 4(2) of the 1933 Act. Each buyer has represented to us that he or she is an
"Accredited Investor," as that term is defined in Rule 501(a) of Regulation D under said Act.

Engagement of Research Firm

In or around February 2002, we engaged Barrow Street Research, Inc., or Barrow,
an independent New York City−based research firm to prepare and issue a basic
research report on us to better inform the investing public of our long term
prospects. We paid Barrow $6,000 for writing and disseminating its report,
inclusion of the report on Barrow's website for the remainder of fiscal 2002, as
well as continued coverage of us by Barrow in fiscal 2002, which included a
mid−year update of our prospects. We also engaged Barrow to prepare a business
plan for us. We paid Barrow $13,209 for (i) the preparation of the business plan
and (ii) reimbursement of expenses. We did not, at any time, issue our
securities to Barrow as compensation for its services and is not aware of any
holdings of our securities by Barrow or its affiliates. We currently do not have
any relationships, financial or otherwise, with any research firms that publish
reports about us.

The information required by Part II, Item 5 relating to Equity Compensation
Plans is incorporated herein by reference to our Definitive Proxy Statement.


                                       28
ITEM 6. SELECTED FINANCIAL DATA


The table below (includes the notes hereto) sets forth a summary of selected consolidated
financial data. The selected consolidated financial data should be read in conjunction with the
related consolidated financial statements and notes thereto.




                                                                            Years Ended
                                                           (in thousands, except per share data)
                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                              11/29/03        11/30/02         12/01/01        11/30/00         11/30/99
                                              −−−−−−−−        −−−−−−−−         −−−−−−−−        −−−−−−−−         −−−−−−−−

Net Sales                                    $    83,129     $  29,609        $     9,292     $     5,767     $     10,837
Cost of Goods Sold                                70,153        20,072              6,335           5,195            6,252
                                                −−−−−−−−      −−−−−−−−           −−−−−−−−        −−−−−−−−         −−−−−−−−
Gross Profit                                      12,976         9,537              2,957             572            4,585


Selling, General &Administrative (2)             19,264         8,092              3,189           4,863            5,401
Depreciation &Amortization                        1,227           256                167             250              287
                                                −−−−−−−−      −−−−−−−−           −−−−−−−−        −−−−−−−−         −−−−−−−−
Income (Loss) from Operations                    (7,515)         1,189              (399)         (4,541)          (1,103)


Interest Expense                                 (1,216)         (538)              (211)           (446)            (517)
Other Income                                         526           235                 84              30              280
Other Expense                                       (68)         (174)                (3)            (99)                −
                                                −−−−−−−−      −−−−−−−−           −−−−−−−−        −−−−−−−−         −−−−−−−−
Income (Loss) before Income Taxes                (8,273)           712              (529)         (5,056)          (1,340)


Income Taxes                                          44           140                 89               −                −
                                                −−−−−−−−      −−−−−−−−           −−−−−−−−        −−−−−−−−         −−−−−−−−

Income (Loss) from Continuing Operations         (8,317)             572            (618)         (5,056)            (1,340)

Discontinued Operations                                −               −                −               −                (1)
Extrordinary Items (1)                                 −               −                −         (1,095)                  −

Net Income (Loss)                           $    (8,317)      $      572      $     (618)    $    (6,151)    $       (1,341)

Income (Loss) per Share from Continuing
Operations
Basic                                       $     (0.49)      $     0.04     $     (0.04)    $     (0.62)     $       (0.22)
Diluted                                     $     (0.49)      $     0.04     $     (0.04)    $     (0.62)     $       (0.22)

Weighted Average Shares Outstanding
Basic                                             17,009          14,856           14,315           8,163              5,984
Diluted                                           17,009          16,109           14,315           8,163              5,984

Balance Sheet Data:
Total Assets                                 $    46,365     $    15,143      $    10,247     $     7,416        $     6,222
Long−Term Debt                                    22,344           3,387            4,225           1,340              2,054
Stockholders' Equity                              16,482           5,068            4,519           3,758              1,730




(1) Represents the loss from the early extinguishments of debt in fiscal 2000. (2) Amount
includes a $145,000 impairment write down of long−term assets in 1999 as well as $293,000
related to the termination of a capital lease and $100,000 for the settlement of a lawsuit in
1999, and a $600,000 impairment write down of long−term assets in fiscal 2000.

                                                     29
ITEM 7. MANAGEMENT'S   DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Introduction and Overview


This discussion and analysis summarizes the significant factors affecting our results of
operations and financial conditions during the fiscal years ended November 29, 2003, November
30, 2002, and December 1, 2001. This discussion should be read in conjunction with our
Consolidated Financial Statements, Notes to Consolidated Financial Statements and supplemental
information in Item 8 of this Annual Report on Form 10−K. The discussion and analysis contains
statements that maybe considered forward−looking. These statements contain a number of risks and
uncertainties as discussed here, under the heading "Forward−Looking Statements" of this Annual
Report on Form 10−K that could cause actual results to differ materially.

Executive Overview

Our principle business activity involves the design, development and worldwide
marketing of high quality consumer products for the apparel and accessory
markets. We do not manufacture any apparel or accessory products. We sell our
products to a large number of different retail, distributors and private label
customers around the world. Retail customers and distributors purchase finished
goods directly from us. Retail customers then sell the products through their
retail stores and     distributors   sell our products to retailers in the
international market place. Private label customers outsource the production and
sourcing of their private label products to us and then sell through their own
distribution channels. Private label customers are generally retail chains who
desire to sell apparel and accessory products under their own brand name. We
work with our private label customers to create their own brand image by custom
designing products. In creating a unique brand, our private label customers may
provide samples to us or may select styles already available in our showrooms.
We believe we have established a reputation among these private label buyers for
the ability to arrange for the manufacture of apparel and accessory products on
a reliable, expeditious and cost−effective basis.

Reportable Segments


For the years ended November 29, 2003 and November 30, 2002, we operated in two segments:
apparel and accessories. The apparel segment is conducted by our Joe's and IAA subsidiaries. The
apparel segment represents the operations of our two−wholly owned subsidiaries, Joe's and IAA,
both of which are involved in the design, development and marketing of apparel products. The
accessory segment, which represents the historical business of our Company, is conducted by our
Innovo subsidiary. The apparel and accessory operating segments have been classified based upon
the nature of their respective operations, customer base and the nature of the products sold.

Our real estate transactions and our other corporate activities are categorized
under "other" and are represented by the operations of Innovo Group Inc., the
parent company, and our two−wholly owned subsidiaries, Leasall and IRI, which
conduct our real estate operations. Our real estate operations do not currently
require a substantial allocation of our resources and are not a significant part
of management's daily operational functions.

Our Principle Sources of Revenue

Joe's


Since its introduction in 2001, Joe's has gained national and international recognition,
primarily in the women's denim market. However, since this introduction and beginning in fiscal
2003, Joe's has expanded its offerings to include women's sportswear and men's apparel items.
While Joe's experienced excess inventory in fiscal 2003, which we discuss in detail below,
Joe's has entered fiscal 2004 with a focus on solidifying its international reputation. To this
effect, Joe's has recently signed a Master Distribution Agreement with Beyond Blue, Inc. or
Beyond Blue, for exclusive distribution of Joe's products in territories outside the United
States. Beyond Blue is a reputable apparel company that specializes in distribution and
licensing of high−end fashion products. We believe that this relationship will allow Joe's to
gain greater recognition in those international markets where Joe's products are currently
sold, as well as expand into other international markets.

IAA


Under our IAA subsidiary, we design and market branded apparel products under various license
agreements. We currently license and market the Fetish(TM) by Eve and Shago(R) by Bow Wow
apparel lines, which is sold to better departments stores, such as Macy's and the Federated
Department Stores, Inc.'s stores. These products are exploited through the high−end fashion and
urban markets, which have proven successful for other well known brands such as Sean John(R),
Rocawear(R) and Phat Farm(R). Eve and Bow Wow, both as world−renowned recording artists and
actors, provide marketing and exposure for their respective brands through their talents and
celebrity status. While we have yet to generate sales during a full fiscal year for either
line, we believe that the creation of these brands

                                        30
in fiscal 2003 and the positive reception from retail buyers and the consumer
marketplace will allow us to derive greater sales as brand awareness increases.
Further, while we experienced production and delivery inefficiencies in our IAA
branded business during the fourth quarter of fiscal 2003, which we discuss in
greater detail below, that hindered better sales, we believe we have corrected
these issues and will be able to improve the results of our branded business in
fiscal 2004. We are currently seeking similar opportunities to capitalize on our
resources and experience in the branded apparel market. During the first quarter
of 2004, we entered into a license agreement to product denim and denim−related
apparel for the Betsey Johnson(R) brand. This license allows us to utilize our
strengths in producing denim apparel, and provides another avenue to increase
our sales in fiscal 2004.


The private label business represents our strongest source of sales under IAA
and a company as a whole, primarily because of our knowledge and experience
within the denim apparel business. Through private label arrangements, we sell
primarily denim products to AEO and Target. We anticipate growth in private
label sales in fiscal 2004, primarily because we will have conducted a full
fiscal year of sales to AEO in connection with the Blue Concept Division
acquisition.

Innovo


Our accessories business is conducted through our Innovo subsidiary. As we continue to produce
craft accessories to sell to large retailers such as Wal−Mart and Michaels Stores, Inc., we have
been able to contribute to the branded apparel licenses we pursue through our IAA subsidiary.

While our overall operations expanded in depth, sophistication and complexity
and our net sales grew significantly during fiscal 2003 and our fourth quarter,
respectively, we generated significant losses for these periods. Management is
confident that certain activities conducted during fiscal 2003, such as the
launch of the Fetish(TM) brand and the Blue Concept Division acquisition, have
created assets and a foundation which will benefit us on a going−forward basis
and further establish us as a quality apparel and accessory marketer. We believe
the reasons for the disappointing financial results during the fourth quarter of
2003 have been identified and should be mitigated in future periods.

Results of Operations


We completed our acquisition of the Blue Concept Division from Azteca on July 17, 2003. The
results of operations of the Blue Concept Division are included in our operating results from
the date of acquisition. Accordingly, the financial position and results of operations presented
and discussed herein are not directly comparable between years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations − Recent Acquisitions and Licenses"
for a further discussion of the Blue Concept acquisition.

The following table sets forth certain              statements of operations          data for the
years indicated (in thousands):



                                                            Years Ended
                                                           (in thousands)
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                       11/29/03        11/30/02         $ Change       % Change
                                       −−−−−−−−        −−−−−−−−         −−−−−−−−       −−−−−−−−

Net Sales                             $    83,129      $  29,609      $    53,520          181%
Cost of Goods Sold                         70,153         20,072           50,081           250
                                         −−−−−−−−       −−−−−−−−         −−−−−−−−      −−−−−−−−
Gross Profit                               12,976          9,537            3,439            36

Selling, General &Administrative          19,264          8,092           11,172           138
Depreciation &Amortization                 1,227            256              971           379
                                         −−−−−−−−       −−−−−−−−         −−−−−−−−      −−−−−−−−
Income (Loss) from Operations             (7,515)          1,189          (8,704)         (732)

Interest Expense                          (1,216)          (538)            (678)           126
Other Income                                  526            235              291           124
Other Expense                                (68)          (174)              106          (61)
                                         −−−−−−−−       −−−−−−−−         −−−−−−−−      −−−−−−−−
Income (Loss) before Income Taxes         (8,273)            712          (8,985)

Income Taxes                                   44            140             (96)          (69)

Net Income (Loss)                    $    (8,317)       $    572     $    (8,889)           (A)




(A) Not Meaningful


                                              31
Comparison of Fiscal Year Ended   November 29, 2003 to Fiscal Year Ended November
30, 2002

Fiscal 2003 Overview


While our net sales grew by 181% during fiscal 2003, we incurred $8,317,000 of losses during
this period. Although we incurred significant losses in fiscal 2003, we believe that many of the
efforts during 2003, such as the creation of the IAA branded business and our lauch of such
brands as Fetish(TM) and the Blue Concept Division acquisition, have established us as
designers, developers and worldwide marketers of high quality consumer products for the apparel
and accessory markets. As further discussed below, we have identified the issues associated with
our losses in fiscal 2003 and we are taking steps to address these issues.

The primary reasons for our net loss in fiscal 2003 were the following:

     o We experienced lower gross margins due to: (i) an increase in the
percentage of our overall sales coming from our lower margin private label
accessory and apparel, and craft products businesses; and (ii) increased
inventory markdowns related to excess inventory that we were unable to sell;

     o Increased employee wages of $3,643,000 primarily attributable to: (i)
hiring needs for the launch of Fetish(TM) and Shago(R); (ii) hiring needs to
support the growth of the Joe's(R) and Joe's Jeans(R) brand; and (iii) the
hiring of 31 employees which we absorbed as a result of the Blue Concept
Division acquisition;

     o Advertising, marketing, tradeshow and related costs of $1,732,000
incurred in order to market the Joe's(R) and Joe's Jeans(R) brand and to launch
the Fetish(TM) and Shago(R);


o Significant increases in legal, accounting, and other professional fees which increased due
to the increase in business activity during fiscal 2003, as well as increased insurance expenses
of $965,000; and

     o Increase in interest      expense    of $678,000 and     depreciation   and
amortization costs of $971,000 primarily    associated with the acquisition of the
Blue Concept Division.


In order to support our 181% growth in our sales, our expenses increased significantly during
fiscal 2003. To support our expanded business platform, we (i) hired an additional 110 employees
in fiscal 2003; (ii) incurred increased royalty and commission expense as a result of strong
sales of our new branded accessory and apparel lines; and (iii) incurred a substantial increase
in advertising expenditures to establish and market our Fetish(TM), Shago(R) and Joe's(R)
branded products. In an effort to align our personnel needs with our operational needs, we have
undertaken measures to reduce our payroll expenses subsequent to November 29, 2003.
Furthermore, we expect that advertising costs associated with the launch, establishment and
expansion of our branded products will decrease in the aggregate in fiscal 2004.

Internal distribution problems and weakening demand for certain branded apparel
products from IAA's branded division primarily contributed to our net loss in
fiscal 2003. As a result of the overall success of the initial delivery of
Shago(R) products in the summer of 2003, we hired additional employees to
support the demand and increased the amount of Shago(R) apparel to be
manufactured. Unfortunately, during the second delivery of our Shago(R) apparel
in the fall of 2003, we started to receive indications that favorable consumer
response had weakened for these fall 2003 deliveries. As a result of weakening
demand, we did not sell all of our fall 2003 Shago(R) inventory. With further
indications of weakening demand, we immediately tried to reduce the original
Shago(R) fall 2003 deliveries and/or manufacturing orders in an attempt to limit
our exposure to unsold inventory. We were able to cancel some of the goods;
however, a majority of the Shago(R) products were in production or had already
been shipped, requiring us to accept the products into our inventory.


Although demand had weakened, we had received indications from our retailers that we would
still be able to sell our slower moving Shago(R) products to the better retailers at a discount,
or, in the alternative, sell these products to discounters either at or above our cost.

While we experienced initial success with this strategy, we discovered that we
would not be able to move these goods at a price above our cost, which would
result in a write−down on this inventory. As a result, we believed that it was
in our best interest to sell these goods through alternate distribution channels
in an effort to turn this excess inventory into cash. Following the end of
fiscal 2003, those goods have been sold, but the year end financial results
reflect reserves taken at what management believes is the fair market value of
those goods at the end of fiscal 2003. Goods were moved out of our inventory,
but losses were taken as a result of selling these goods below cost.

                                       32
With respect to our efforts to sell the Fetish(TM) branded products, we
experienced a similar situation with respect to excess inventory. We initially
launched our Fetish(TM) products for the fall 2003 season, and our first
delivery was an overall success. We did, however, have excess inventory that was
anticipated to be moved to discount retailers. In an effort to support the
reputation of the Fetish(TM) brand in the consumer and retail marketplace, we
did not immediately move the product into alternative markets. As a result, we
did not begin to move the excess Fetish(TM) fall inventory until the beginning
of December 2003.


The second delivery for Fetish(TM) products, or the Holiday delivery, was scheduled to be
delivered between November 15, 2003 and December 15, 2003. A portion of this delay was due to
production problems and, when shipped, a portion of the goods was held in customs. This required
us to reconfigure a significant number of our orders to address customers' needs since some of
the purchased products were no longer available. The production delays were primarily a function
of the design department for Fetish(TM) not completing the design of the Holiday line in a
timely manner, thereby reducing production time.

These problems resulted in excess inventory since a large portion of the
products could not be shipped prior to the end of the Holiday delivery season.
Rather than risk holding the goods and attempting to sell them slowly with no
assurance of successfully doing so, we chose to move these goods, even though
often at a loss. Consequently, our finncial results for the fourth quarter of
fiscal 2003 reflect the necessary inventory reserves as what we believe to be
the fair market value of the goods.


Another operational factor leading to our financial losses for fiscal 2003 was the unexpected
and significant number of returns and charge−backs we received on the Fetish(TM) products
Holiday delivery. This problem was attributable to Fetish(TM) products Holiday delivery delays
and the substitutions and delivery problems attributable to certain styles being held in
customs. While we did experience some returns and charge−backs on our Shago(R) inventory, the
amount was insignificant compared to the Fetish(TM) inventory returns and charge−backs.

While IAA was responsible for a large portion of our losses during fiscal 2003
and our fourth quarter, our Innovo subsidiary also experienced inventory reserve
issues due to slow moving inventory for its Bongo(R) and Fetish(TM) accessory
products. This was due to weaker Bongo(R) sales during fiscal 2003 and similar
design, production and delivery delays and issues discussed above for our
Fetish(TM) products. Also, our Joe's subsidiary's financial performance was
negatively impacted due to an inventory write−down for slow moving inventory
sold after our fiscal 2003 year end.

Our fiscal 2003 net loss was also   attributable   to certain other   adjustments ,
namely:

     o    The recording of a charge for the Hot Wheels(R) royalty guarantees due
          to the fact we have generated no sales under this license agreement,
          and are in discussions with Mattel regarding the future of this
          license   agreement and a reserve against the potential royalty
          obligations.

     o    An increase in our bad debt reserve to address concerns            of the
          likelihood of collection of certain outstanding accounts.

We are making a focused effort to address these operational issues. In February
of 2004, we promoted Pierre Levy, who has over 20 years' of management
experience in the apparel industry, as our General Manager of Apparel Operations
to oversee all aspects of apparel related operations as we move into fiscal
2004. We believe his experience will minimize the design, production and
delivery issues that we experienced in fiscal 2003.


In connection with our discussion below of the results of our operations in fiscal 2003 compared
to fiscal 2002 below, we explain in greater detail the reasons for the net loss incurred in
fiscal 2003.

As discussed above, we classify our business in two reportable segments. The
following table sets forth certain statements of operations data by segment for
the periods indicated:

                                        33
      November 29, 2003               Accessories               Apparel             Other (A)                 Total
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                                   (in thousands)

Net Sales                             $    14,026            $    69,103           $          −           $     83,129
Gross Profit                                3,095                  9,881                      −                 12,976
Depreciation &Amortization                    39                  1,087                   101                   1,227
Interest Expense                              214                    946                    56                   1,216




      November 30, 2002               Accessories               Apparel             Other (A)                 Total
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                                   (in thousands)

Net Sales                             $    12,072            $    17,537           $          −           $     29,609
Gross Profit                                3,393                  6,144                      −                  9,537
Depreciation &Amortization                    21                    183                    52                     256
Interest Expense                              140                    339                    59                     538




         2003 to 2002              Accessories              Apparel              Other (A)                Total
                               $ Change    % Change   $ Change    % Change $ Change     % Change   $ Change     % Change
                                                                    (in thousands)

Net Sales                       $ 1,954         16%    $51,566        294%   $      −        N/A    $53,520         181%
Gross Profit                      (298)         (9)      3,737          61          −        N/A      3,439           36
Depreciation &Amortization          18          86        904         494        49          94        971          379
Interest Expense                     74          53        607         179       (3)         (5)        678          126




(A) Other includes           corporate     expenses and assets and expenses                   related to real
estate operations

Net Sales


Net sales increased to $83,129,000 in fiscal 2003 from $29,609,000 in fiscal 2002, or a 181%
increase. The primary reasons for the increase in our net sales were due: (i) to increased
sales to our private label customers in both the apparel and accessories segments, a large
portion of which is attributable to sales generated as a result of the Blue Concept Division
acquisition; (ii) growth in Joe's and Joe's Jeans branded apparel products; (iii) growth in
sales of our craft products; and (iv) initial sales from our Fetish(TM) and Shago(R) branded
apparel and accessory products.

Accessory

            Innovo


Sales for our accessory segment increased to $14,026,000 in fiscal 2003 from $12,072,000 in
fiscal 2002, or a 16% increase. The increase is primarily a result of higher sales of Innovo's
private label and craft accessories products.

                                   Net Sales
                               ($ in thousands)                                      % of Total Net Sales
                             −−−−−−−−−−−−−−−−−−−−                                   −−−−−−−−−−−−−−−−−−−−−−
                                2003         2002                 % Chg.               2003       2002
                             −−−−−−−−−−−−−−−−−−−−                −−−−−−−−−          −−−−−−−−−−−−−−−−−−−−−−
Craft                        $ 5,372     $ 4,417                     22%                38%        37%

Private Label                   4,856               3,317             46%                35%              27%

Bongo                           2,534       3,125                    −19%                18%              26%
Fetish                            192         −                       N/A                 1%               0%
Other Branded                   1,072       1,213                    −12%                 8%              10%
                             −−−−−−−−−−−−−−−−−−−−
    Total Branded               3,798       4,338                    −12%                27%              36%
                             −−−−−−−−−−−−−−−−−−−−
Total Net Sales              $ 14,026   $ 12,072                      16%               100%             100%


Craft Accessories. Innovo's net sales from its craft business increased                                           to
$5,372,000 in fiscal 2003 from $4,417,000 in fiscal 2002, or a

                                                        34
22% increase. Craft accessories sales accounted for 38% of Innovo's sales in
fiscal 2003. Sales of craft accessories increased due to increased sales to our
existing customer base, which was a function of our customers opening new
stores. In fiscal 2004, we expect sales to continue to increase as our customers
continue to aggressively expand their store bases and we take on new customers.
However, we anticipate sales of craft products to decline as a percentage of
Innovo's total net sales because of anticipated growth from our private label
and branded accessories products.


Private Label Accessories. Innovo's net sales from its private label business
increased to $4,856,000 in fiscal 2003 from $3,317,000 in fiscal 2002, or a 46%
increase. Private label accessories sales accounted for 35% of Innovo's sales in
fiscal 2003. This increase was due to (1) sales to new private label customers,
(2) increased sales to existing customers, and (3) a full fiscal year of sales
to a new retail customer we acquired at the end of fiscal 2002. In fiscal 2004,
we expect sales to private label customers to increase as we continue to expand
sales with existing customers and increase our customer base.


Branded Accessories. Innovo's net sales from its branded accessory business decreased to
$3,798,000 in fiscal 2003 from $4,338,000 in fiscal 2002, or a 12% decrease. Branded
accessories sales accounted for 27% of Innovo's sales in fiscal 2003. Innovo's branded
accessories carry the following brand names: Bongo(R), Fetish(TM), Friendship(TM) and Clear
Gear(TM). Sales of branded accessories declined primarily as a result of a decline in the
Bongo(R) line of bags, which in 2003 represented the majority of branded accessory sales. The
decline in sales of Bongo(R) bags was a result of a decline in sales of junior branded bags in
the mid−tier retailers such as The May Department Stores Company, Sears, Roebuck and Company,
and J.C. Penney Company, Inc. While sales of Fetish(TM) accessories offset a portion of the
decline of net sales of Bongo(R) bags, Fetish(TM) accessories did not start shipping until
November 2003, the last month of Innovo's fiscal 2003. In fiscal 2004, we anticipate sales of
certain branded accessories, such as Friendship(TM) and Clear Gear(TM), to decrease as we
continue to sell off existing inventory, and we anticipate that this decrease will be offset by
the growth in our Bongo(R) and Fetish(TM) accessories. In fiscal 2004, we anticipate branded
accessories sales to increase as a result of: (i) increased sales of Bongo(R) bags based on our
initial projections for the back−to−school season; and (ii) generating sales of Fetish(TM) bags
for the full year of fiscal 2004 compared to just one month of sales in fiscal 2003.

Apparel

           Joe's

Joe's net sales increased to $11,476,000              in fiscal 2003 from   $9,179,000    in
fiscal 2002, or a 25% increase.




                                      Net Sales
                                   ($ in thousands)                         % of Total Net Sales
                                 −−−−−−−−−−−−−−−−−−−−−                      −−−−−−−−−−−−−−−−−−−−−
                                     2003       2002          % Chg.            2003       2002
                                 −−−−−−−−−−−−−−−−−−−−−      −−−−−−−−−−−−    −−−−−−−−−−−−−−−−−−−−−

Domestic                         $   6,075   $    5,398          13%               53%          59%

Joe's Jeans Japan                   3,018       1,902            59%               26%          21%
International Distributors          2,383       1,879            27%               21%          20%
                                 −−−−−−−−−−−−−−−−−−−−−
   Total International Markets      5,319       3,781            41%               46%          41%
                                 −−−−−−−−−−−−−−−−−−−−−
Total Net Sales                   $11,476    $ 9,179             25%              100%         100%
                                 −−−−−−−−−−−−−−−−−−−−−




Domestic. Joe's domestic net sales increased to $6,057,000 in fiscal 2003 from
$5,398,000 in fiscal 2002, or a 13% increase. This increase occurred despite the
presence of pricing pressures for our products in the domestic market. The
increase in sales is attributable to higher unit demand for Joe's products. The
number of units shipped in the domestic market increased to 146,000 units in
fiscal 2003 from 120,000 units in fiscal 2002, or a 22% increase. In fiscal
2004, we plan to take the following         steps to further     increase sales
domestically: (1) expand our collection of products, to include not only pants
in different materials other than denim, but also tops such as shirts and
jackets; (2) expand our denim pants line to include four fits that are tailored
to different body types; and (3) increase advertising spending to include not
only print ads, but also billboards.


Joe's Jeans Japan. Joe's net sales in Japan increased to $3,018,000 in fiscal 2003 from
$1,902,000 in fiscal 2002, or a 59% increase. The majority of the increase is attributable to
sales by JJJ of approximately $1,000,000 of discounted inventory to Itochu. During the third
fiscal quarter of 2003, Joe's decided to terminate its direct sales operations in Japan in
favor of entering into a licensing and distribution agreement with Itochu for the licensing of
Joe's and the Joe's Jeans brands in Japan. See "Management's Discussion & Analysis − Recent
Acquisitions and Licenses" for a further discussion regarding the Joe's Jeans licensing
agreement. In fiscal 2004, Joe's Jeans Japan does not anticipate having any sales. However, as
discussed below, we believe that our sales in Japan will grow as a result of the agreement with
Itochu.

                                             35
International Distributors. Joe's net sales to international distributors
increased to $2,383,000 in fiscal 2003 from $1,879,000 in fiscal 2002, or a 27%
increase. Currently, Joe's products are sold internationally in Canada, Japan,
Australia, France, England and Korea. The increase in international sales is
attributable to sales to Itochu. In fiscal 2003, Joe's shipped $1,477,000 to
Itochu. Excluding sales to Itochu, sales to international distributors declined.
Sales to France, which represents our second largest international market behind
Japan, declined to $350,000 in fiscal 2003 from $937,000 in fiscal 2002, or a
63% decrease. In fiscal 2004, we expect sales to international distributors to
increase as a result of adding Itochu as our international distributor in Japan
and as a result of partnering with Beyond Blue to increase Joe's distribution in
the international marketplace.     Beyond Blue will be responsible for the
management of the existing relationships with Joe's international distributors
and will work to open new territories by obtaining additional international
sub−distributors and sales agents.


          IAA


IAA's net sales increased to $57,627,000 in fiscal 2003 from $8,358,000 in fiscal 2002, or a
589% increase. IAA segregates its operations between two businesses: private label and branded
apparel. IAA's increase in net sales is attributable to an increase in sales from the private
label business, most notably due to sales of the Blue Concept division acquired from Azteca,
Hubert Guez and Paul Guez in July 2003. Also, as a result of the license agreements entered into
during fiscal 2002 and 2003, IAA generated approximately 11% of its net sales from its branded
business, which began shipping branded apparel in May of fiscal 2003.




                                    Net Sales
                                 ($ in thousands)                   % of Total Net Sales
                               −−−−−−−−−−−−−−−−−−−−−              −−−−−−−−−−−−−−−−−−−−−−
                                   2003        2002      % Chg.         2003       2002
                               −−−−−−−−−−−−−−−−−−−−−   −−−−−−−−   −−−−−−−−−−−−−−−−−−−−−−

Branded                         $ 5,917     $     −         (A)          10%         0%

Private Label (Existing)         23,950       8,358        187%          42%       100%
Private Label (Blue Conpets)     27,760           −         (A)          48%         0%
                               −−−−−−−−−−−−−−−−−−−−−
   Total Private Label           51,710       8,358        519%          90%       100%
                               −−−−−−−−−−−−−−−−−−−−−
Total Net Sales                 $57,627      $8,358        589%         100%       100%
                               −−−−−−−−−−−−−−−−−−−−−



(A) Not Meaningful


Private Label. IAA's net sales from its private label business increased to
$51,710,000 in fiscal 2003 from $8,358,000 in fiscal 2002, or a 519% increase.
The increase in sales is attributable to an increase in sales to the private
label division's existing customer base and sales generated in connection with
the Blue Concepts acquisition in July 2003. Approximately one−third (1/3) of the
increase in the private label division's sales is attributable to sales from the
division's existing customer base with the balance of the growth coming from the
Blue Concepts acquisition. In fiscal 2004, we expect sales from the private
label division to increase as a result of the benefit of a full year's
contribution of sales from the purchase of Blue Concepts versus only four months
in fiscal 2003.


Branded. IAA's net sales from its branded apparel business was $5,917,000 in fiscal 2003. IAA
did not have branded apparel sales in fiscal 2002. Branded apparel sales accounted for 11% of
IAA's net sales in fiscal 2003. During fiscal 2003, IAA's branded apparel carried the following
brand names: Shago(R) by Bow Wow, Fetish(TM) by Eve and Hot Wheels(R) by Mattel, IAA did not
generate sales from its Hot Wheels(R) branded apparel line. See "Business − License Agreements
and Intellectual Property" for further discussion regarding the Hot Wheels(R) license. IAA
commenced shipping its Shago(R) apparel and Fetish(TM) apparel lines in May 2003 and in
September 2003, respectively. The Shago(R) and Fetish(TM) apparel products were shipped to
retailers such as better department stores and specialty stores in the United States. In fiscal
2004, the Company expects to increases sales in its branded division through (1) sales of
Fetish(TM) apparel for the full fiscal year; (2) sales of Shago(R) branded apparel potentially
through alternative channels of distribution, including mid−tier department and specialty
stores, and (3) sales from new licensed apparel, such as the Betsey Johnson(R) license. See
"Business − Subsequent Events" for further discussion regarding the Betsey Johnson(R) license.

Gross Margin


Our gross profit increased to $12,976,000 in fiscal 2003 from $9,537,000 in fiscal 2002, or a
36% increase. The increase was due to our increase in net sales. Overall, gross margin, as a
percentage of net sales, decreased to 16% in fiscal 2003 from 32% in fiscal 2002. The decline
was attributable to: (i) a higher percentage of our total sales coming from our private label
accessory and apparel products, as well as our craft products, and (ii) significant inventory
markdowns taken in the fourth quarter of fiscal 2003. Generally, private label apparel,
accessories and craft product lines have lower gross margins than our branded product lines. Our
private label accessory and apparel and craft products represented approximately 75% of our
total sales in fiscal 2003 compared to 54% of our total sales in fiscal 2002. Additionally, in
fiscal 2003, we recorded a fourth quarter charge of $3,875,000, or 5% of net sales, related to
of out−of−season and

                                       36
second quality inventory in the Joe's, Innovo, and IAA divisions. In fiscal
2004, we believe that gross margins will be lower than our historical averages
due to a higher percentage of sales coming from sales to private label
customers. The increase in sales to private label customers is primarily the
result of the acquisition of the Blue Concept Division, which sells private
label apparel to retailers, particularly American Eagle Outfitters, Inc.

Accessory

          Innovo


Innovo's gross profit decreased to $3,095,000 in fiscal 2003 from $3,393,000 in fiscal 2002, or
a 9% decrease. Innovo's gross margin decreased to 22% in fiscal 2003 from 28% in fiscal 2002.
The decrease in gross margin is a result of a greater percentage of sales coming from lower
margin products and a charge related to out−of−season inventory. Our craft and private label
accessory products have traditionally experienced lower gross margins than our branded accessory
products. Our craft and private label accessory product represented 74% of net sales in fiscal
2003 compared to 64% of net sales in fiscal 2002. In addition, we recorded a charge of $335,000
in the fourth quarter related to out−of−season and slow moving Fetish(TM), Shago(R) and Bongo(R)
accessories, which reduced gross margins by 2%. Approximately 80% of the charge recorded to
mark down out−of−season and slow moving inventory was related to Bongo(R) products. The decline
in Bongo(R) sales relative to our expectations of growth resulted in over−ordering of excess
Bongo(R) inventory. Further, we anticipate that branded products will grow faster than total
sales for the accessories business, which would result in a greater portion of net sales
attributable to branded accessories in fiscal 2004 than in fiscal 2003.

Apparel

          Joe's


Joe's gross profit decreased to $4,087,000 in fiscal 2003 from $4,515,000 in fiscal 2002, or a
9% decrease. Joe's gross margins decreased to 36% in fiscal 2003 from 51% in fiscal 2002. Joe's
gross margin decrease was primarily attributable to the following factors: (i) JJJ sold the
majority of its inventory, equaling approximately $1,000,000, to Itochu, which approximated our
book value. See "Business − License Agreements and Intellectual Property" for further
discussion of this sale of JJJ inventory; (ii) we recorded a charge of $143,000 related to
second−quality inventory in Japan in the third quarter of fiscal 2003; (iii) we recorded a
charge of $287,000 related to out−of−season fabric; (iv) we recorded a charge of $247,000
related to second−quality goods and damaged goods in the U.S to mark down the value of the
goods carried on our books to market value; and (v) our cost of goods sold increased as a
result of no longer being able to purchase finished goods from our domestic supplier, which
resulted in the need to change our inventory purchasing strategy during the second quarter of
fiscal 2003 from buying finished goods to buying raw materials and outsourcing the
manufacturing of our goods. Joe's cost to buy raw materials and outsource the manufacturing of
its own goods was significantly higher than its cost to buy finished goods. The above
referenced charges in the U.S. and in Japan reduced gross margins by 6%.

          IAA


IAA's gross profit increased to $5,794,000 in fiscal 2003 from $1,629,000 in fiscal 2002, or a
256% increase. However, gross margin decreased to 10% from 19% in fiscal 2002. The decrease in
gross margin is primarily attributable to the following factors: (i) lower gross margins
associated with sales of private label apparel products, primarily sales to AEO as part of the
Blue Concept Division. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations − Recent Acquisitions and Licenses" for further discussion of the Blue
Concept Division acquisition; (ii) we recorded a charge of $33,000 related to slow moving
inventory in our private label division; and (iii) we recorded a charge of $3,134,000 to
markdown out−of−season Shago(R) and Fetish(TM) inventory carried on our books to its estimated
market value. This $3,134,000 charge was due to not only our over−estimation of the demand in
the marketplace for our initial deliveries of Shago(R) and Fetish(TM) branded apparel products,
but also our production delays that caused certain customers to cancel their orders. In
aggregate, the charges related to inventory lowered gross margins by 5%.

Selling, General and Administrative Expense


Selling, general and administrative ("SG&A") expenses increased to $19,264,000 in fiscal 2003
from $8,092,000 in fiscal 2002, or a 138% increase. The SG&A increase is largely a result of the
following factors: (i) an increase in advertising expenditures to establish and market our
Fetish(TM), Shago(R) and Joe's(R) branded products through both advertising and tradeshows; (ii)
the hiring of 31 employees as a result of the Blue Concept Division acquisition; (iii) the
hiring of 60 employees to support or facilitate the establishment of and increase sales for
Fetish(TM), Shago(R) and Joe's(R) branded products; (iv) the hiring of 19 employees to support
our Far East outsourcing operations and 4 employees to increase our management personnel; (v)
increased royalty and commission expense associated with our existing and new branded accessory
and apparel lines; (vi) increased outside legal, accounting and other professional fees as a
result of continued growth of the business in fiscal 2003; and (vii) increased insurance costs
primarily as a result of increase in our general liability and D & O insurance.

As discussed in greater detail below, we incurred the following SG&A expenses in
fiscal 2003: (i) $1,732,000 of expense in fiscal 2003

                                       37
from $491,000 of expense in fiscal 2002, or a 253% increase, to establish and
market our branded products through advertising and tradeshows; (ii) $6,475,000
of expense in fiscal 2003 from $2,832,000 of expense in fiscal 2002, or a 129%
increase, for hiring additional employees and wage increases; (iii) $2,032,000
of expense in fiscal 2003 from $1,568,000 of expense in fiscal 2002, or a 30%
increase, for royalties and commissions associated with our existing and new
branded accessory and apparel lines; (iv) $1,577,000 of expense in fiscal 2003
from $611,000 of expense in fiscal 2002, or a 158% increase, for increased
legal, accounting and other professional fees; and (vi) $240,000 of expense in
fiscal 2003 from $134,000 in fiscal 2002, or a 79% increase, for increased D & O
and general liability insurance.


Accessory

          Innovo


Innovo's SG&A expenses increased to $3,345,000 in fiscal 2003 from $2,854,000 in fiscal 2002,
or a 17% increase. This SG&A expense increase is primarily attributable to wage increases.
Innovo's employee wages increased to $1,284,000 in fiscal 2003 from $842,000 in fiscal 2002 or a
52% increase. Wage increases are a result of the following factors: (i) hiring of two
additional salespersons to replace outsourced sales personnel working on a commission only
basis, which accounted for $152,000 of the wage expense increase; (ii) wage increases for
existing employees, which accounted for $50,000 of the wage expense increase; (iii) hiring of
new employees in functions including purchasing, data entry, merchandising, designing and
accounting, which accounted for $200,000 of the wage expense increase; and (4) the hiring of
additional employees added to the Hong Kong sourcing office, which accounted for $40,000 of the
wage expense. Further, as a result of shifting to using in−house sales personnel instead of
outsourcing sales to sales representatives that work for commissions, wage increases were
partially offset by lower commission expenses. Commission expense declined to $130,000 in
fiscal 2003 from $292,000 in fiscal 2002, or a 26% decrease.

Due to the expansion of the branded accessories product line, three other SG&A
expense categories increased, namely: (i) product sample expenses; (ii) contract
labor; and (iii) rent. First, expenses to make samples of future products
increased to $137,000 in fiscal 2003 from $54,000 in fiscal 2002, or a 154%
increase. Sample expense increased due to additional development of branded
accessories such as Fetish(TM) accessories. Second, in addition to using our own
design and development personnel for branded accessories, we also used contract
labor. As a result, contract labor expense increased to $46,000 in fiscal 2003
from $12,000 in fiscal 2002, or a 283% increase. Finally, rental expense
increased to $191,000 in fiscal 2003 from $120,000 in fiscal 2002, or a 59%
increase. The increase in rent is primarily attributable to an increase in rent
to expand the New York showroom to include support for the branded accessories
lines.

Apparel

          Joe's


Joe's SG&A expenses increased to $5,426,000 in fiscal 2003 from $3,245,000 in fiscal 2002, or a
67% increase. This increase is primarily attributable to the following factors: (i) a wage and
benefits expense increase in connection with the hiring of additional employees in order to
expand Joe's product lines from denim pants to a full sportswear collection of pants and tops
bearing the Joe's(R) brand for Spring 2004; (ii) severance payments paid in connection with the
termination of operations in Japan pursuant to the agreement with Itochu. See "Business −
License Agreements and Intellectual Property" for further discussion of the Itochu agreement;
(iii) increases in legal and accounting fees due to the termination of operations in Japan in
connection with the Itochu agreement; (iv) increased expenditures on marketing and advertising
the Joe's(R) and Joe's Jeans(R) brand; (v) increased apparel sample costs; and (vi) increased
royalty and factoring expenses due to increased sales of Joe's products.

More specifically, Joe's employee wages and related benefits expenses increased
to $1,794,000 in fiscal 2003 from $1,140,000 in fiscal 2002, or a 57% increase,
as a result of hiring 11 new employees to support the growth in Joe's business.
Severance payments totaling $274,000 were paid in the second and third quarters
of 2003 to certain employees as part of a separation payment in connection with
the termination of operations in Japan, compared to no severance payments being
made in fiscal 2002. Joe's legal and accounting expenses increased to $434,000
in fiscal 2003 from $82,000 in fiscal 2002, or a 429% increase, and were
attributable to the termination of operations in connection with the Itochu
agreement. Joe's expenses associated with marketing and advertising, including
trade show expenditures, increased to $706,000 in fiscal 2003 from $426,000 in
fiscal 2002, or a 66% increase. Sample costs were $291,000 in fiscal 2003,
compared to no sample costs in fiscal 2002. This expense is due to changes in
inventory strategy in the second quarter of fiscal 2003 whereby Joe's began
purchasing raw materials and outsourcing the manufacturing of its goods as
opposed to purchasing finished goods. As a result of this change in inventory
strategy, Joe's began buying its own samples. By contrast, in fiscal 2002 our
supplier of finished goods bore the cost of producing samples. Finally, as a
result of higher net sales, Joe's royalty expense increased to $339,000 in
fiscal 2003 from $277,000 in fiscal 2002, or a 22% increase. and Joe's factoring
expense under its factoring arrangement with CIT Commercial Services increased
to $72,000 in fiscal 2003 from $41,000 in fiscal 2002, or a 76% increase.

          IAA

                                       38
IAA's SG&A expenses increased to $7,541,000 in fiscal 2003 from $761,000 in
fiscal 2002, or an 891% increase. The increase in SG&A expenses is primarily
attributable to the growth in IAA's branded apparel business and the acquisition
of the Blue Concept Division.


IAA had higher employee costs associated with the expansion of its branded
apparel business and the acquisition of the Blue Concept Division, increasing
its employee count by adding 80 new employees. The expansion into the branded
apparel business required us to fill certain positions such as designers for
Shago(R) and Fetish(TM), which were necessary to bring the products to
production and, ultimately, to the marketplace. As a result, employee wages and
benefits increased to $2,362,000 in fiscal 2003 from $522,000 in fiscal 2002, or
a 352% increase. Of the $2,362,000 in total wages, $1,082,000, or 46%, was
associated with employees working on branded apparel products; $708,000, or 30%,
was associated with employees joining the private label division in connection
with the Blue Concept Division acquisition, with the remaining 24% of the total
wages associated with the private label division's existing operations.


During fiscal 2003, we incurred $989,000 of expense to market and promote our branded apparel
products, including: (i) $498,000 spent on billboard advertising, photo shoots in connection
with Fetish(TM) and Shago(R), and national print publications, such as Vibe, Honey and Women's
Wear Daily, from no advertising expenses incurred in fiscal 2002; and (ii) $491,000 incurred in
connection with the semi−annual trade show MAGIC held in Las Vegas, Nevada to build and erect
the booth used to launch the Fetish(TM), Shago(R) and Hot Wheels(R) lines; and (iii) $431,000
for samples, production and development of its apparel products, compared to no expenses for
these sample and development costs in fiscal 2002.

During fiscal 2003, we incurred $1,061,000 of royalties and commissions for
Shago(R) and Fetish(TM) branded apparel sales, which commenced shipping in the
second and fourth quarters of fiscal year 2003, respectively. In future periods
we anticipate that royalties and commissions will increase as we expect sales of
branded apparel to increase. With the exception of $21,000 spent in fiscal 2002
allocated toward minimum royalty guarantees in connection with the Hot Wheels(R)
and Shago(R) lines, no commissions were expensed during fiscal 2002 since we
generated no sales from branded apparel during fiscal 2002.


Factoring expenses under IAA's inventory− and receivables−based line of credit agreements with
CIT increased to $342,000 in fiscal 2003 from $130,000 in fiscal 2002, or a 163% increase. This
increase was due to the increase in sales.

Travel, meals and entertainment expense     increased to $408,000 in fiscal 2003
from $18,000 in fiscal 2002, or a 2,167%    increase, as a result of the larger
employee and customer base.

Legal expenses increased $161,000 in fiscal 2003 from $2,000 in fiscal 2002, or
a 7,950% increase, as a result of increased costs associated with the
development of the branded apparel business.

IAA incurred $231,000 of bad debt expense for uncollectible   accounts in fiscal
2003 compared to no bad debt expense in fiscal 2002.


As a part of the acquisition of the Blue Concept Division, IAA pays to Azteca a fee for
allocated expenses associated with the use of its office space and expenses incurred in
connection with maintaining office space. These allocated expenses include, but are not limited
to: rent, security, office supplies, machine leases and utilities. During fiscal 2003, we
incurred $694,000 of expense to Sweets Sportswear LLC pursuant to an earn−out agreement
associated with the Blue Concepts acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations − Recent Acquisitions and Licenses" for further
discussion regarding the acquisition of the Blue Concepts Division. We expect earn−out expense
to increase as we anticipate sales growth from the Blue Concept Division, particularly as we
will benefit from a full year of sales in fiscal 2004 compared to only four months of sales in
fiscal 2003. As a part of the acquisition of Blue Concepts, IAA pays Azteca Productions
International a fee for allocated expenses associated with the use of its infrastructure. Such
allocated expenses include but are not limited to rent, security, office supplies, machine
leases and utilities. In fiscal 2003, IAA recorded $318,000 for such expenses. The balance of
the approximate $689,000 of additional SG&A in fiscal 2003 is attributable to the growth of our
business from IAA having net sales of $8,358,000 and 7 employees in fiscal 2002 to $57,627,000
net sales and 87 employees in fiscal 2003.

Other

         IGI


IGI, which reflects our corporate expenses and operates under the "other" segment, does not have
sales. IGI's expenses, excluding interest, depreciation and amortization, increased to
$2,812,000 in fiscal 2003 from $1,375,000 in fiscal 2002, or a 105% increase. IGI's management
level wages, and related taxes and benefits increased to $859,000 in fiscal 2003 from $295,000
in fiscal 2002, or a 191% increase, primarily as a result of hiring five additional management
level employees, including a Chief Financial Officer and a Chief Operating Officer, to provide
the infrastructure necessary to manage our growth. Also, insurance expense increased to $240,000
in fiscal 2003 from $134,000 in fiscal 2002, or a 79% increase. Legal, accounting and
professional fees increased to $933,000 in fiscal 2003 from $406,000 in fiscal 2002, or a 130%
increase, as a result of the Company's increased business needs in fiscal 2003. Travel, meals
and entertainment expense increased to $266,000 in fiscal 2003 compared to $143,000 in fiscal
2002, or a 86% increase, as a result of the travel associated with senior management
coordinating the opening of a New York office for the IAA subsidiary, and the

                                      39
commuting and relocation costs associated with the hiring of the Chief Financial
Officer.

         Leasall


Leasall's SG&A expense increased to $130,000 in fiscal 2003 from $21,000 in fiscal 2002, or a
519% increase, primarily due to $98,000 of expenses incurred to maintain and operate our former
manufacturing facility and headquarters located in Springfield, Tennessee, which is now
partially leased to third party tenants. The balance of the $32,000 was spent by Leasall on
Tennessee property taxes and insurance.

         IRI


IRI's SG&A expense decreased to $8,000 in fiscal 2003 from $64,000 for fiscal 2002, or a 700%
decrease. IRI's SG&A expense is primarily comprised of legal and accounting fees.

Depreciation and Amortization Expenses

Our depreciation and amortization expenses increased to $1,227,000 in fiscal
2003 from $256,000 in fiscal 2002, or a 379% increase. The increase is primarily
attributable to (1) the depreciation and amortization associated with the
purchase of the Blue Concepts division and (2) the purchase of a booth for the
tradeshow, MAGIC. More specifically, in connection with the Blue Concepts
acquisition in fiscal 2003, the Company amortized $848,000 of the intangible
assets based upon the fair value of the majority of the gross profit associated
with existing purchase orders at closing and the intangible value of the
customer list obtained. We also depreciated $50,000 of the expense related to
the purchase of the booth for the MAGIC tradeshow. The remaining depreciation
and amortization expense of $329,000 is due to (i) deprecation of $76,000 in
connection with the Springfield, Tennessee facility and related leasehold
improvements, (ii) amortization of $48,000 in connection with the licensing
rights to the Joe's(R) and Joe's Jeans(R) marks acquired on February 7, 2001,
(iii) amortization of $95,000 from the purchase of the knit division from Azteca
on August 24, 2001, and (iv) depreciation of $110,000 related to small
operational assets such as furniture, fixtures, machinery and software.

Interest Expense

Our combined interest expense increased to $1,216,000 in fiscal 2003 from
$538,000 in fiscal 2002, or a 126% increase. Our interest expense is primarily
associated with: (i) $359,000 of interest expense from our factoring and
inventory lines of credit and letter's of credit from CIT used to help support
our working capital increases; (ii) $182,000 of interest expense from the knit
acquisition purchase notes issued in connection with the purchase of the knit
division from Azteca in fiscal 2001; (iii) $30,000 of interest expense from two
loans totaling $500,000 provided by Marc Crossman, our Chief Financial Officer,
to the Company on February 7, 2003 and February 13, 2003; (iv) $26,000 of
interest expense from a $476,000 mortgage on our former manufacturing facility
and headquarters in Springfield, Tennessee; (v) $482,000 of interest expense
incurred as a result of the $21,800,000 convertible note issued as a part of the
purchase of the Blue Concepts acquisition in July of 2003. See "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations−−Liquidity and Capital Resources" for a further discussion of these
financing arrangements;    (vi) $139,000 of interest expense incurred from
discounts given to customers who paid their invoices early; and (vii) interest
income of $2,000.

Other Income

We had other income, net of other expenses,     of   $458,000 in fiscal 2003 from
$61,000 in fiscal 2002, or a 651% increase.

         IRI


Other income in fiscal 2003 included $329,000 of income from a quarterly sub−asset management
fee that IRI received pursuant to a sub−asset management agreement entered into on April 5,
2002, in connection with the acquisition by IRI of a 30% limited partnership interest in 22
separate limited partnerships, which acquired 28 apartment complexes at various locations
throughout the United States. Part of the consideration accepted by the sellers in the Limited
Partnership Real Estate Acquisition was 195,000 shares of the Company's $100 Redeemable 8%
Cumulative Preferred Stock, Series A, or the Series A Preferred Stock. We are not entitled to
any cash flow or proceeds from the sales of the properties until all shares of the Series A
Preferred Stock have been redeemed. Until such time, we only receive the quarterly sub−asset
management fee. IRI generated $173,000 of income from the sub−asset management fee in fiscal
2002. See "Business − Real Estate Transactions".

         Joe's and Leasall


Additionally, we had $153,000 of other income from Joe's in fiscal 2003 compared to $41,000 of
other expense in fiscal 2002. The vast majority of Joe's other income was unrealized Japanese
currency translation income of $137,000. Offsetting a portion of other income was net rental
expenses of $21,000 from tenants who are occupying our former manufacturing facility located in
Springfield, Tennessee.

                                         40
Net Income


We generated a net loss of $8,317,000 in fiscal 2003 compared to net income of $572,000 in
fiscal 2002. The net loss in fiscal 2003 versus net income in fiscal 2002 is largely the result
of the following factors: (i) lower gross margins, due to (a) over−estimations by management in
its inventory purchases and (b) significant charges taken against excess inventory; (ii)
increased employee wages of $3,643,000; (iii) increased advertising, marketing, tradeshow and
related costs of $1,241,000 incurred in order to market the Joe's brand and launch the Shago(R)
by Bow Wow and Fetish(TM) by Eve brands; (iv) increased royalties and commissions associated
with our branded products and the earnout associated with the Blue Concepts purchase of
$1,539,000; (v) increases in legal, accounting, and other professional fees and insurance of
$965,000; (vi) an increase in interest expense of $681,000 and depreciation and amortization
costs of $973,000 primarily associated with the acquisition of the Blue Concepts division from
Azteca in fiscal 2003 as discussed in greater detail above.

Results of Operations

The following table sets forth certain           statement of       operations        data for the
years indicated:



                                                            Years Ended
                                                           (in thousands)
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                     11/30/02        12/01/01           $ Change       % Change
                                     −−−−−−−−        −−−−−−−−           −−−−−−−−       −−−−−−−−

Net Sales                            $ 29,609         $ 9,292          $ 20,317            219%
Cost of Goods Sold                     20,072           6,335            13,737             217
                                     −−−−−−−−        −−−−−−−−          −−−−−−−−        −−−−−−−−
Gross Profit                            9,537           2,957             6,580             223

Selling, General &Administrative       8,092           3,189             4,903             154
Depreciation &Amortization               256             167                89              53
                                     −−−−−−−−        −−−−−−−−          −−−−−−−−        −−−−−−−−
Income (Loss) from Operations           1,189           (399)             1,588           (398)

Interest Expense                        (538)           (211)             (327)             155
Other Income                              235              84               151             180
Other Expense                           (174)             (3)             (171)             (A)
                                     −−−−−−−−        −−−−−−−−          −−−−−−−−        −−−−−−−−
Income (Loss) before Income Taxes         712           (529)             1,241           (235)

Income Taxes                              140              89                 51             57

Net Income (Loss)                    $    572         $ (618)          $   1,190            (A)




(A) Not Meaningful


Comparison of Fiscal Year Ended     November 30, 2002 to Fiscal Year Ended December
1, 2001

Overview


In fiscal 2002, we increased our sales and reported an overall profit for the year ended
November 30, 2002. We experienced growth in all three of our main consumer products operating
subsidiaries and moved forward in our efforts to strengthen our presence in the apparel market.

Our accessory division, Innovo, experienced an increase in sales as a result of
our entry into the private label business, growth from the Bongo(R) product line
and an increase in its legacy craft division. In fiscal 2002, Innovo focused on
strengthening its sourcing capabilities through the establishment of IHK.


During fiscal 2002, our Joe's subsidiary continued to experience strong demand for its product
lines in the international marketplace. In May of 2002, Joe's established JJJ to distribute its
products in the Japanese market. Additionally, we began to distribute our Joe's products in
Europe and Canada.

Our IAA subsidiary increased its sales in fiscal 2002 as a result of growth in
its business with its private label customers such as Target Corporation and J.
Crew, Inc. During the period, in an effort to expand into branded products, IAA
obtained the license rights to Bow

                                            41
Wow from Bravado International Group, the agency with the master license rights
to Bow Wow, and LBW Entertainment, Inc. and to the Hot Wheels(R) brand from
Mattel, Inc.


Our net income for the fiscal year ended 2002 was $572,000, or $0.04 per share,
compared to a loss of $618,000, or $0.04 per share, for the fiscal year ended
2001, as a result of our ability to increase our revenues, maintain our gross
margins and to control our increase in expenses.

Reportable Segments


During fiscal 2002 and fiscal 2001, we operated in two segments, accessories and apparel. The
accessories segment represents our original core business and is conducted by our Innovo
subsidiary. The apparel segment operates under Joe's and IAA. Our real estate operations and
corporate activities are categorized under "other." The operating segments have been classified
based upon the nature of their respective operations, customer base and the nature of the
products sold.

The following table sets forth certain                    statement of operations data by segment
for the years indicated (in thousands):



         November 30, 2002     Accessories      Apparel      Other (A)      Total
                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                   (in thousands)

Net Sales                        $12,072        $17,537        $ −−        $29,609
Gross Profit                       3,393          6,144          −−          9,537
Depreciation &Amortization           21            183          52            256
Interest Expense                     140            339          59            538


          December 1, 2001     Accessories      Apparel      Other (A)      Total
                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                   (in thousands)

Net Sales                        $ 5,642        $ 3,650        $ −−        $ 9,292
Gross Profit                       1,749          1,208          −−          2,957
Depreciation &Amortization           45             35          87            167
Interest Expense                      32             79         100            211


            2002 to 2001              Accessories                 Apparel               Other (A)                 Total
                                $ Change     % Change      $ Change    % Change    $ Change   % Change     $ Change     % Change
                                −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                      (in thousands)

Net Sales                        $ 6,430        114%        $13,887       380%       $ −−        N/A        $20,317       219%
Gross Profit                       1,644         94           4,936       409          −−        N/A          6,580       223
Depreciation &Amortization          (24)       (53)            148       423         (35)       (40)            89        53
Interest Expense                     108        338             260       329         (41)       (41)           327       155




(A) Other includes           corporate     expenses and assets and expenses                  related to real
estate operations.

Net Sales


Our net sales increased to $29,609,000 in fiscal 2002 from $9,292,000 for fiscal 2001, or an
increase of 219%. This increase is attributable to sales by our three main operating
subsidiaries, Innovo operating in the accessory segment and Joe's and IAA operating in the
apparel segment.

Accessory

            Innovo


Innovo's net sales increased to $12,072,000 in fiscal 2002 from $5,642,000 in fiscal 2001, or
an increase of 114%. Innovo's gross sales for fiscal 2002 were $12,216,000. The increase is
attributable to our entry into the private label accessory business, growth in sales of Innovo's
craft products, and higher sales from its Bongo(R) accessory products.

Innovo's accessory craft business increased as a result of Innovo's ability to
sell a greater amount of its new and existing products to new and existing
customers. In fiscal 2002, Innovo focused upon increasing the quality of its
products and improving the marketing strategy associated with the Innovo's
products. Innovo's craft business gross sales increased to $4,577,000 in fiscal
2002 from $2,831,000 in fiscal 2001, or a 62% increase. Innovo's craft business
represented approximately 37% of Innovo's total gross sales for fiscal 2002.

                                                       42
Innovo's Bongo(R) product line experienced an increase in        sales partly as a
result of fiscal 2002 being Innovo's first full twelve month     cycle of business
with the Bongo(R) product line. Gross sales generated by the     Bongo(R) product
line of $3,101,000 represented approximately 25% of Innovo's     total gross sales
for fiscal 2002.


Innovo began selling its products to private label customers in fiscal 2002.
Innovo's two main private label customers for fiscal 2002 were American Eagle
Outfitters, Inc. and Limited Brands, Inc.'s Express division. Innovo's private
label business gross sales of $3,218,000 represented approximately 26% of
Innovo's gross sales for fiscal 2002.

Apparel

          Joe's


Joe's net sales increased to $9,179,000 in fiscal 2002 from $1,519,000 in fiscal 2001, or an
increase of 504%. Joe's product line experienced an increase in sales partly as a result of
fiscal 2002 being Joe's first full 12 month business cycle. For fiscal 2002, Joe's product mix
consisted primarily of women's denim based jeans, skirts and jackets and men's denim jeans.
Joe's is continuing to diversify its product offerings to meet the changing trends in the high
fashion apparel markets and believes, although there can be no assurances, that its new product
line is designed to meet the current fashion trends and the expectations of its customers and
the consumer.

During fiscal 2002, Joe's experienced increase demand in both the domestic and
international marketplaces. Joe's net sales domestically increased to $5,398,000
in fiscal 2002 from $1,519,000 in fiscal 2001, or an increase of 255%. This
increase is primarily a result of the maturity and development of the Joe's
brands in the marketplace. Joe's continues to attract customer and consumer
awareness as a result of its design and quality characteristics. Management
believes the desirability of products bearing the Joe's(R) brand and the
characteristics associated therewith are resulting in increased demand from
Joe's customers.

In fiscal 2002, Joe's expanded into the international marketplace through the
formation of Joe's Jeans Japan, Inc., or JJJ, and through the use of
international distributors. JJJ is headquartered in Tokyo, Japan where we
operate a showroom and operational offices. Net sales by JJJ in the amount of
$1,902,000 represented approximately 21% of Joe's total net sales. Additionally,
Joe's   marketed its products in Europe and Canada         through the use of
international distributors who purchase Joe's products and then distributed the
product to retailers in the distributor's local markets.          Sales in the
international market, excluding sales by JJJ, represented approximately 10% of
Joe's total sales for fiscal 2002.

          IAA

IAA's net sales increased to $8,358,000 for fiscal 2002 from $2,130,000 for
fiscal 2001, or an increase of 292%. IAA was formed in August 2001 in connection
with acquisition of the knit division from Azteca.          IAA's product line
experienced an increase in sales partly as a result of fiscal 2002 being IAA
first full 12 month business cycle and an increase in sales of IAA's private
label apparel products to its two main customers, J. Crew, Inc. and Target
Corporation's Mossimo division.     IAA's products in fiscal 2002 primarily
consisted of denim jeans and knit shirts.


In an attempt to expand its product business, in fiscal 2002, IAA entered into a license
agreements with Bow Wow and Mattel for the creation of apparel and accessory products bearing
the Shago(R) and Hot Wheels(R) brand, respectively. IAA's branded products did not have any
sales in fiscal 2002.

Gross Margin

Our overall gross   margin   remained at 32% for fiscal 2002   compared to 32% for
fiscal 2001.

Accessory

          Innovo


Innovo's gross margin decreased to 27% for fiscal 2002 from 31% for fiscal 2001, or a decrease
of 2%. Innovo's gross margin is largely a function of Innovo's product mix for the given period,
however, during the fiscal 2002, Innovo's gross margin was negatively impacted from the west
coast dock strike. As a result of the west coast dock strike, Innovo was obligated to incur
increased airfreight of $303,000, which affected our gross margin by three percentage points.
In addition, we were required to give customer discounts as a result of the late shipment of
products. Innovo's product categories have historically had a gross margin in the 30% range,
with some product categories being higher and some lower. Innovo's branded product have
traditionally experienced higher margin than its craft and private label business, which usually
have similar gross margins.

Apparel

                                        43
          Joe's

Joe's gross margins decreased to 50% for fiscal 2002 from 57% for fiscal 2001,
or a decrease of 7%. The decrease reflects an increase in sales in the
international marketplace, which are often sold at a discount. Additionally,
Joe's gross margin was negatively impacted as a result of an increase in cost
for some of the more fashion oriented products in Joe's product line. In an
effort to maintain high margins, Joe's usually attempts to pass the higher cost
of certain goods to its customer by charging a higher sales price for such
products.

          IAA

IAA's gross margins increased to 20% for fiscal 2002 from 16% for fiscal 2001,
or an increase of 4%. IAA's sales in fiscal 2002 primarily consisted of denim
jeans and knit shirts to private label customers. IAA's sales to its private
label customers usually have lower margins than the sales of our other
divisions. We anticipate that IAA's branded apparel will experience higher gross
margins than its private label apparel because it can obtain higher prices for
its branded apparel products.


The increase in IAA's gross margins offset decreases in Joe's and Innovo's gross margins. This
attributed an overall increase in the collective gross margin. Our collective gross margin may
fluctuate in future periods based upon which segments operating subsidiary and operating
division accounts for a larger percentage of sales.

Selling, General and Administrative Expense


Our selling, general and administrative, or SG&A, expenses increased to $8,092,000 in fiscal
2002 from $3,189,000 in fiscal 2001, or approximately a 176% increase. The increase in SG&A
expenses is largely a result of an increase in expenses to support our sales growth during the
period. During the period, we incurred an increase in wages to $2,832,000 in fiscal 2002 from
$1,026,000 in fiscal 2001, or an increase of 176%. We hired new employees to handle the growth
in our accessory and apparel business. In addition, advertising expenses increased to $287,000
in fiscal 2002 from $114,000 in fiscal 2001, or an increase of 152%, travel expenses increased
to $342,000 in fiscal 2002 from $152,000 in fiscal 2001, or an increase of 125%, professional
fees increased to $611,000 in fiscal 2002 from $285,000 in fiscal 2001, or an increase of 114%,
and sales shows and samples expenses increased to $389,000 in fiscal 2002 from $88,000 in
fiscal 2001, or an increase of 342%. These increased expenses were all related to our sales
growth in fiscal 2002.

Accessory

          Innovo

Innovo's SG&A expenses increased to $2,854,000 in fiscal 2002 from $1,441,000
fiscal 2001, or an increase of 98%. Innovo's increase in SG&A expenses is
largely attributable to expenses which were necessary to support or associated
with Innovo's increase in sales primarily attributable to its Bongo(R) product.
During fiscal 2002, Innovo's wages increased to $842,000 in fiscal 2002 from
$414,000 in fiscal 2001, or an increase of 103% as Innovo added staff members at
its   headquarters   in Knoxville and to its showroom in New York City.
Additionally, Innovo's wages increased from the addition of employees at
Innovo's sourcing office IHK in Hong Kong. Innovo's commission expense increased
to $292,000 in fiscal 2002 to $126,000 in fiscal 2001 or an increase of 132%
during the period due to the increase in commission based sales.


Royalty expenses for fiscal 2002 increased by 215% to $270,000 primarily due to royalty expense
associated with the sales of Bongo(R) related products. Innovo's distribution costs also
increased by approximately 50% during fiscal 2002 because it distributed a greater amount of
product.

          Nasco Products International, Inc.


Our accessory business in the international marketplace had previously been conducted through
our subsidiary, Nasco Products International, Inc., or NPII. NPII had international license
rights for certain sports and character related trademarks. In fiscal 1999, NPII ceased
operations in the international accessory market. At such time, NPII was in disagreement with
certain licensors with respect to the terms and royalty commitments under the license
agreements. In 1999, NPII accrued $104,000 against the potential liability associated with the
agreements. For fiscal 2002, NPII reversed into SG&A expense the accrual due to the fact there
has not been material activity with respect to the agreements over the last three fiscal years.

Apparel

          Joe's


Joe's SG&A expenses increased to $3,245,000 in fiscal 2002 from $618,000 in fiscal 2001, or an
increase of 425%. Joe's wage expense increased to $1,140,000 during fiscal 2002 from $201,000
during fiscal 2001, or an increase of 467%. Joe's wage expense was attributable to its increase
in staff to support Joe's growth. Joe's royalty and commission expenses increased to $981,000
in fiscal 2002

                                        44
from $197,000, or an increase of 398%, as a result of Joe's increasing sales and
royalties and commissions associated therewith. During fiscal 2002, as part of
Joe's marketing campaign, Joe's participated in numerous sales shows and
advertised the Joe's brand in national print publications. As a result, Joe's
sales show expense increased by 232% to $166,000 in fiscal 2002 and its
advertising expenses increased by 294% to $264,000 in fiscal 2002 compared to
fiscal 2001. Joe's factoring expense increased to $41,000 in fiscal 2002 from
$8,000 in fiscal 2001, or an increase of 413% in response to the increase in the
number of receivables Joe's factored. Joe's SG&A expenses for fiscal 2002 also
include the additional expense of $540,000 associated with the operation of JJJ.

          IAA

IAA's SG&A expenses increased to $761,000 in fiscal 2002 from $83,000 in fiscal
2001, or an increase of 817%, because fiscal 2002 was IAA's first full
twelve−month business cycle. IAA's wage expense increased to $522,000 in fiscal
2002 from $80,000 in fiscal 2001, or an increase of 553%. IAA sales sample
expense increases to $46,000 in fiscal 2002 from no sales sample expense in
fiscal 2001. IAA's factor expense increased to $130,000 in fiscal 2002 as a
result of an increase in the amount of receivables IAA factored and an extra
factor fee charged to IAA for the factoring of one of IAA's significant
customers.

Other

          IGI

IGI, which reflects our corporate expenses and operates under the "other"
segment, does not have sales. For fiscal 2002, IGI's expenses, excluding
interest, depreciation and amortization, increased to $1,375,000 for fiscal 2002
from $1,171,000 in fiscal 2001, or an increase of 17%. IGI had a large increase
in its professional fees and insurance        expenses in fiscal 2002. IGI's
professional fee's expense increased approximately 49% in fiscal 2002 compared
to fiscal 2001. The increase in professional fees is largely attributable to
additional legal and accounting fees. IGI's insurance expense increased by 22%
as a result of an increase in the cost of our Director and Officer insurance and
as a result of an increase in the cost of general liability insurance for our
growing operations. IGI's remaining expenses did not differ materially compared
to fiscal 2001.

          IRI


During fiscal 2002, IRI had approximately $64,000 of professional fees which were represented
in the SG&A under our "other" segment. These professional fees were primarily associated with
the formation of IRI and professional fees necessary for the completion of the investments made
by IRI during the period. See "Business− Real Estate Transactions."

Depreciation and Amortization Expenses


Our depreciation and amortization expenses increased to $256,000 in fiscal 2002 from $167,000
in fiscal 2001, or an increase of 53%. The increase is primarily attributable to IAA's
amortization of the non−compete agreement entered into in August 2001, pursuant to the terms of
the knit acquisition. The non−compete agreement has been valued at $250,000 and is being
amortized over two years, based upon the term of the agreement. IAA's amortization expense
increased to $120,000 in fiscal 2002 from $35,000 in fiscal 2001, or an increase of 243%. See
Note 3 "Acquisitions," in the Notes to the Consolidated Financials.

Our combined deprecation expense totaled $86,000 in fiscal 2002, with Leasall's
depreciation of the Springfield, Tennessee facility representing $40,000 of the
depreciation total. The remaining depreciation expense in fiscal 2002 is
associated with the depreciation of small operational assets such as furniture,
fixtures, leasehold improvements, machinery and software.

Interest Expense


Our combined interest expense increased to $538,000 for fiscal 2002 from $211,000 for fiscal
2001, or an increase of 155%. Our interest expense is primarily attributable to our factoring
and inventory lines of credit, the promissory note issued in connection with the acquisition of
the knit division from Azteca and the promissory note associated with our former manufacturing
facility and headquarters in Springfield, Tennessee.

Accessory

          Innovo


Innovo's interest expense increased to $140,000 in fiscal 2002 from $32,000 in fiscal 2001, or
an increase of 338%. This increase represents interest expense incurred from borrowings under
Innovo's factoring agreement and inventory line of credit. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations−Liquidity and Capital Resources."

Apparel

                                         45
          Joe's


Joe's interest expense was $29,000 in fiscal 2002 because Joe's does not factor all of its
receivables and thus does not borrow against these receivables under its factoring agreement.
Joe's carries these receivables as "house accounts." Joe's interest expense does include
borrowings under its inventory line of credit. See "Managements Discussion and Analysis of
Financial Condition and Results of Operations−Liquidity and Capital Resources."

          IAA

IAA's interest expense increased to $310,000 in fiscal 2002 compared to fiscal
2001 or an increase of 377%. This increase is attributable to IAA factoring a
vast majority of its receivables and then borrowing funds against these
receivables. See "Managements Discussion and Analysis of Financial Condition and
Results of Operations−Liquidity and Capital Resources." Additionally, IAA's
interest expense increased as a result of interest payments associated with the
promissory note issued as part of the purchase of the knit division from Azteca
and the creation of IAA. See Note 3, "Acquisitions" in the Notes to the
Consolidated Financials.

Other Income

Our "other income" decreased      to $61,000 in fiscal 2002 from $81,000 in fiscal
2001, or a decrease of 25%.

Leasall


Our decrease in "other income" in fiscal 2002 is largely attributable to a $90,000 expense that
our Leasall subsidiary incurred as a result of repair expenses associated with our former
manufacturing facility and headquarters in Springfield, Tennessee. See "Business−−Properties."
During fiscal 2002, Leasall's operational expenses did not change materially. Leaseall's main
operational expenses are maintenance and taxes. However, during the year, Leasall made
significant renovations to the Springfield facility that totaled approximately $425,000 of
which $335,000 was capitalized and $90,000 was expensed during fiscal 2002. Leasall's
operations are part of our "other" segment of business.

IRI

"Other Income" in fiscal 2002 includes $173,000 of income from a management fee
the IRI receives pursuant to an investment that we made through our IRI
subsidiary in the second quarter of fiscal 2002. IRI, which operates under our
"other" business segment was formed during fiscal 2002 and thus did not have
operations during fiscal 2001. During fiscal 2002, IRI had approximately $61,000
of professional fees which were represented in the SG&A expense under our
"other" segment. These professional fees were primarily associated with the
formation of IRI and professional fees necessary for the completion of the
investments made by IRI during the period.         See   "Business−Real   Estate
Transactions."


The remaining other income is primarily associated with rental income generated from tenants who
are occupying our former manufacturing facility located in Springfield, Tennessee.

Net Income

Our net income increased to $572,000 for fiscal 2002 from a net loss of $618,000
in fiscal 2001. Our profitability in fiscal 2002 is attributable to a
significant increase in sales in fiscal 2002 compared sales to fiscal 2001 and
our ability to maintain our gross margins during fiscal 2002. While our expenses
increased in fiscal 2002, our gross profits offset the increase in revenues,
thus, resulting in net income for the period.

Liquidity and Capital Resources


Our primary sources of liquidity are cash flows from operations, trade payables credit from
vendors and related parties equity financings and borrowings from the factoring of accounts
receivables and borrowing against inventory. Cash used for operating activities was $9,857,000
for fiscal 2003 compared to cash provided by operating activities of $1,504,000 for fiscal
2002. During the period, we used cash to purchase inventory, extend credit to our customers
through accounts receivable, reduce related party payables and fund operating expenses. Cash
used in operating activities combined with cash used in investing activities and repayment of
debt was offset by cash generated through a related party borrowing of $500,000, factor
borrowings of $332,000 and the proceeds from five equity issuances providing net proceeds of
$17,540,000. During fiscal 2003, we generated $7,026,000 of cash versus a use of cash of
$70,000 for fiscal 2002.

We are dependent on credit arrangements with suppliers and factoring and
inventory based lines of credit agreements for working capital needs. From time
to time, we have obtained short−term working capital loans from senior members
of management and from members

                                         46
of the Board of   Directors,   and   conducted   equity   financing   through   private
placements.


Our primary capital needs are for working capital to fund inventory purchases and extensions of
our customers trade credit to our customers. During fiscal 2004, we anticipate funding working
capital through the following: (1) utilize our receivables and inventory based line of credit
with CIT, (2) utilize trade payables with our domestic and international suppliers, (3) manage
our inventory levels, and (4) reduce the trade credit we extend to our customers.

For fiscal 2003, we relied on the following primary sources to fund operations:

      −     A financing and inventory based line of credit agreements with CIT

      −     Cash balances

      −     Trade payables credit with our domestic and international suppliers

      −     Trade payables credit from related parties

      −     Five equity financings through private placements

On June 1, 2001, our subsidiaries, Innovo and Joe's, entered into accounts
receivable factoring agreements with CIT which may be terminated with 60 days
notice by CIT, or on the anniversary date, by Innovo or Joe's. Under the terms
of the agreements, Innovo or Joe's has the option to factor receivables with CIT
on a non−recourse basis, provided that CIT approves the receivable in advance.
Innovo or Joe's may, at their option, also factor non−approved receivables on a
recourse basis. Innovo or Joe's continue to be obligated in the event of product
defects and other disputes, unrelated to the credit worthiness of the customer.
Innovo or Joe's has the ability to obtain advances against factored receivables
up to 85% of the face amount of the factored receivables. The agreement calls
for a 0.8% factoring fee on invoices factored with CIT and a per annum rate
equal to the greater of the Chase prime rate plus 0.25% or 6.5% on funds
borrowed against the factored receivables. On September 10, 2001, IAA entered
into a similar factoring agreement with CIT upon the same terms.


On or about August 20, 2002, our Innovo and Joe's subsidiaries each entered into certain
amendments to their respective factoring agreements, which included inventory security
agreements, to permit the subsidiaries to obtain advances of up to 50% of the eligible inventory
up to $400,000 each. According to the terms of the agreements, amounts loaned against inventory
are to bear an interest rate equal to the greater of the Chase prime rate plus 0.75% or 6.5% per
annum.

On or about June 10, 2003, the existing financing facilities with CIT for these
subsidiaries were amended, to be effective as of April 11, 2003, primarily to
remove the fixed aggregate cap of $800,000 on their inventory security agreement
to allow for Innovo and Joe's to borrow up to 50% of the value of certain
eligible inventory calculated on the basis of the lower of cost or market, with
cost calculated on a first−in−first out basis. In connection with these
amendments, IAA, entered into an inventory security agreement with CIT based on
the same terms as Joe's and Innovo. IAA did not previously have an inventory
security agreement with CIT. Under the factoring arrangements, we, through our
subsidiaries, may borrow up to 85% of the value of eligible factored receivables
outstanding. The factoring rate that we pay to CIT to factor accounts, on which
CIT bears some or all of the credit risk, was lowered to 0.4% and the interest
rate associated with borrowings under the inventory lines and factoring facility
were reduced to the Chase prime rate. We have also established a letter of
credit facility with CIT whereby we can open letters of credit, for 0.125% of
the face value, with international and domestic suppliers provided we has
availability on its inventory line of credit. In addition, we also may elect to
factor with CIT its receivables by utilizing an adjustment of the interest rate
as set on a case−by−case basis, whereby certain allocation of risk would be
borne by us, depending upon the interest rate adjustment. We record our account
receivables on the balance sheet net of receivables factored with CIT, since the
factoring of receivables is non−recourse to us. Further, in the event our loan
balance with CIT exceeds the face value of the receivables factored with CIT, we
record the difference between the face value of the factored receivables and the
outstanding loan balance as a liability on our balance sheet as "Due to Factor".
Cross guarantees were executed by and among the subsidiaries, Innovo, Joe's, and
IAA and we entered into a guarantee for our subsidiaries' obligations in
connection with the amendments to the existing credit facilities. Our loan
balance as of November 29, 2003 with CIT was $8,786,000 and we had $8,536,000 of
factored receivables with CIT as of November 29, 2003. As of November 29, 2003,
an aggregate amount of $2,149,000 of unused letter of credit was outstanding.


In connection with the agreements with CIT, certain assets are pledged to CIT. The pledged
assets include inventory, merchandise, and/or goods, including raw materials through finished
goods.

Based on our anticipated internal growth for the upcoming fiscal 2004, we
believe that we have the working capital resources necessary to meet the
operational needs associated with such growth in the next twelve months. For the
year ended November 29, 2003, we raised additional working capital through five
equity financings. We believe that with the net proceeds from the equity
financings and the amended financing agreements with CIT, we have addressed our
short−term working capital needs. See "Management's Discussion and Analysis on
Financial Results and Operational Conditions−−Equity Financing" for a further
discussion of the equity financings that

                                       47
occurred in fiscal 2003.


However, if we grow beyond our current anticipated expectations, we believe that it might be
necessary to obtain additional working capital through debt or equity financings. We believe
that any additional capital, to the extent needed, could be obtained from the sale of equity
securities or short−term working capital loans. There can be no assurance that this or other
financings will be available if needed. Our inability to fulfill any interim working capital
requirements would force us to constrict our operations. We believe that the relatively
moderate rate of inflation over the past few years has not had a significant impact on our
revenues or profitability.

Equity Financings

In fiscal 2003, we consummated five private placements of our common stock to a
limited number of "accredited investors" pursuant to Rule 506 of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act"), resulting
in net proceeds of approximately $17,540,000 after all commissions and expenses
(including legal and accounting) to us. Our first private placement, completed
on March 19, 2003 to 17 accredited investors,          raised net proceeds of
approximately $407,000 at $2.65 per share. Our second private placement,
completed on March 26, 2003 to 5 accredited investors, raised net proceeds of
approximately $156,000 at $2.65 per share. Our third private placement,
completed on July 1, 2003 to 34 accredited investors, raised net proceeds of
approximately $8,751,000 at $3.33 per share. Our fourth private placement was
completed on August 29, 2003 to 5 accredited investors, and raised net proceeds
of approximately $592,000 at $3.62 per share. Our fifth private placement was
completely funded on or before November 29, 2003, but was not completed until
December 1, 2003, to 14 accredited investors and raised net proceeds of
approximately $10,704,000 at $3.00 per share and warrants at $4.00 per share. We
issued 165,000 shares, or the I Shares, as a result of the first private
placement. Capital Wealth Management, LLC, or Capital Wealth, acted as the
placement agent on a best efforts basis for the first private placement. In
consideration of the services rendered by Capital Wealth, they were paid 7% of
the gross proceeds, plus expenses, for a total of approximately $31,000. We
issued 63,500 shares, or the II Shares, as a result of the second private
placement. Capital Wealth acted as the placement agent on a best efforts basis
for the second private placement. In consideration of the services rendered by
Capital Wealth, they were paid 7% of the gross proceeds, plus expenses, for a
total of approximately $12,000. We issued 2,835,481 shares, or the III Shares,
as a result of the third private placement. Sanders Morris Harris, Inc., or SMH,
acted as the placement agent on a best efforts basis for the third private
placement. In consideration of the services rendered by SMH, SMH was paid 7% of
the gross proceeds, plus expenses, for a total of $691,000, and also received a
five year warrant entitling SMH to purchase 300,000 shares of common stock at
$4.50 per share which is exercisable on January 1, 2004. We issued 175,000
shares, or the IV Shares, as a result of the fourth private placement. Pacific
Summit Securities, Inc., or PSS, acted as the placement agent on a best efforts
basis for the fourth private placement. In consideration of the services
rendered by PSS, PSS was paid 6% of gross proceeds, plus expenses, for a total
of approximately $42,000, and also received a warrant entitling PSS to purchase
17,500 shares of our common stock at $3.62 per share which is exercisable on
January 1, 2004. We issued 2,996,667 shares and warrants to purchase an
additional 599,333 shares of common stock to these certain investors at $4.00
per share, or the V Shares, and together with the I Shares, the II Shares, the
III Shares and the IV Shares, we will refer to them as the 2003 Placement
Shares. SunTrust Robinson Humphrey Capital Markets Division, or SunTrust, acted
as the placement agent on a best efforts basis for the fifth private placement.
In consideration of the services rendered by SunTrust, SunTrust was paid 6% of
gross proceeds, plus expenses, for a total of approximately $683,000. Each of
the warrants issued to SMH and PSS includes a cashless exercise option, pursuant
to which the holder thereof can exercise the warrant without paying the exercise
price in cash. If the holder elects to use this cashless exercise option, it
will receive a fewer number our shares than it would have received if the
exercise price were paid in cash. The number of shares of common stock a holder
of the warrant would receive in connection with a cashless exercise is
determined in accordance with a formula set forth in the applicable warrant. We
intend to use and have used the proceeds from the transactions for general
corporate purposes.


The buyers of the 2003 Placement Shares have represented to us that they purchased the 2003
Placement Shares for their own account, with the intention of holding the 2003 Placement Shares
for investment and not with the intention of participating, directly or indirectly, in any
resale or distribution of the 2003 Placement Shares. The 2003 Placement Shares were offered and
sold to the buyers in reliance upon Regulation D, which provides an exemption from registration
under Section 4(2) of the 1933 Act. Each buyer has represented to us that he or she is an
"Accredited Investor," as that term is defined in Rule 501(a) of Regulation D under said Act.

Short−Term Debt

Crossman Loan


On February 7, 2003 and on February 13, 2003, we entered into a loan agreement with Marc
Crossman, then a member of our board of directors and now also our Chief Financial Officer. The
loan was funded in two phases of $250,000 each on February 7, 2003 and February 13, 2003 for an
aggregate loan value of $500,000. In the event of default, each loan is collateralized by
125,000 shares of our common stock as well as a general unsecured claim on our assets. Each loan
matures six months and one day from the date of its respective funding, at which point the
principal amount loaned and any unpaid accrued interest is due and payable in full without
demand. Each loan carries an 8% annualized interest rate with interest payable in equal monthly
installments. The loan may be repaid by us at any time during the term of the loan without
penalty. Further, prior to the maturity of each loan and the original due dates, we elected, at
our sole option, to extend the term of each loan for an additional period of six months and one
day. Our disinterested directors

                                       48
approved each loan from Mr. Crossman. Subsequent to the year ended November 29,
2003 and prior to the maturity of the loans in February 2004, the parties agreed
to extend the term of each loan for an additional period of ninety days.
Further, pursuant to the extension amendments, Mr. Crossman has the sole and
exclusive option to continue to extend the terms of the loans for three
additional ninety day periods by giving us notice of such extension on or before
the due dates of the loan.

As of November 29, 2003, we had a loan balance with CIT of $8,536,000 the
majority of which was collateralized against non− recourse factored receivables.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations−−Liquidity and Capital Resources" for further discussion of our
financing agreements with CIT.

Long−Term Debt

Long−term debt consists of the following (in thousands):

                                                      2003          2002
                                                    −−−−−−−−−−−−−−−−−−−−−

First mortgage loan on Springfield property         $   476        $ 558
Promissory note to Azteca (Blue Concepts)            21,800            −−
Promissory note to Azteca (Knit Div. Note 1)             68           786
Promissory note to Azteca (Knit Div. Note 2)             −−         2,043
                                                    −−−−−−−−−−−−−−−−−−−−−
Total long−term debt                                $22,344        $3,387
Less current maturities                                 168           756
                                                    −−−−−−−−−−−−−−−−−−−−−
Total long−term debt                                $22,176        $2,631
                                                    =====================

Springfield Property Loan


The first mortgage loan, held by First Independent Bank of Gallatin, is collateralized by a
first deed of trust on real property in Springfield, Tennessee (with a carrying value of $1.2
million at November 29, 2003), and by an assignment of key−man life insurance on our President,
Pat Anderson, in the amount of $1 million. The loan bears interest at 2.75% over the lender's
prime rate per annum and requires monthly principal and interest payments of $9,900 through
February 2008. The loan is also guaranteed by the Small Business Administration, or SBA. In
exchange for the SBA guarantee, we, Innovo, Nasco Products International, Inc., our
wholly−owned subsidiary, and our President, Pat Anderson, have also agreed to act as guarantors
for the obligations under the loan agreement.

Knit Acquisition Notes


In connection with the acquisition of the knit division from Azteca in 2001 (which, as noted
below, is controlled by significant stockholders of ours, Hubert and Paul Guez), we issued two
promissory notes in the face amounts of $1.0 million and $2.6 million, which bear interest at
8.0% per annum and require monthly payments of $20,000 and $53,000, respectively. The notes have
a five−year term and are unsecured.

The $1.0 million note was subject to adjustment in the event that the actual net
sales of our newly formed knit division did not reach $10.0 million during the
18−month term following the closing date of them Knit Acquisition. The principal
amount was to be reduced by an amount equal to the sum of $1.5 million less 10%
of the net sales of our newly formed knit division during the 18 months
following the closing date of the Acquisition. For the 18−month period following
the closing of the knit acquisition, nets sales for the knit division exceeded
the $10 million threshold.

Both notes state that, in the event that we determine, from time to time, at the
reasonable discretion of management, that our available funds are insufficient
to meet the needs of our business, we may elect to defer the payment of
principal due under the promissory notes for as many as six months in any one
year (but not more than three consecutive months) and as many as eighteen
months, in the aggregate, over the term of the notes. The term of the notes will
automatically be extended by one month for each month the principal is deferred,
and interest shall accrue accordingly.


At the election of Azteca, the balance of the promissory notes may be offset against monies
payable by Azteca or its affiliates to us for the exercise of our issued and outstanding stock
warrants that are owned by Azteca or its affiliates (including the Commerce Investment Group)
prior to the closing date of the acquisition.

Blue Concept Acquisition Note


In connection with the purchase of the Blue Concept Division from Azteca, IAA issued a
seven−year convertible promissory note for $21.8 million, or the Blue Concept Note. The Blue
Concept Note bears interest at a rate of 6% and requires payment of interest only during the
first 24 months and then is fully amortized over the remaining five−year period. The terms of
the transaction further allow us,

                                       49
upon shareholder approval, to convert a portion of the Blue Concept Note into
equity through the issuance of 3,125,000 shares of our common stock valued at
the greater of $4.00 per share or the market value of our common stock on the
day prior to the date of the shareholder meeting at which approval for this
conversion is sought, or the Conversion Price. In the event shareholder approval
is obtained, the Blue Concept Note will be reduced by an amount equal to the
product of the Conversion Price and 3,125,000, so long as the principal amount
of the Blue Concept Note is not reduced below $9.3 million and the shares issued
pursuant to the conversion will be subject to certain lock−up periods. Up to
1,041,667 additional shares may be issued upon the occurrence of certain future
contingencies relating to our stock price for the 30 day period ending March 6,
2005.


In the event that sales of the Blue Concept Division fall below $70 million
during the first 17 month period, or Period I, following the closing of the
acquisition, or $65 million during the 12 month period, or Period II following
Period I, certain terms of the APA allow for a reduction in the purchase price
through a decrease in the principal balance of the Blue Concept Note and/or the
return of certain locked−up shares of our common stock. In the event the Blue
Concept Note is reduced during Period I and the sales of the Blue Concept
Division in Period II are greater than $65 million, the Blue Concept Note shall
be increased by half of the amount greater than $65 million, but in no event
shall the Blue Concept Note be increased by an amount greater than the decrease
in Period I.


In the event the principal amount of the Blue Concept Note needs to be reduced beyond the
outstanding principal balance of such Blue Concept Note, then an amount of the locked−up shares
equal to the balance of the required reduction shall be returned to us. For these purposes, the
locked−up shares shall be valued at $4.00 per share. Additionally, if during the 12 month
period following the closing, AEO is no longer a customer of IAA, the locked−up shares will be
returned to us, and any amount remaining on the balance of the Blue Concept Note will be
forgiven.

In the event the revenues of the Blue Concept Division decrease to $35 million
or less during Period I or Period II, IAA shall have the right to sell the
purchased assets back to Azteca, and Azteca shall have the right to buy back the
purchased assets for the remaining balance of the Blue Concept Note and any and
all Locked Up Shares shall be returned to us.

The following table sets forth our contractual obligations                                   and    commercial
commitments as of November 29, 2003 (in thousands):



Contractual Obligations                                                   Payments Due by Period
                                                     −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                     Total    Less than 1    1−3 years    4−5 years After 5 years
                                                                  year
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Long Term Debt                                      22,344        168        9,674        9,205         3,297
Operating Leases                                     2,812        616        1,479          717            −−
Other Long Term Obligations−Minimum Royalties        3,322        832        2,490           −−            −−




Recent Acquisitions and Licenses

License Agreement for Fetish(TM) by Eve


On February 13, 2003, our IAA subsidiary entered into a 44 month exclusive license agreement for
the United States, its territories and possessions with the recording artist and entertainer Eve
for the license of the Fetish(TM) mark for use with the production and distribution of apparel
and accessory products. We have guaranteed minimum net sales obligations of $8 million in the
first 18 months of the agreement, $10 million in the following 12 month period and $12 million
in the 12 month period following thereafter. According to the terms of the agreement we are
required to pay an eight percent royalty and a two percent advertising fee on the nets sales of
products bearing the Fetish(TM) logo. In the event we do not meet the minimum guaranteed sales,
we will be obligated to make royalty and advertising payments equal to the minimum guaranteed
sales multiplied by the royalty rate of eight percent and the advertising fee of two percent.
We also have the right of first refusal with respect to the license rights for the Fetish(TM)
mark in the apparel and accessories category upon the expiration of the agreement, subject to
us meeting certain sales performance targets during the term of the agreement. Additionally, we
have the right of first refusal for the apparel and accessory categories in territories in
which we do not currently have the license rights for the Fetish(TM) mark. We entered into the
license agreement of the Fetish mark because we believed it was strong opportunity to expand and
complimented our existing branded and accessory business.

Itochu Distribution and License Agreement


On July 1, 2003, Joe's entered into a Master Distribution and Licensing Agreement, or the
Distribution and Licensing Agreement, with Itochu, pursuant to which Itochu obtained certain
manufacturing, licensing rights for the "Joe's" and "Joe's Jeans" marks. The Distribution and
Licensing Agreement grants Itochu certain rights with respect to the manufacture, distribution,
sale and/or

                                                        50
advertisement of certain Joe's apparel products, or Joe's Products, including
but not limited (i) a non−exclusive right to use the Joe's and Joe's Jeans marks
in connection with the manufacture of certain licensed Joe's and Joe's Jeans
products, which we will refer to as the Licensed Products, throughout the world,
and an exclusive right to use the Joe's and Joe's Jeans marks to manufacture the
Licensed Products in Japan; and (ii) an exclusive right to import and distribute
certain imported Joe's Products, which we will refer to as the Imported
Products, into Japan. These Imported Products will be purchased directly from
Joe's, with Itochu being obligated to purchase a minimum of $5.75 million of
Joe's over the 42 month term of the Agreement. Additionally, Itochu shall have
the right to develop, produce and distribute certain apparel products bearing
the Joe's and Joe's Jeans marks for which Joe 's shall receive a running royalty
payment for each contract year equal to the aggregate amount of six percent of
the net sales of all bottoms for both men and women of the Licensed Products,
and five percent of the net sales of all tops for both men and women of the
Licensed Products. As a part of the transaction, Itochu agreed to purchase the
existing inventory of JJJ for approximately $1 million, assume the management
and operations of JJJ's showroom in Tokyo and employ certain employees of JJJ.


We will continue to operate JJJ until all operations have ceased, including the fulfillment of
existing purchase orders from customers and the collection of all outstanding accounts
receivables. Upon the cessation of all operating activities, we intend to dissolve the JJJ
subsidiary. We will continue to sell product in Japan through its licensing and distribution
agreement with Itochu.

We believe that the Distribution and License Agreement with Itochu allows us to
more expediently grow the Joe's and Joe's Jeans brand and business in Japan
because Itochu, as a local Japanese corporation, is better suited to market and
distribute the Joe's and Joe's Jeans products in accordance with cultural tastes
and norms compared to JJJ which was controlled and operated out of Los Angeles,
California. We further believe that Itochu is well suited and capable of
developing additional products suited to the local environment, which we will
benefit from through additional royalty payments.


There exists no common ownership between us, our affiliates or subsidiaries with Itochu, nor was
compensation paid in the form of equity securities for any portion of the Itochu transaction.

Blue Concept Division Acquisition

On July 17, 2003, IAA entered into an asset purchase agreement, or APA with
Azteca, Hubert Guez and Paul Guez, whereby IAA acquired the division known as
the Blue Concept division, or the Blue Concept Division, of Azteca. The Blue
Concept Division sells primarily denim jeans to AEO, a national retailer. Hubert
Guez and Paul Guez, two of our substantial stockholders and parties to the APA,
together have a controlling interest in Azteca. Based upon the Schedule 13D/A
filed on January 20, 2004, Hubert Guez, Paul Guez and their affiliates
beneficially owned in the aggregate approximately 17.6% of our common stock on a
fully diluted basis.


Pursuant to the terms of the APA, IAA paid $21.8 million for the Blue Concept Division, subject
to adjustment as noted below. Pursuant to the APA, IAA employed all of the existing employees
of the Blue Division but did not assume any of the Blue Concept Division's or Azteca's existing
liabilities. The purchase price was paid through the issuance of a seven−year convertible
promissory note, or the Blue Concept Note. See "Management's Discussion & Analysis−−Long Term
Debt" for further discussion of the terms of the Blue Concept Note.

As part of the transaction, IAA and AZT International SA de CV, a Mexico
corporation and wholly−owned subsidiary of Azteca, or AZT, entered into a
two−year, renewable, non−exclusive supply agreement, or Supply Agreement, for
products to be sold by our Blue Concept Division. Under the terms of the Supply
Agreement, we have agreed to market and sell the products to be purchased from
AZT to certain of our customers, more particularly the customers of our Blue
Concept Division. In addition to the customary obligations, the Supply Agreement
requires that: (i) the we will submit written purchase orders to AZT on a
monthly basis specifying (x) the products to be supplied and (y) a specified
shipping date for products to be shipped; (ii) we will give AZT reasonable time
allowances upon placing its purchase orders with AZT prior to delivery of the
products by AZT; (iii) AZT will receive payment immediately upon receipt by us
of invoices for our purchase orders; (iv)we will have a guaranteed profit margin
on a "per unit" basis; and (v) the products to be supplied shall be subject to
quality control measures by us and by the customer of the Blue Concept Division.


Management and the board of directors entered into the acquisition of the Blue Concept Division
for the following reasons: (i) the ability to enter into an acquisition with a seller with
which we have a long−standing relationship; (ii) the ability to acquire a profitable business
that has (x) a financial history of producing conservative profit margins with significant
revenues; (iii) a strong customer relationship with AEO, (iv) the manufacturing relationships
to produce effectively and efficiently; and (v) was able to acquire the personnel and talent of
a profitable business. Further, although there can be no assurance the Blue Concept Division is
expected to increase our revenue growth and is expected to maintain positive cash flows. For the
year ended November 29, 2003, our Blue Concept Division accounted for $27,760,000, or 33% of our
net revenue. Furthermore, the APA protects us if revenue expectations are not realized by
providing "downside" protections, such as guaranteed sales minimums, and a buy−sell provision
that allows for the sale of the business if revenues do not reach $35 million. See
"Management's Discussion & Analysis−−Long Term Debt" for further discussion of the above
referenced "downside" protections.
As noted above,   Azteca is controlled by our   significant stockholders,   Hubert
Guez and Paul     Guez,   brothers who were     also individual

                                        51
parties to the transaction.

Seasonality


Our business is seasonal. The majority of the marketing and sales activities take place from
late fall to early spring. The greatest volume of shipments and sales are generally made from
late spring through the summer, which coincides with our second and third fiscal quarters and
our cash flow is strongest in its third and fourth fiscal quarters. Due to the seasonality of
our business, often our quarterly or yearly results are not necessarily indicative of the
results for the next quarter or year.

Management's Discussion of Critical Accounting Policies


We believe that the accounting policies discussed below are important to an understanding of our
financial statements because they require management to exercise judgment and estimate the
effects of uncertain matters in the preparation and reporting of financial results.
Accordingly, we caution that these policies and the judgments and estimates they involve are
subject to revision and adjustment in the future. While they involve less judgment, management
believes that the other accounting policies discussed in Note 2 − "Summary of Significant
Accounting Polices" of the Consolidated Financial Statements included in our Annual Report on
Form 10−K for the year ended November 29, 2003 are also important to an understanding of our
financial statements. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements.

Revenue Recognition


Revenues are recorded on the accrual basis of accounting when title transfers to the customer,
which is typically at the shipping point. Innovo Group records estimated reductions to revenue
for customer programs, including co−op advertising, other advertising programs or allowances,
based upon a percentage of sales. Innovo Group also allows for returns based upon pre−approval
or in the case of damaged goods. Such returns are estimated and an allowance is provided at the
time of sale.

Accounts Receivable−−Allowance for Returns, Discounts and Bad Debts

We evaluate our ability to collect on accounts receivable and charge−backs
(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 (e.g., bankruptcy filings, 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
charge−backs based on our historical collection experience. If collection
experience deteriorates (i.e., 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.


For the year ended November 29, 2003, the balance in the allowance for returns, discounts and
bad debts reserves was $2,158,000 compared to $383,000 at November 30, 2002.

Inventory


We continually evaluate the composition of our inventories, assessing slow−turning, ongoing
product as well as product from prior seasons. Market value of distressed inventory is valued
based on historical sales trends of our individual product lines, the impact of market trends
and economic conditions, and the value of current orders relating to the future sales of this
type of inventory. Significant changes in market values could cause us to record additional
inventory markdowns.

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 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.


When we determine that the carrying value of intangibles, long−lived assets and goodwill may not
be recoverable based upon the existence of one or more of the above indicators of impairment,
we will measure any impairment based on a projected discounted cash

                                         52
flow method using a discount rate determined by our management. No impairment
indicators existed as of November 29, 2003. Changes in estimated cash flows or
the discount rate assumptions in the future could require us to record
impairment charges for the assets.

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 its 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 income. Reserves are also estimated for ongoing
audits regarding Federal, state and international issues that are currently
unresolved. We routinely monitor the potential impact of these situations and
believe that it is properly reserved.

Contingencies

We account for     contingencies in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies". SFAS No. 5
requires that we record an estimated loss from a loss contingency when
information available prior to issuance of our financial statements indicates
that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for contingencies such as legal and income
tax matters requires management to use judgment. Many of these legal and tax
contingencies can take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. Management believes that the
accruals for these matters are adequate. Should events or circumstances change,
we could have to record additional accruals.

Recently Issued Financial Accounting Standard


In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003 and is not expected to have
a material impact on Innovo Groups' consolidated results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003 and is not expected
to have a material impact on Innovo Group's consolidated results of operations
or financial position.


In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities." FIN 46 requires companies to evaluate variable interest entities to
determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies
must apply FIN 46 to entities created after January 31, 2003, and to variable interest entities
in which a company obtains an interest after that date. It applies in the first fiscal year or
interim period endings after December 15, 2003, to variable interest entities in which a company
holds a variable interest that it acquired before February 1, 2003. Adoption of FIN 46 is not
expected to have a material impact on Innovo Group's consolidated results of operations or
financial position.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We are exposed to certain market risks arising from transactions in the normal course of our
business, and from debt incurred in connection with the knit acquisition and the acquisition of
the Blue Concept Division form Azteca we have made. See Note 3 "Acquisitions" in the Notes to
the Consolidated Financial Statements. Such risk is principally associated with interest rate
and foreign exchange fluctuations, as well as changes in our credit standing.

Interest Rate Risk

Our long−term debt bears a fixed interest rate. However, because our obligation
under our receivable and inventory financing agreements
53
bear interest at floating rates (primarily JP Morgan Chase prime rate), we are
sensitive to changes in prevailing interest rates. A 10% increase or decrease in
market interest rates that affect our financial instruments would have a
immaterial impact on earning or cash flows during the next fiscal year.


Foreign Currency Exchange Rates


Foreign currency exposures arise from transactions, including firm commitments and anticipated
contracts, denominated in a currency other than an entity's functional currency, and from
foreign−denominated revenues translated into U.S. dollars. Our primary foreign currency
exposures relate to the Joe's Jeans Japan subsidiary and resulting Yen Investments. We believe
that a 10% adverse change in the Yen rate with respect to the US dollar would not have a
material impact on earning or cash flows during the next fiscal year because of the relatively
small size of the subsidiary compared to the rest of us.

We generally purchase our products in U.S. dollars. However, we source most of
our products overseas and, as such, the cost of these products may be affected
by changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which we and our foreign
competitors sell products in the same market. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We cannot assure you
that foreign currency fluctuations will not have a material adverse impact on
our financial condition and results of operations.

Manufacturing and Distribution Relationships


We purchase a significant portion of finished goods and obtain certain warehousing and
distribution services from Commerce and its affiliates and obtain credit terms which we believe
are favorable. The loss of Commerce as a vendor, or material changes to the terms, could have
an adverse impact on our business. Commerce and its affiliates are controlled by two of our
significant stockholders, Hubert Guez and Paul Guez.

Our products are manufactured by contractors located in Los Angeles, Mexico
and/or Asia, including, Hong Kong, China, Korea, Vietnam and India. The products
are then distributed out of Los Angeles or directly from the factory to the
customer. For the year ended 2003, 22% of our apparel and accessory products
were manufactured outside of North America. The rest of our accessory and
apparel products were manufactured in the United States (21%) and Mexico (57%).
All of our products manufactured in Mexico are manufactured by an affiliate of
Commerce, Azteca or its affiliates.

See "Management's Discussion & Analysis−−Manufacturing,       Warehousing,   and
Distribution" for further discussion of our use of Commerce for such services.



ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The information required by Item 8 is included in "Item 15. Exhibits, Financial Statement
Schedules and Reports on Form 8−K" of our consolidated financial statements and notes thereto,
and the consolidated financial statement schedule filed on this Annual Report on Form 10−K.


ITEM 9. CHANGES AND   DISAGREEMENTS   WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES

There have been no changes in or   disagreements   with our independent   auditors,
Ernst & Young LLP.



ITEM 9A. CONTROLS AND PROCEDURES


As of November 29, 2003, the end of the period covered by this annual report on Form 10−K, we
carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Securities and
Exchange Act Rule 15d−15.

A control system, no matter how well conceived and operated, can provide only
reasonable assurance that the objectives of the control system are met. Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
error and fraud. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues within the company have been detected. These inherent
limitations include the realities that judgments in decision−making can be
faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions,   or the degree of   compliance   with the policies or

                                         54
procedures may    deteriorate.   Because of the inherent      limitations in a
cost−effective control system, misstatements due to error or fraud may occur and
not be detected.


Our Chief Executive Officer and Chief Financial Officer have concluded, based on our evaluation
of our disclosure controls and procedures, that our disclosure controls and procedures under
Rule 13a−15(e) and Rule 15d−15(e) of the Securities Exchange Act of 1934 are effective, except
as discussed below. Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal controls, except as
discussed below.

Our independent auditors, Ernst & Young LLP, or Ernst & Young, have advised
management and the audit committee of our board of directors of the following
matters that Ernst & Young considered to be material weaknesses in our internal
controls, which constitute reportable conditions under standards established by
the American Institute of Certified Public Accountants: (i) lack of adequate
preparation of account reconciliations and analysis necessary to accurately
prepare annual financial statements; and (ii) shared accounting responsibilities
for   accounting   functions   between our    company   and Azteca    Production
International, Inc., or Azteca, and its related entities.

The primary     reasons for the lack of adequate       preparation   of account
reconciliations    and analysis to accurately prepare our annual financial
statements include, but are not limited to: (i) our significant growth in fiscal
2003 in both size and complexity, which significantly increased the number of
accounting transactions from prior reporting periods; for example, our net sales
increased from $29,609,000 in fiscal 2002 to $83,129,000 in fiscal 2003, or a
181% increase; in fiscal 2003 we acquired the Blue Concept Division; and we
began shipping branded products under our license agreements for the Fetish(TM)
and Shago(R) marks for the first time; (ii) the introduction of new operating
software to track production, delivery and sales of our products during the
third quarter of 2003; (iii) the loss of key accounting personnel during
completion of account reconciliations and analysis after our fiscal year end;
and (iv) certain accounting personnel were not sufficiently competent to
adequately reconcile and analyze certain accounts.


Our second material weakness resulted from our hiring of former Azteca accounting employees in
connection with the Blue Concept Division acquisition. During this integration, some of the
newly acquired accounting personnel have, in their transitional roles, been responsible for the
shared recording of transactions between our company and Azteca, and/or its affiliates. We
hired the Azteca accounting personnel because we believed that their historical knowledge of the
Blue Concept Division accounting process and systems would help facilitate the transition of
recording the new transactions into our books and records. Despite their historical knowledge,
we discovered during the completion of account reconciliations and analysis after our fiscal
year end that this was not the case.

These material weaknesses have been discussed in detail among the audit
committee of our board of directors, the board of directors, management and
Ernst & Young. We have assigned the highest priority to the correction of these
material weaknesses, and management and our audit committee are committed to
addressing and resolving them fully. On February 22, 2004, the audit committee
of our board of directors instructed management to improve the overall level of
our disclosure and internal controls by increasing the number and competency of
accounting personnel, including the hiring of a controller at IGI, who would
report directly to our Chief Financial Officer. The audit committee instructed
management to hire, subject to audit committee approval, a controller with
sufficient experience to function as the chief accounting officer of a public
company with appropriate public accounting experience. Management has begun the
hiring process and shall use its best efforts to find a suitable person prior to
the end of our second quarter of 2004.


In addition, prior to the report of our independent accountants we had already taken the
following actions to improve our disclosure controls and procedures and internal controls: (i)
hired a seasoned manager for our apparel division, who will be able to supervise our continued
growth and complexity and coordinate information between operations and accounting; (ii) hired
two new staff accountants; and (iii) increased training of staff on our new operating software.
Also, we are currently transferring responsibility for recording transactions between our
company and Azteca and its affiliates to non−Azteca related staff accountants and implementing
internal controls to reconcile and verify account balances and transactions between our company
and Azteca and/or its affiliates. In addition we are reviewing and revising our procedures for
the timely reconciliation of all accounts and for the appropriate review of account
reconciliation.

We are confident that our financial statements for the fiscal year ended
November 29, 2003 fairly present, in all material respects, our financial
condition, results of operations and cash flows.

                                       55
                                    PART III


Certain information required by Part III is omitted on this Annual Report on Form 10−K since we
intend to file our Definitive Proxy Statement for our next Annual Meeting of Stockholders,
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, on our
Definitive Proxy Statement no later than March 29, 2004, and certain information to be included
in the Definitive Proxy Statement is incorporated herein by reference.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


The information required by Item 10 as to directors, executive officers and Section 16 reporting
compliance is incorporated by reference from our Definitive Proxy Statement.

Our Board of Directors has determined that at least one person serving on the
Audit Committee is an "audit committee financial expert" as defined under Item
401(h) of Regulation S−K. Suhail Rizvi, the Chairman of the Audit Committee, is
an "audit committee financial expert" and is independent as defined under
applicable SEC and Nasdaq rules.


Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors,
officers and employees on May 22, 2003. Our Code of Business Conduct and Ethics is available on
our website at www.innovogroup.com/ or you may request a free copy of our Code of Business
Conduct and Ethics from:

                  Innovo Group Inc.
                  Attention: Chief Operating Officer
                  5804 East Slauson Avenue
                  Commerce, CA 90040
                  (323) 725−5526


To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to
disclose any amendments to our Code of Business Conduct and Ethics and any waiver from a
provision of the Code granted on a Form 8−K filed with the SEC within five business days
following such amendment or waiver or on our website at www.innovogroup.com within five business
days following such amendment or waiver. The information contained or connected to our website
is not incorporated by reference into this Annual Report on Form 10−K and should not be
considered a part of this or any other report that we file or furnish to the SEC.


ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 as to executive compensation is incorporated
by reference from our Definitive Proxy Statement.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN      BENEFICIAL   OWNERS AND   MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS


The information required by Item 12 as to the security ownership of certain beneficial owners
and management and related stockholder matters is incorporated by reference from our Definitive
Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 as to certain relationships and related
transactions is incorporated by reference from our Definitive Proxy Statement.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 as to principal accountant fees and services
is incorporated by reference from our Definitive Proxy Statement.

                                       56
                                                      PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8−K

(a) List of documents filed as a part of this Annual Report on Form 10−K:

              1 and 2. Financial Statements and Financial Statement Schedules




Audited Consolidated Financial Statements:                                                                           Page
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−                                                                           −−−−

Report of Independent Auditors −   Ernst &Young LLP                                                                 F−1

Consolidated Balance Sheets at November 29, 2003 and November 30, 2002                                               F−2

Consolidated Statement of Operations for the years ended November 29, 2003,
  November 30, 2002 and December 1, 2001                                                                             F−3

Consolidated Statements of Stockholders' Equity for the years ended November 29,
  2003, November 30, 2002 and December 1, 2001                                                                       F−4

Consolidated Statement of Cash Flows for the years ended November 29, 2003 and
November 30, 2002                                                                                                    F−5

Notes to Consolidated Financial Statements                                                                           F−7

Schedule II − Valuation of Qualifying Accounts                                                                       F−32




(a)3. Exhibits (listed according to the number assigned in the table in Item 601
of Regulation S−K)



Exhibit
Number          Description                                                           Document if Incorporated by Reference
−−−−−−          −−−−−−−−−−−                                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

2.1             Asset Purchase Agreement dated July 17, 2003 by and among Innovo      Exhibit 2.1 to Current Report on Form 8−K
                Azteca Apparel, Inc., Azteca Production International, Inc., Hubert   dated July 18, 2003 filed on August 1, 2003
                Guez and Paul Guez

2.2             Asset Purchase Agreement dated August 16, 2001 by and among Innovo    Exhibit 2.1 to Current Report on Form 8−K
                Group Inc., Innovo Apparel, Inc. and Azteca Production                dated September 10, 2001
                International, Inc.

3.1             Fifth Amended and Restated Certificate of Incorporation of the        Exhibit 10.73 to Annual Report on Form
                Registrant                                                            10−K for the year ended November 30, 2000
                                                                                      filed on March 15, 2001

3.2             Amended and Restated Bylaws of Registrant                             Exhibit 4.2 to Registration Statement on
                                                                                      Form S−8 (file no. 33−71576) filed on
                                                                                      November 12, 1993

4.1             Article Four of the Registrant's Amended and Restated                 Exhibit 10.73 to Annual Report on Form
                Certificate of Incorporation (included in Exhibit 3.1                 10−K for the year ended November 30, 2000
                filed herewith) 10−K for                                              filed on March 15, 2001

4.2             Certificate of Resolution of Designation, Preferences and Other       Exhibit 4.2 to Quarterly Report on Form
                Rights, $100 Redeemable 8% Cumulative Preferred Stock, Series A       10−Q/A for the period ended June 1, 2002
                dated April 4, 2002                                                   filed on July 25, 2002




                                                        57
Exhibit
Number    Description                                                           Document if Incorporated by Reference
−−−−−−    −−−−−−−−−−−                                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

4.3       Amendment to Certificate of Resolution of Designation, Preferences    Exhibit 4.3 to Quarterly Report on Form
          and Other Rights, $100 Redeemable 8% Cumulative Preferred Stock,      10−Q/A for the period ended June 1, 2002
          Series A, dated April 14, 2002.                                       filed on July 25, 2002

4.4       Form of Stock Purchase and Subscription Agreement between Innovo      Exhibit 4.1 to Quarterly Report on Form
          Group Inc. and purchasers dated as of March 19, 2003 and March 26,    10−Q for the period ended May 31, 2003
          2003                                                                  filed on July 15, 2003

4.5       Placement Agent Agreement between Innovo Group Inc. and Sanders       Exhibit 4.2 to Quarterly Report on Form
          Morris Harris, Inc. dated June 23, 2003                               10−Q for the period ended May 31, 2003
                                                                                filed on July 15, 2003

4.6       Common Stock Purchase Warrant Agreement between Innovo Group Inc.     Exhibit 4.3 to Quarterly Report on Form
          and Sanders Morris Harris, Inc. dated June 30, 2003                   10−Q for the period ended May 31, 2003
                                                                                filed on July 15, 2003

4.7       Registration Rights Agreement between Innovo Group Inc and certain    Exhibit 4.4 to Quarterly Report on Form
          purchasers dated June 30, 2003                                        10−Q for the period ended May 31, 2003
                                                                                filed on July 15, 2003

4.8       Placement Agent Agreement between Innovo Group Inc. and Pacific       Exhibit 4.4 to Quarterly report on   Form
          Summit Securities dated July 30, 2003, as amended on August 6, 2003   10−Q/A for the period ended August   30,
                                                                                2003 filed on October 17, 2003
4.9       Common Stock Purchase Warrant Agreement between Innovo Group Inc.     Exhibit 4.5 to Quarterly Report on   Form
          and certain purchasers dated August 29, 2003                          10−Q/A for the period ended August   30,
                                                                                2003 filed on October 17, 2003

4.10      Registration Rights Agreement between Innovo Group Inc and certain    Exhibit 4.6 to Quarterly Report on Form
          purchasers dated August 29, 2003                                      10−Q/A for the period ended August 30,
                                                                                2003 filed on October 17, 2003

4.11      Form of Securities Purchase Agreement dated December 1, 2003          Exhibit 4 to Current Report on Form 8−K
                                                                                dated December 1, 2003 filed on December
                                                                                2, 2003

10.1      Note executed by NASCO, Inc. and payable to First Independent Bank,   Filed with Amendment No. 2 to the
          Gallatin, Tennessee in the principal amount of $950,000 dated         Registration Statement on Form S−1(file
          August 6, 1992                                                        no. 33−51724) filed November 12, 1992

10.2      Authorization and Loan Agreement from the U.S. Small Business         Filed with Amendment No. 2 to the
          Administration, Nashville, Tennessee dated July 21, 1992              Registration Statement on Form S−1 (file
                                                                                no. 33−51724) filed November 12, 1992

10.3      Indemnity Agreement between NASCO, Inc. and First Independent Bank,   Filed with Amendment No. 2 to the
          Gallatin, Tennessee                                                   Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992

10.4      Compliance Agreement between NASCO, Inc. and First Independent        Filed with Amendment No. 2 to the
          Bank, Gallatin, Tennessee                                             Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992

10.5      Assignment of Life Insurance Policy upon the life of Patricia         Filed with Amendment No. 2 to the
          Anderson−Lasko to First Independent Bank, Gallatin, Tennessee dated   Registration Statement on Form S−1(file
          July 31, 1992                                                         no. 33−51724) filed November 12, 1992

10.6      Guaranty of Patricia Anderson on behalf of NASCO, Inc. in favor of    Filed with Amendment No. 2 to the
          First Independent Bank, Gallatin, Tennessee dated August 6, 1992      Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992




                                                 58
Exhibit
Number    Description                                                           Document if Incorporated by Reference
−−−−−−    −−−−−−−−−−−                                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

10.7      Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in favor of    Filed with Amendment No. 2 to the
          First Independent Bank, Gallatin, Tennessee dated August 6, 1992      Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992

10.8      Guaranty of Innovo Group, Inc. on behalf of NASCO, Inc. in favor of   Filed with Amendment No. 2 to the
          First Independent Bank, Gallatin, Tennessee dated August 6, 1992      Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992

10.9      Guaranty of NASCO Products, Inc. on behalf of NASCO, Inc. in favor    Filed with Amendment No. 2 to the
          of First Independent Bank, Gallatin, Tennessee dated August 6, 1992   Registration Statement on Form S−1(file
                                                                                no. 33−51724) filed November 12, 1992

10.10     Merger Agreement between Innovo Group Inc and TS Acquisition, Inc.    Exhibit 10.1 to Current Report on Form 8−K
          and Thimble Square, Inc. and the stockholders of Thimble Square       dated April 12, 1996 filed on April 29,
          Inc. dated April 12, 1996                                             1996

10.11     Property Acquisition Agreement between Innovo Group Inc., TS          Exhibit 10.2 to Current Report on Form 8−K
          Acquisition, Inc., Philip Schwartz and Lee Schwartz dated April 12,   dated April 12, 1996 filed on April 29,
          1996                                                                  1996

10.12     Common Stock and Warrant Purchase Agreement between Innovo Group      Exhibit 10.63 to Current Report on Form
          Inc. and Commerce Investment Group LLC dated August 11, 2000          8−K/A dated August 11, 2000 filed on
                                                                                September 15, 2000

10.13     Warrant Agreement between Innovo Group Inc. and Commerce Investment   Exhibit 10.64 to Current Report on Form
          Group LLC dated August 11, 2000                                       8−K/A dated August 11, 2000 filed on
                                                                                September 15, 2000

10.14     Investor Rights Agreement between Innovo Group Inc., the Furrow       Exhibit 10.65 to Current Report on Form
          Group, the Board Members and Commerce Investment Group LLC dated      8−K/A dated August 11, 2000 filed on
          August 11, 2000                                                       September 15, 2000

10.15     Investor Rights Agreement dated October 31, 2000between Innovo        Exhibit 10.75 to Annual Report on Form
          Group Inc., the Furrow Group, the Board Members and Third             10−K for the period ended November 30,
          Millennium Properties, Inc. JAML, LLC and Innovation, LLC [sic]       2000 filed on March 15, 2001

10.16     Common Stock and Warrant Purchase Agreement between Innovo Group      Exhibit 10.79 to Quarterly Report on Form
          Inc. and JD Design, LLC dated February 7, 2001                        10−Q for the period ended March 3, 2001
                                                                                filed on April 17, 2001

10.17     Stock Purchase Warrant between Innovo Group Inc. and JD Design, LLC   Exhibit 10.80 to Quarterly Report on Form
          dated February 7, 2001                                                10−Q for the period ended March 3, 2001
                                                                                filed on April 17, 2001

10.18     Employment Agreement between Innovo Group Inc. and Joe Dahan dated    Exhibit 10.81 to Quarterly Report on Form
          February 7, 2001                                                      10−Q for the period ended March 3, 2001
                                                                                filed on April 17, 2001

10.19     Stock Incentive Agreement between Innovo Group Inc. and Joe Dahan     Exhibit 10.82 to Quarterly Report on Form
          dated February 7, 2001                                                10−Q for the period ended March 3, 2001
                                                                                filed on April 17, 2001

10.20     License Agreement between Innovo Group Inc and JD Design, LLC dated   Exhibit 10.83 to Quarterly Report on Form
          February 7, 2001                                                      10−Q for the period ended March 3, 2001
                                                                                filed on April 17, 2001

10.21     Form of Investment Letter relating to purchase of $100 Redeemable     Exhibit 10.85 to Quarterly Report on Form
          8% Cumulative Preferred Stock, Series A, of Innovo Group Inc. dated   10−Q/A for the period ended June 1, 2002
          April 4, 2002                                                         filed on July 25, 2002

10.22     Form of Limited Partnership Agreement relating to Metra Capital LLC   Exhibit 10.86 to Quarterly Report on Form
          and Innovo Realty, Inc. as limited partners                           10−Q/A for the period ended June 1, 2002
                                                                                filed on July 25, 2002




                                                 59
Exhibit
Number    Description                                                           Document if Incorporated by Reference
−−−−−−    −−−−−−−−−−−                                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

10.23     Form of Sub−Asset Management Agreement between Metra Management,      Exhibit 10.87 to Quarterly Report on Form
          L.P., Innovo Realty Inc. and a Sub−Asset Manager                      10−Q/A for the period ended June 1, 2002
                                                                                filed on July 25, 2002

10.24     Distribution of Cash Flow and Capital Events Proceeds Letter          Exhibit 10.88to Quarterly Report on Form
          Agreement dated April 5, 2002, between Innovo Realty, Inc., Innovo    10−Q/A for the period ended June 1, 2002
          Group Inc., Income Opportunity Realty Investors, Inc.,                filed on July 25, 2002
          Transcontinental Realty Investors, Inc., American Realty
          Investors, Inc., and Metra Capital, LLC

10.25     Distribution of Capital Events Letter Agreement dated April 5,        Exhibit 10.89 to Quarterly Report on Form
          2002, between Metra Capital, LLC, Innovo Realty, Inc., Innovo Group   10−Q/A for the period ended June 1, 2002
          Inc., Income Opportunity Realty Investors, Inc., Transcontinental     filed on July 25, 2002
          Realty Investors, Inc., and American Realty Investors, Inc.

10.26     Reimbursement of Legal Fees Letter dated April 5, 2002 between        Exhibit 10.90 to Quarterly Report on Form
          Innovo Realty, Inc., Innovo Group Inc., Income Opportunity Realty     10−Q/A for the period ended June 1, 2002
          Investors, Inc., Transcontinental Realty Investors, Inc., American    filed on July 25, 2002
          Realty Investors, Inc. and Third Millennium Partners, LLC

10.27     Nonqualified Stock Option Agreement between Innovo Group Inc. and     Exhibit 10.85 to Form S−8 filed on January
          Samuel J. Furrow dated June 5, 2001                                   17, 2003

10.28     Nonqualified Stock Option Agreement between Innovo Group Inc. and     Exhibit 10.86 to Form S−8 filed on January
          Patricia Anderson−Lasko dated June 5, 2001                            17, 2003

10.29     Nonqualified Stock Option Agreement between Innovo Group Inc. and     Exhibit 10.87 to Form S−8 filed on January
          Samuel J. Furrow dated December 11, 2002                              17, 2003

10.30     Nonqualified Stock Option Agreement between Innovo Group Inc. and     Exhibit 10.88 to Form S−8 filed on January
          Patricia Anderson−Lasko dated December 11, 2002                       17, 2003

10.31     Letter of Intent regarding License Agreement between Mattel, Inc.     Exhibit 10.91 to the Annual Report on Form
          and Innovo Group Inc. dated July 25, 2002                             10−K for the year ended November 30, 2003
                                                                                filed on March 17, 2003

10.32     License Agreement between Bravado International Group Inc. and        Exhibit 10.93 to the Annual Report on Form
          Innovo Azteca Apparel, Inc. dated October 15, 2002                    10−K for the year ended November 30, 2003
                                                                                filed on March 17, 2003

10.33     Trademark License Agreement between Blondie Rockwell, Inc. and        Exhibit 10.96 to the Quarterly Report on
          Innovo Azteca Apparel, Inc. dated as of February 13, 2003             Form 10−Q for the period ending March 1,
                                                                                2003 filed on April 15, 2003

10.34     First Amendment to Trademark License Agreement between Blondie        Exhibit 10.14 to Quarterly Report on Form
          Rockwell, Inc. and Innovo Azteca Apparel, Inc. effective as of        10−Q/A for the period ended August 30,
          September 8, 2003                                                     2003 filed on October 17, 2003.

10.35     Second Amendment to Trademark License Agreement between Innovo        Filed herewith
          Group Inc. and Blondie Rockwell, Inc. dated effective as of
          February 18, 2004

10.36     Promissory Note between Innovo Group Inc. and Marc Crossman dated     Exhibit 10.97 to the Quarterly Report on
          February 7, 2003                                                      Form 10−Q for the period ending March 1,
                                                                                2003 filed on April 15, 2003




                                                 60
Exhibit
Number    Description                                                            Document if Incorporated by Reference
−−−−−−    −−−−−−−−−−−                                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

10.37     Promissory Note between Innovo Group Inc. and Marc Crossman dated      Exhibit 10.98 to the Quarterly Report on
          February 13, 2003                                                      Form 10−Q for the period ending March 1,
                                                                                 2003 filed on April 15, 2003


10.38     Second Amendment to Promissory Note between Innovo Group Inc. and      Filed herewith
          Marc Crossman dated February 9, 2003

10.39     Second Amendment to Promissory Note between Innovo Group Inc. and      Filed herewith
          Marc Crossman dated February 9, 2003

10.40     Supply Agreement between Innovo Group Inc. and Commerce Investment     Exhibit 10.1 to Quarterly Report on Form
          Group, LLC dated August 11, 2000                                       10−Q for the period ended May 31, 2003
                                                                                 filed on July 15, 2003

10.41     Distribution Agreement between Innovo Group Inc. and Commerce          Exhibit 10.2 to Quarterly Report on Form
          Investment Group, LLC dated August 11, 2000                            10−Q for the period ended May 31, 2003
                                                                                 filed on July 15, 2003

10.42     License Agreement between Innovo, Inc. and Michael Caruso &           Exhibit 10.3 to Quarterly Report on Form
          Company, Inc. dated March 26, 2001 and Amendment Letter dated July     10−Q for the period ended May 31, 2003
          26, 2002                                                               filed on July 15, 2003

10.43     Amendment to License Agreement between Innovo Inc. and IP Holdings     Exhibit 10.92 to the Annual Report on Form
          LLC dated effective as of April 1, 2003                                10−K for the year ended November 30, 2003
                                                                                 filed on March 17, 2003

10.44     Factoring Agreement dated June 1, 2001 between Joe's Jeans, Inc.       Exhibit 10.4 to Quarterly Report on Form
          and CIT Commercial Services                                            10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.45     Factoring Agreement dated June 1, 2001 between Innovo, Inc. and CIT    Exhibit 10.6 to Quarterly Report on Form
          Commercial Services                                                    10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.46     Factoring Agreement dated September 10, 2001 between Innovo Azteca     Exhibit 10.5 to Quarterly Report on Form
          Apparel, Inc. and CIT Commercial Services                              10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.47     Inventory Security Agreement dated August 20, 2002 between Joe's       Exhibit 10.7 to Quarterly Report on Form
          Jeans, Inc. and CIT Commercial Services                                10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.48     Inventory Security Agreement dated August 20, 2002 between Innovo      Exhibit 10.8 to Quarterly Report on Form
          Azteca Apparel, Inc. and CIT Commercial Services                       10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.49     Inventory Security Agreement dated August 20, 2002 between Innovo,     Exhibit 10.9 to Quarterly Report on Form
          Inc. and CIT Commercial Services                                       10−Q/A for the period ended August 30,
                                                                                 2003 filed on October 17, 2003

10.50     Amendment to Factoring Agreement originally dated June 1, 2001         Exhibit 10.6 to Quarterly Report on Form
          between Joe's Jeans, Inc. and CIT Commercial Services dated            10−Q for the period ended May 31, 2003
          effective April 23, 2003                                               filed on July 15, 2003

10.51     Amendment to Factoring Agreement originally dated June 1, 2001         Exhibit 10.8 to Quarterly Report on Form
          between Innovo Inc. and CIT Commercial Services dated effective        10−Q for the period ended May 31, 2003
          April 23, 2003                                                         filed on July 15, 2003




                                                 61
Exhibit
Number    Description                                                           Document if Incorporated by Reference
−−−−−−    −−−−−−−−−−−                                                           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

10.52     Amendment to Factoring Agreement originally dated September 10,       Exhibit 10.7 to Quarterly Report on Form
          2001 between Innovo Azteca Apparel, Inc. and CIT Commercial           10−Q for the period ended May 31, 2003
          Services dated effective April 23, 2003                               filed on July 15, 2003

10.53     Supply Agreement between Innovo Azteca Apparel, Inc. and AZT          Exhibit 10.1 to Current Report on Form 8−K
          International SA de CV dated July 17, 2003                            dated July 18, 2003 filed on August 1, 2003

10.54     Master Distribution and Licensing Agreement between Joe's Jeans,      Exhibit 10.3 to Quarterly Report on Form
          Inc. and Itochu Corporation dated July 10, 2003                       10−Q/A for the period ended August 30,
                                                                                2003 filed on October 17, 2003

10.55     2000 Employee Stock Incentive Plan, as amended                        Exhibit 99.1 to Current Report on Form 8−K
                                                                                dated July 18, 2003 filed on August 1, 2003

10.56     2000 Director Option Plan                                             Attachment E to Definitive Proxy Statement
                                                                                on Schedule 14A filed on September 19, 2000

10.57     Sublease Agreement between Innovo Group Inc. and WRC Media Inc.       Filed herewith
          dated July 28, 2003

10.58     Agreement of Lease between 500−512 Seventh Avenue Limited             Filed herewith
          Partnership and WRC Media, Inc. dated as of March 2000 relating to
          Sublease Agreement filed as Exhibit 10.57 hereto

10.59     Assignment and Amendment of License Agreement, Amendment of           Filed herewith
          Guaranty and Consent Agreement among Innovo Azteca Apparel, Inc.,
          B.J. Vines, Inc., and Blue Concept, LLC dated February 3, 2004

10.60     Letter License Agreement between B.J. Vines, Inc. and Blue Concept    Filed herewith
          LLC executed on January 8, 2004 relating to Assignment and
          Amendment of License Agreement, Amendment of Guaranty and
          Consent Agreement filed as Exhibit 10.59 hereto

10.61     Master Distribution Agreement between Joe's Jeans, Inc. and Beyond    Filed herewith
          Blue, Inc. dated effective as of January 1, 2004

14        Code of Business Conduct and Ethics adopted as of May 22, 2003        Filed herewith

21        Subsidiaries of the Registrant                                        Filed herewith

23        Consent of Ernst &Young LLP                                          Filed herewith

24.1      Power of Attorney (included on page 64)                               Filed herewith

31.1      Certification of the Chief Executive Officer pursuant to 18 U.S.C.    Filed herewith
          Section 1350, as adopted pursuant to Section 302 of the
          Sarbanes−Oxley Act of 2002.

31.2      Certification of the Chief Financial Officer pursuant to 18 U.S.C.    Filed herewith
          Section 1350, as adopted pursuant to Section 302 of the
          Sarbanes−Oxley Act of 2002.

32        Certification of the Chief Executive Officer and Chief Financial      Filed herewith
          Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
          Section 906 of the Sarbanes−Oxley Act of 2002.




                                                    62
(b). Reports on Form 8−K for the last fiscal quarter



    Date                 Purpose
    −−−−                 −−−−−−−

    September 30, 2003   To report an amendment the current report on Form 8−K filed on
                         August 1, 2003 to include financial statements of the Blue Concept
                         Division of Azteca Production International, Inc. as required by


                         Item 7(a).

    October 15, 2003     To report a press release dated October 15, 2003 announcing      our
                         financial results for the third quarter ended August 30, 2003.

    October 17, 2003     To report an amendment the Form 8−K/A filed on September 30, 2003
                         to delete the last sentence of the third paragraph of Note 3 to
                         Financial Statements under sub−paragraph (a)(iii) of Item 7(a).

    December 2, 2003     To report a press release dated December 2, 2003 announcing the
                         completion of a private placement of (i) 2,996,667 shares of its
                         common stock at a purchase price of $3.00 per share and warrants to
                         purchase an additional 599,333 shares of its common stock at an
                         exercise price of $4.00 per share, and (ii) attaching a form of
                         Securities Purchase Agreement dated December 1, 2003.



                                        63
                                                 SIGNATURES


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

                                             INNOVO GROUP INC.

                                    By: /s/ Samuel J. Furrow, Jr.
                                        Samuel J. Furrow, Jr.
                                       Chief Executive Officer



                                             February 27, 2004

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below   constitutes   and   appoints   Samuel J.    Furrow,   Jr., his or her
attorney−in−fact, each with the power of substitution for him or any and all
capacities, to sign any amendments to this Annual Report on Form 10−K and to
file the same with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each said attorney−in−fact, or his or her substitutes, may do or cause to
be done by virtue hereof. Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.



                     Signature                                         Capacity                           Date
                     −−−−−−−−−                                         −−−−−−−−                           −−−−


                                                      Chief Executive Officer (Principal
  /s/ Samuel J. Furrow, Jr.                           Executive Officer) and Director      February 27, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Samuel J. Furrow, Jr.

                                                      Chief Financial Officer (Principal
  /s/ Marc B. Crossman                                Financial Officer) and Director      February 27, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Marc B. Crossman

  /s/ Patricia Anderson                               President and Director               February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Patricia Anderson

  /s/ Samuel J. Furrow                                Chairman of the Board of Directors   February 25, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Samuel J. Furrow

  /s/ John Looney                                     Director                             February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  John Looney, M.D.

  /s/ Daniel Page                                     Director                             February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Daniel Page

  /s/ Suhail R. Rizvi                                 Director                             February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Suhail R. Rizvi

  /s/ Kent Savage                                     Director                             February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Kent Savage

  /s/ Vincent Sanfilippo                              Director                             February 26, 2004
  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  Vincent Sanfilippo




                                                       64
Innovo Group and Subsidiaries

Index to Consolidated Financial Statements



Audited Consolidated Financial Statements:                                        Page
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−                                        −−−−

Report of Independent Auditors − Ernst &Young LLP

Consolidated Balance Sheets at November 29, 2003 and November 30, 2002

Consolidated Statement of Operations for the years ended November 29, 2003,
November 30, 2002 and December 1, 2001 Consolidated Statements of Stockholders'

Equity for the years ended November 29, 2003, November 30, 2002
and December 1, 2001

Consolidated Statement of Cash Flows for the years ended November 29, 2003 and
November 30, 2002

Notes to Consolidated Financial Statements

Schedule II − Valuation of Qualifying Accounts
Report of Independent Auditors

Board of Directors
Innovo Group Inc.


We have audited the accompanying consolidated balance sheets of Innovo Group Inc. and
subsidiaries as of November 29, 2003 and November 30, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the three years in
the period ended November 29, 2003. Our audits also included the financial statement schedule
listed in the index at


Item 15(a). These financial statements and schedule are the responsibility of Innovo Group
Inc.'s management. Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovo Group Inc.
and subsidiaries as of November 29, 2003 and November 30, 2002 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 29, 2003 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects
the information set forth therein.


                                             /s/ Ernst & Young LLP

Los Angeles, California
February 20, 2004

                                       F−1
                                  INNOVO GROUP INC AND SUBSIDIARIES
                                     CONSOLIDATED BALANCE SHEETS
                                (in thousands, except per share data)



                                                                           11/29/03     11/30/02
                                                                           −−−−−−−−     −−−−−−−−

                                    ASSETS
CURRENT ASSETS
      Cash and cash equivalents                                            $    7,248   $     222
      Accounts receivable, and due from factor net of allowance for
      customer credits and allowances of $2,158 (2003) and $383 (2002)        1,683        2,737
      Inventories                                                             7,524        5,710
      Prepaid expenses &other current assets                                 2,115          279
                                                                           −−−−−−−−     −−−−−−−−
TOTAL CURRENT ASSETS                                                         18,570        8,948
                                                                           −−−−−−−−     −−−−−−−−

PROPERTY, PLANT and EQUIPMENT, net                                            2,067        1,419
GOODWILL                                                                     12,592        4,271
INTANGIBLE ASSETS, NET                                                       13,058          487
OTHER ASSETS                                                                     78           18
                                                                           −−−−−−−−     −−−−−−−−

TOTAL ASSETS                                                               $ 46,365     $ 15,143
                                                                           ========     ========

                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable and accrued expenses                                $  6,128     $  2,438
      Due to factor                                                             332           −−
      Due to related parties                                                    579        4,250
      Note payable to officer                                                   500           −−
      Current maturities of long−term debt (including related parties)          168          756
                                                                           −−−−−−−−     −−−−−−−−
TOTAL CURRENT LIABILITIES                                                     7,707        7,444

LONG−TERM DEBT, less current maturities (including related parties)            22,176       2,631

Commitments and Contingencies

8% Redeemable preferred stock, $0.10 par value: Authorized shares−5,000,
194 shares (2003 and 2002)                                                         −−          −−
STOCKHOLDERS' EQUITY
      Common stock, $0.10 par − shares, Authorized 40,000
      Issued and outstanding 25,785 (2003), and 14,901 (2002)                 2,579        1,491
      Additional paid−in capital                                             59,077       40,343
      Accumulated deficit                                                   (41,824)     (33,507)
      Promissory note−officer                                                  (703)        (703)
      Treasury stock, 71 shares (2003) and 58 shares (2002)                  (2,588)      (2,537)
      Accumulated other comprehensive loss                                      (59)         (19)
                                                                           −−−−−−−−     −−−−−−−−
TOTAL STOCKHOLDERS' EQUITY                                                   16,482        5,068
                                                                           −−−−−−−−     −−−−−−−−

                        TOTAL LIABILITIES and STOCKHOLDERS' EQUITY         $ 46,365     $ 15,143
                                                                           ========     ========




See accompanying notes

                                                        F−2
                           INNOVO GROUP INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF OPERATIONS
                          (in thousands, except per share data)



                                                                   Year Ended
                                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                    11/29/03         11/30/02         12/01/01
                                                    −−−−−−−−         −−−−−−−−         −−−−−−−−

NET SALES                                           $ 83,129        $ 29,609         $  9,292
COST OF GOODS SOLD                                    70,153          20,072            6,335
                                                    −−−−−−−−        −−−−−−−−         −−−−−−−−
        Gross profit                                  12,976           9,537            2,957

OPERATING EXPENSES
        Selling, general and administrative           19,264           8,092            3,189
        Depreciation and amortization                  1,227             256              167
                                                    −−−−−−−−        −−−−−−−−         −−−−−−−−
                                                      20,491           8,348            3,356

INCOME (LOSS) FROM OPERATIONS                           (7,515)          1,189             (399)

INTEREST EXPENSE                                      (1,216)           (538)            (211)
OTHER INCOME                                             526             235               84
OTHER EXPENSE                                            (68)           (174)              (3)
                                                    −−−−−−−−        −−−−−−−−         −−−−−−−−

INCOME (LOSS) BEFORE INCOME TAXES                       (8,273)            712             (529)

INCOME TAXES                                              44             140               89
                                                    −−−−−−−−        −−−−−−−−         −−−−−−−−

NET INCOME (LOSS)                                   $ (8,317)       $    572         $ (618)2
                                                    ========        ========         ========

NET INCOME (LOSS) PER SHARE:
        Basic                                       $    (0.49)     $     0.04       $    (0.04)
        Diluted                                     $    (0.49)     $     0.04       $    (0.04)

WEIGHTED AVERAGE SHARES OUTSTANDING
        Basic                                           17,009          14,856           14,315
        Diluted                                         17,009          16,109           14,315



See accompanying notes

                                              F−3
                               INNOVO GROUP INC AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                        (in thousands)



                                                                                                                     Other      Total
                                                   Common Stock    Additional            Promissory               Comprehen−    Stock−
                                                −−−−−−−−−−−−−−−−−−   Paid−In Accumulated    Note      Treasury       sive      holders'
                                                Shares   Par Value   Capital    Deficit    Officer      Stock        Loss       Equity
                                                −−−−−−− −−−−−−−−− −−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−   −−−−−−−−    −−−−−−−−−−   −−−−−−−−

Balance, November 30, 2000                      13,721    $1,371   $ 38,977    $(33,461)    $(703)     $(2,426)      $ −−      $  3,758
Issuance of common stock for acquisitions        1,200       120      1,249          −−        −−           −−         −−         1,369
Common stock offering expenses                      −−        −−        (35)         −−        −−           −−         −−           (35)
Expense associated with options and warrants        −−        −−         86          −−        −−           −−         −−            86
Treasury Stock Purchased                            −−        −−         −−          −−        −−          (41)        −−           (41)
Net Loss                                            −−        −−         −−        (618)       −−           −−         −−          (618)
                                               −−−−−−−    −−−−−−   −−−−−−−−    −−−−−−−−     −−−−−      −−−−−−−       −−−−      −−−−−−−−

Balance, December 1, 2001                       14,921     1,491     40,277     (34,079)     (703)      (2,467)        −−         4,519
Net Income                                          −−        −−         −−         572        −−           −−         −−           572
Foreign curreny translation adjustment              −−        −−         −−          −−        −−           −−        (19)          (19)
                                                                                                                               −−−−−−−−
Comprehensive income                                −−        −−         −−          −−        −−           −−         −−           553
Common stock offering expenses                      −−        −−        (25)         −−        −−           −−         −−           (25)
Expense associated with options and warrants        −−        −−         91          −−        −−           −−         −−            91
Cancelled shares                                   (20)       −−         −−          −−        −−           −−         −−            −−
Treasury stock purchased                            −−        −−         −−          −−        −−          (70)        −−           (70)
                                               −−−−−−−    −−−−−−   −−−−−−−−    −−−−−−−−     −−−−−      −−−−−−−       −−−−      −−−−−−−−

Balance, November 30, 2002                      14,901     1,491     40,343     (33,507)     (703)      (2,537)       (19)        5,068
Net loss                                            −−        −−         −−      (8,317)       −−           −−         −−        (8,317)
Foreign curreny translation adjustment              −−        −−         −−          −−        −−           −−        (40)          (40)
                                                                                                                               −−−−−−−−
Comprehensive loss                                  −−        −−         −−          −−        −−           −−         −−        (8,357)
Proceeds from sale of stock, net                 6,236       624     16,916          −−        −−           −−         −−        17,540
Treasury stock purchased                            −−        −−         −−          −−        −−          (51)        −−           (51)
Expense associated with options and warrants        −−        −−        101          −−        −−           −−         −−           101
Exercise of stock options                           50         5         77          −−        −−           −−         −−            82
Exercise of warrants                             4,598       459      1,640          −−        −−           −−         −−         2,099
                                               −−−−−−−    −−−−−−   −−−−−−−−    −−−−−−−−     −−−−−      −−−−−−−       −−−−      −−−−−−−−

Balance, November 29, 2003                      25,785    $2,579   $ 59,077    $(41,824)    $(703)     $(2,588)      $(59)     $ 16,482
                                               =======    ======   ========    ========     =====      =======       ====      ========




See accompanying notes

                                                          F−4
                           INNOVO GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (in thousands)



                                                                       Year Ended
                                                         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                         11/29/03        11/30/02        12/01/01
                                                         −−−−−−−−        −−−−−−−−        −−−−−−−−

Net income (loss)                                        $ (8,317)       $   572         $   (618)
Adjustment to reconcile net income (loss)
   to cash provided by (used in) operating activities:
      Depreciation                                           232              86               92
      Loss on sale of fixed assets                             9              90                2
      Amortization of intangibles                            943             122               35
      Amortization of licensing rights                        48              48               40
      Stock compensation expenses                            101              91               86
      Provision for uncollectible accounts                 1,775             219              128
      Changes in current assets and liabilities:
         Accounts receivable                                 (721)        (1,490)           (882)
         Inventories                                       (1,814)        (3,300)            933
         Prepaid expenses and other                        (1,746)          (117)            (86)
         Due to related parties                            (3,976)         3,444             698
         Other long term assets                               (61)            (3)              4
         Accounts payable and accrued expenses              3,670          1,742          (1,064)
                                                         −−−−−−−−        −−−−−−−         −−−−−−−
Cash (used in) provided by operating activities          $ (9,857)       $ 1,504         $ (632)



                                                  F−5
CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of fixed assets                      $      6    $    −−    $ 1,082
Proceeds from investment in real estate                    1,013        436         −−
Redemption of preferred shares                              (798)      (436)        −−
Purchases of fixed assets                                   (895)      (622)       (61)
Acquisition costs                                            (62)        −−        (36)
                                                        −−−−−−−−    −−−−−−−    −−−−−−−
Cash (used in) provided by   investing activities       $   (736)   $ (622)    $   985

CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock                              $    (51)   $   (70)   $   (41)
Payments on notes payables and long term debt               (744)      (838)    (1,164)
Factor borrowings                                            332         −−         −−
Proceeds from note payable to officer                        500         −−         −−
Exercise of stock options                                     82         −−         −−
Proceeds from issuance of stock, net                      17,540        (25)       (35)
                                                        −−−−−−−−    −−−−−−−    −−−−−−−
Cash provided by (used in) financing activities         $ 17,659    $ (933)    $(1,240)

Effect of exchange rate on cash                              (40)       (19)         −−

NET CHANGE IN CASH AND CASH EQUIVALENTS                 $   7,026   $   (70)   $   (887)

CASH AND CASH EQUIVALENTS, at beginning of period            222        292      1,179
                                                        −−−−−−−−    −−−−−−−    −−−−−−−

CASH AND CASH EQUIVALENTS, at end of period             $ 7,248     $   222    $   292
                                                        ========    =======    =======

Supplemental Disclosures of Cash Flow Information:
   Cash Paid for Interest                               $   1,008   $   519    $    110
   Cash Paid for Taxes                                  $      89   $    28    $     −−




During fiscal 2002, the Company issued 195,295 shares of its cumulative non−convertible
preferred stock with an 8% coupon in exchange for real estate partnership interests.

                                                  F−6
                                INNOVO GROUP INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Business Description


Innovo Group Inc.'s (Innovo Group) principle business activity involves the design, development
and worldwide marketing of high quality consumer products for the apparel and accessory markets.
Innovo Group operates its consumer products business through three wholly−owned, operating
subsidiaries, Innovo, Inc. (Innovo), Joe's Jeans, Inc. (Joe's), and Innovo Azteca Apparel, Inc.
(IAA) with Innovo Group and Joe's having two wholly−owned operating subsidiaries, Innovo Hong
Kong Limited (IHK) and Joe's Jeans Japan, Inc. (JJJ), respectively. Innovo Group's products are
manufactured by independent contractors located in Los Angeles, Mexico and/or Asia, including,
Hong Kong, China, Korea, Vietnam and India. The products are then distributed out of Los Angeles
or directly from the factory to the customer.

During fiscal year 2001, Innovo Group changed its fiscal year end from November
30 of each year to the Saturday closest to November 30. For fiscal years 2003,
2002 and 2001, the years ended on November 29, 2003, November 30, 2002 and
December 1, 2001, respectively. These fiscal year periods are referred to as
2003, 2002 and 2001, respectively, in the accompanying Notes to Consolidated
Financial Statements.

Restructuring of Operations


In connection with a strategic equity investment by Commerce Investment Group, LLC (Commerce)
in 2000, Innovo Group shifted manufacturing to third−party foreign manufacturers and outsourced
certain distribution functions to Commerce to increase the effectiveness of its distribution
network and to reduce freight costs. Innovo Group entered into certain supply and distribution
agreements with Commerce. These agreements provide for Commerce or its designated affiliates to
manufacture and supply specified products to Innovo Group at agreed upon prices. In addition,
Commerce provides distribution services to Innovo Group for certain of its products for an
agreed upon fee, including warehousing, shipping and receiving, storage, order processing,
billing, customer service, information systems, maintenance of inventory records, and direct
labor and management services. These agreements were renewed for a two−year term ending fiscal
2004 and are renewable thereafter for consecutive two−year terms unless terminated by either
party with 90 days notice. There are no minimum purchase or distribution obligations during
these renewal periods.

Pursuant to the Commerce transaction and related agreements, Innovo Group
relocated its headquarters     and distribution    operations to Los Angeles,
California, and transitioned its manufacturing needs to Mexican production
facilities operated by an affiliate of Commerce. Innovo Group continues to
maintain its Innovo subsidiary operations, which focuses on accessory products,
in Knoxville, Tennessee, the site of its former headquarters.


Innovo Group experienced a significant operating loss and negative cash flow from operations for
the year ended November 29, 2003. Innovo Group historically has funded operations by equity
financing through private placements, credit arrangements with suppliers and factoring
agreements for working capital needs. From time to time, Innovo Group has obtained short−term
working capital loans from senior members of management and/or members of the Board of
Directors.

Other Operations


Innovo Group, through its wholly−owned operating subsidiary Leasall Management, Inc. (Leasall)
owns real property located in Springfield, Tennessee which formerly served as Innovo Group's
headquarters. Leasall currently leases this property to third parties. In April 2002, Innovo
Group, through its wholly owned operating subsidiary, Innovo Group Realty Inc. (IRI), entered
into a real estate investment transaction by purchasing limited partnership interests in 22
limited partnerships that subsequently acquired limited partnerships in 28 apartment buildings
consisting of approximately 4,000 apartment units. See Note 5.

2.       Summary of Significant Accounting Policies

Principles of Consolidation


The accompanying consolidated financial statements include the accounts of Innovo Group and its
wholly owned subsidiaries. All significant intercompany transactions and balances have been
eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires

                                       F−7
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. The most significant estimates affect the
evaluation of contingencies, and the determination of allowances for accounts
receivable and inventories. Actual results could differ from these estimates.


Revenue Recognition


Revenues are recorded when title transfers to the customer, which is typically at the shipping
point. Innovo Group records estimated reductions to revenue for customer programs, including
co−op advertising, other advertising programs or allowances which are based upon a percentage
of sales. Innovo Group also allows for returns based upon pre−approval or for damaged goods.
Such returns are estimated and an allowance is provided at the time of sale.

Shipping and Handling Costs


Innovo Group outsources its distribution functions to an affiliate of Commerce or, in certain
cases, to other third party distributors. Shipping and handling costs include costs to
warehouse, pick, pack and deliver inventory to customers. In certain cases Innovo Group is
responsible for the cost of freight to deliver goods to the customer. Shipping and handling
costs were approximately $1,834,000, $1,023,000 and $408,000 for the years ended 2003, 2002, and
2001, respectively, and are included in cost of goods sold. Freight billed to customers that is
included in Innovo Group sales for the years ended 2003, 2002 and 2001 were $24,000, $201,000
and $77,000 respectively.

Earnings (loss) Per Share

Net income (loss) per share has been computed in accordance with Financial
Accounting Standard Board (FASB) Statement No. 128, "Earnings Per Share."

Comprehensive Income (loss)


Assets and liabilities of the Japan and Hong Kong divisions are translated at the rate of
exchange in effect on the balance sheet date. Income and expenses are translated at the average
rates of exchange prevailing during the year. The functional currency in which Innovo Group
transacts business is the Japanese yen and Hong Kong dollar. Comprehensive income (loss)
consists of net income (loss) and foreign currency gains and losses resulting from translation
of assets and liabilities.

Advertising Costs


Advertising costs are expensed as incurred, or, in the case of media ads, upon first airing,
except for brochures and catalogues that are capitalized and amortized over their expected
period of future benefits.

Capitalized costs related to catalogues and brochures are included in prepaid
expenses and other current assets. Advertising expenses included in selling,
general and administrative expenses were approximately $985,000, $287,000, and
$114,000 for the years ended 2003, 2002, and 2001, respectively.


Advertising costs include items incurred in connection with royalty agreements or amounts paid
to licensors pursuant to royalty agreements. Included in prepaid expenses is $985,000,
representing prepaid advertising royalties pursuant to license agreements for the year ended
2003.

Financial Instruments


The fair values of Innovo Group's financial instruments (consisting of cash, accounts
receivable, accounts payable, due to factor and notes payable) do not differ materially from
their recorded amounts because of the relatively short period of time between origination of the
instruments and their expected realization. Management believes it is not practicable to
estimate the fair value of the first mortgage loan as the loan has a fixed interest rate secured
by real property in Tennessee. Innovo Group neither holds, nor is obligated under, financial
instruments that possess off−balance sheet credit or market risk.

Impairment of Long−Lived Assets and Intangibles

Long−lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

                                       F−8
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. Innovo Group adopted SFAS No. 142 beginning with the first
quarter of fiscal 2002. SFAS No. 142 requires that goodwill and intangible
assets that have indefinite useful lives not be amortized but, instead, tested
at least annually for impairment while intangible assets that have finite useful
lives continue to be amortized over their respective useful lives. Accordingly,
Innovo Group has not amortized goodwill.


SFAS No. 142 requires that goodwill and other intangibles be tested for
impairment using a two−step process. The first step is to determine the fair
value of the reporting unit, which may be calculated using a discounted cash
flow methodology, and compare this value to its carrying value. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss would be recognized. The second step is an allocation of the fair value of
the reporting unit to all of the reporting unit's assets and liabilities under a
hypothetical purchase price allocation. Based on the evaluation performed by
Innovo Group, there is no impairment to be recorded at November 29, 2003.

Cash Equivalents


Innovo Group considers all highly liquid investments that are both readily convertible into
known amounts of cash and mature within 90 days from their date of purchase to be cash
equivalents.

Concentration of Credit Risk


Financial instruments that potentially subject Innovo Group to significant concentrations of
credit risk consist principally of cash, accounts receivable and amounts due from factor.
Innovo Group maintains cash and cash equivalents with various financial institutions. Its
policy is designed to limit exposure to any one institution. Innovo Group performs periodic
evaluations of the relative credit rating of those financial institutions that are considered
in Innovo Group's investment strategy.

Concentrations of credit risk with respect to accounts receivable are limited
due to the number of customers comprising Innovo Group's customer base. However,
for the years ended November 29, 2003 and November 30, 2002, $1,301,000 and
$1,652,000, respectively of total non−factored accounts receivables, (or 37% and
60%) were due from three and four customers. Innovo Group does not require
collateral for trade accounts receivable, and, therefore, is at risk for up to
$3,388,000 and $2,813,000, respectively, if these customers fail to pay. Innovo
Group provides an allowance for estimated losses to be incurred in the
collection of accounts receivable based upon the ageing of outstanding balances
and other account monitoring analysis. Such losses have historically been within
management's   expectations.   Uncollectible   accounts are written off once
collection efforts are deemed by management to have been exhausted.

During fiscal 2003, 2002 and 2001, sales to customers   representing greater than
10 percent of sales are as follows:

                                        2003    2002     2001
                                        −−−−    −−−−     −−−−
American Eagle Outfitters                38%      *        *
Target                                   12%      *        *
Wal−Mart Stores                           *       *       27%

* Less than 10%


Manufacturing, Warehousing and Distribution


Innovo Group purchases a significant portion of finished goods and obtains certain warehousing
and distribution services from Commerce and its affiliates and obtains credit terms which
Innovo Group believes are favorable. The loss of Commerce as a vendor, or material changes to
the terms, could have an adverse impact on the business. Commerce and its affiliates are
controlled by two significant stockholders of Innovo Group.

Innovo Group's products are manufactured by contractors located in Los Angeles,
Mexico and/or Asia, including, Hong Kong, China, Korea, Vietnam and India. The
products are then distributed out of Los Angeles or directly from the factory to
the customer. For the year ended 2003, 22% of its apparel and accessory products
were manufactured outside of North America. The rest of its accessory and
apparel products were manufactured in the United States (21%) and Mexico (57%).
All of its products manufactured in Mexico are manufactured by an affiliate of
Commerce, Azteca Productions International, Inc. (Azteca) or its affiliates.

                                       F−9
Stock−Based Compensation


Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS No. 123), encourages, but does not require, companies to record compensation cost for
stock−based employee compensation plans at fair value. Innovo Group has chosen to continue to
account for employee stock−based compensation using the method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Innovo Group has adopted the disclosure−only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recorded in conjunction with options issued to
employees. Had compensation costs been determined based upon the fair value of the options at
the grant date and amortized over the option's vesting period, consistent with the method
prescribed by SFAS No. 123, Innovo Group's net income (loss) would have been increased to the
pro forma amounts indicated below for the years ended November 29, 2003, November 30, 2003 and
December 1, 2001 (in thousands, except per share data):



                                                                          Year Ended
                                                             (in thousands, except per share data)
                                                         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                            2003              2002            2001
                                                         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Net (loss) income as reported                            $    (8,317)       $     572      $    (618)
Add:
         Stock based employee compensation
         expense included in reported net income
         net of related tax effects                              101               91             86
Deduct:
         Total stock based employee compensation
         expense determined under fair market value
         based method for all awards, net of related
         tax effects                                           504               140             454
                                                         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Pro forma net (loss) income                              $ (8,720)         $     523       $    (986)
                                                         ===========================================

Net (loss) income per share
         As reported − basic                             $     (0.49)       $    0.04      $   (0.04)
         As reported − diluted                           $     (0.49)       $    0.04      $   (0.04)

         Pro forma − basic                               $     (0.51)       $    0.04      $   (0.07)
         Pro forma − diluted                             $     (0.51)       $    0.03      $   (0.07)




The fair value of each option granted is estimated on the date of grant using the Black−Scholes
option pricing model with the following assumptions used for grants in 2003 and 2002:

                                                                        2003        2002         2001
                                                                        −−−−        −−−−         −−−−
Estimated dividend yield.........................                       0.0%        0.0%          0.0%
Expected stock price volatility..................                        48%         38%           68%
Risk−free interest rate..........................                       5.0%        6.0%          6.0%
Expected life of options.........................                       4 yrs.     2−4 yrs.      2−4 yrs.


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

Property, Plant and Equipment


Property, plant and equipment are stated at the lesser of cost or fair value in the case of
impaired assets. Depreciation is computed on a straight−line basis over the estimated useful
lives of the assets and includes capital lease amortization. Leasehold improvements are
amortized over the lives of the respective leases or the estimated service lives of the
improvements, whichever is shorter. Routine maintenance and repairs are charged to expense as
incurred. On sale or retirement, the asset cost and related accumulated depreciation or
amortization is removed from the accounts, and any related gain or loss is included in the
determination of income.

Reclassifications

Certain reclassifications have been made to prior year consolidated                                financial
statements to conform to the current year presentation.

                                                       F−10
Recently Issued Financial Accounting Standard


In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003 and is not expected to have
a material impact on Innovo Groups' consolidated results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003 and is not expected
to have a material impact on Innovo Group's consolidated results of operations
or financial position.


In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities." FIN 46 requires companies to evaluate variable interest entities to
determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies
must apply FIN 46 to entities created after January 31, 2003, and to variable interest entities
in which a company obtains an interest after that date. It applies in the first fiscal year or
interim period endings after December 15, 2003, to variable interest entities in which a company
holds a variable interest that it acquired before February 1, 2003. Adoption of FIN 46 is not
expected to have a material impact on Innovo Group's consolidated results of operations or
financial position

3.       Acquisitions

Blue Concept Division Acquisition

On July 17, 2003, IAA entered into an asset purchase agreement (APA), with
Azteca, Hubert Guez and Paul Guez, (the Sellers), whereby IAA acquired the
division known as the Blue Concept Division of Azteca (the Blue Concept
Division). The Blue Concept Division sells primarily denim jeans to American
Eagle Outfitters, Inc. (AEO), a national retailer. Pursuant to the terms of the
APA, IAA paid $21.8 million for the Blue Concept Division, subject to adjustment
as noted below. Pursuant to the APA, IAA employed all of the existing employees
of the Blue Concept Division but did not assume any of the Blue Concept
Division's or the Sellers' existing liabilities. In connection with the purchase
of the Blue Concept Division from the Sellers, IAA issued a seven−year
convertible promissory note for $21.8 million (the Blue Concept Note). The Blue
Concept Note bears interest at a rate of 6% and requires payment of interest
only during the first 24 months and then is fully amortizing over the remaining
five−year period. The terms of the transaction further allows Innovo Group, upon
stockholder approval, to convert a portion of the Blue Concept Note into equity
through the issuance of 3,125,000 shares of its common stock valued at the
greater of $4.00 per share or the market value of our common stock on the day
prior to the date of the stockholder meeting at which approval for this
conversion is sought (Conversion Price) and up to an additional 1,041,667 shares
upon the occurrence of certain future contingencies relating to Innovo Group's
stock price for the thirty day period ending March 6, 2005. Presently, a special
stockholder meeting is scheduled for March 5, 2004 to vote on the approval of
this conversion of the Blue Concept Note into equity. In the event stockholder
approval is obtained, the Blue Concept Note will be reduced by an amount equal
to the product of the Conversion Price and 3,125,000 shares, so long as the
principal amount of the Blue Concept Note is not reduced below $9.3 million. The
shares issued pursuant to the conversion will be subject to certain lock−up
periods.


In the event that sales of the Blue Concept Division fall below $70 million during the first 17
month period, (Period I), following the closing of the acquisition, or $65 million during the
12 month period (Period II) following Period I, certain terms of the APA allow for a reduction
in the purchase price through a decrease in the principal balance of the Blue Concept Note
and/or the return of certain locked−up shares of Innovo Group's common stock. In the event the
Blue Concept Note is reduced during Period I and the sales of the Blue Concept Division in
Period II are greater than $65 million, the Blue Concept Note shall be increased by half of the
amount greater than $65 million, but in no event shall the Blue Concept Note be increased by an
amount greater than the decrease in Period I.

In the event the principal amount of the Blue Concept Note needs to be reduced
beyond the outstanding principal balance, then an amount of the locked−up shares
equal to the balance of the required reduction shall be returned to Innovo
Group. For these purposes, the locked−up shares shall be valued at $4.00 per
share. Additionally, if during the 12 month period following the closing, AEO is
no longer a customer of IAA, the locked−up shares will be returned to Innovo
Group, and any amount remaining on the balance of the Blue Concept Note will be
forgiven.

In the event the revenues of the Blue Concept   Division   decrease to $35 million
or less during Period I or Period II, IAA shall have the right to sell the
purchased assets back to the Sellers, and the Sellers shall have the right to
buy back the purchased assets for the

                                     F−11
remaining balance    of the Blue   Concept   Note and any and all   Locked Up Shares
shall be returned.


As part of the transaction, IAA and AZT International SA de CV (AZT), a Mexico corporation and
wholly−owned subsidiary of Azteca entered into a two−year, renewable, non−exclusive supply
agreement (Supply Agreement) for products to be sold by the Blue Concept Division. In addition
to the customary obligations, the Supply Agreement requires that AZT will receive payment
immediately upon receipt of invoices for purchase orders and that AZT will charge a per unit
price such that IAA will have a guaranteed profit margin of 15 percent on a "per unit" basis.
In addition, AZT is responsible for all quality defects in merchandise manufactured.

The acquisition of the Blue Concept Division was accounted for under the
purchase method of accounting. Of the $21.8 million purchase price, $13.2
million was recorded as an intangible asset representing the value of the
customer relationship, $361,000 was recorded as an intangible asset representing
the fair value of the existing purchase orders at the closing of the acquisition
and the balance of the purchase price of $8.32 million was recorded as goodwill.
The purchase price allocation was based upon a third party valuation. The
results of operations of the Blue Concept Division are included in Innovo
Group's consolidated results of operations beginning July 17, 2003.


The value assigned to the existing purchase orders was amortized during 2003 at the time the
goods were shipped and the value of the customer list is being amortized over 10 years. The
goodwill is expected to be amortizable for income tax purposes. The acquisition was consummated
to enable Innovo Group to expand its private label operations.

The following table presents the unaudited pro forma consolidated results of
operations for the years ended 2003 and 2002 assuming the Blue Concept Division
had been acquired as of December 2, 2001.

                                                      Year Ended
                                         (in thousands, except per share data)
                                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                           2003                         2002
                                        −−−−−−−−−                    −−−−−−−−−
Net sales                               $ 130,720                    $ 105,496
Net income (loss)                          (4,343)                       4,681
Earnings (loss) per share:
Basic                                   $    (0.22)                    $    0.26
Diluted                                 $    (0.22)                    $    0.24



The pro forma operating results do not reflect any anticipated operating efficiencies or
synergies and are not necessarily indicative of the actual results which might have occurred had
the operations and management of the companies been combined for the fiscal years included
above.

Azteca Production International, Inc. Knit Division


On August 24, 2001, Innovo Group through its subsidiary, IAA, completed the first phase of a two
phase acquisition of Azteca knit apparel division (Knit Division or Knit Acquisition). As
discussed previously, Azteca is an affiliate of Commerce. Pursuant to the terms of the first
phase closing, Innovo Group purchased the Knit Division's customer list, the right to
manufacture and market all of the Knit Division's current products and entered into certain
non−compete and non−solicitation agreements and other intangible assets associated with the Knit
Division (Phase I Assets). As consideration for the Phase I Assets, Innovo Group issued to
Azteca, 700,000 shares of its common stock valued at $1.27 per share based upon the closing
price of the common stock on August 24, 2001, and promissory notes in the amount of $3.6
million.

The second phase of the Knit Acquisition called for Innovo Group to purchase for
cash the inventory of the Knit Division prior to November 30, 2001, with the
consideration not to exceed $3 million. The acquisition of the inventory was
subject to Innovo Group obtaining adequate financing. Upon the mutual agreement
of both parties, Innovo Group did not complete the second phase of the
acquisition prior to the expiration date due to Innovo Group's inability to
obtain the necessary funding.


The Knit Acquisition was accounted for under the purchase method of accounting for business
combinations pursuant to FAS 141. Accordingly, the accompanying consolidated financial
statements include the results of operations and other information for the Knit Division for the
period from August 24, 2001 through December 1, 2001. The Acquisition was consummated to allow
Innovo Group to continue its expansion into various segments of the apparel industry.

Of the aggregate purchase price of $4,521,000, including acquisition costs of
$36,000, $250,000 has been allocated to the non−compete agreement and the
remaining amount of $4,271,000 has been allocated to goodwill. The non−compete
agreement was amortized over two years, based upon the term of the agreement.
The total amount of the goodwill is expected to be deductible for income tax
purposes.

                                         F−12
The following table shows Innovo Group's unaudited pro forma        consolidated
results of operations for the fiscal year ended December 1, 2001,   assuming the
Knit Acquisition had occurred at the beginning of the year:


                                                     Year Ended
                                                   (in thousands,
                                               except per share data)
                                               −−−−−−−−−−−−−−−−−−−−−−
                                                        2001
                                               −−−−−−−−−−−−−−−−−−−−−−

Net sales                                             $17,243
Loss before extraordinary item                           (406)
Net Loss                                                 (406)
Loss per share:
    Basic                                              ($0.03)
    Diluted                                            ($0.03)


Joe's Jeans License


On February 7, 2001, Innovo Group acquired the license rights to the Joe's Jeans label from JD
Design, LLC (JD Design), along with the right to market the previously designed product line and
existing sales orders, in exchange for 500,000 shares of Innovo Group's common stock and, if
certain sales and gross margin objectives are reached, a warrant with a four year term granting
JD Design the right to purchase 250,000 shares of Innovo Group's common stock at a price of
$1.00 per share. As of November 29, 2003, the sales and gross margin objectives had not been
reached.

Additionally, Joe Dahan, the designer of the Joe's Jeans line joined Innovo
Group as President of its newly formed and wholly owned subsidiary, Joe's Jeans,
Inc. and received an option, with a four−year term, to purchase 250,000 shares
of Innovo Group's common stock at $1.00 per share, vesting over 24 months. These
options were granted pursuant to the employment agreement between Innovo Group
and Joe Dahan. These options vest over the term of employment. Under the terms
of the license, Innovo Group is required to pay a royalty of 3% of net sales,
with additional royalty amounts due in the event Innovo Group exceeds certain
minimum sales and gross profit thresholds. Innovo Group recorded $339,000,
$277,000 and $46,000 in royalty expense for the license in the years ended 2003,
2002 and 2001, respectively.

The purchase price for the Joe's Jeans license of $480,000 was determined based
upon the fair value of the 500,000 shares issued in connection with the
acquisition using the average of the quoted market price of $0.96 for a period
of 5 days prior to and 5 days after the commitment date. No value was assigned
to the warrant for 250,000 shares of common stock because the warrant only vests
in the event that Joe's Jeans meets certain sales and gross profit targets. The
remaining sales target for 2004 is $15 million, provided, that the sales have a
minimum gross profit of 55%. In the event that both the net sales and gross
margin target is achieved, JD Design will receive a warrant for 250,000 shares
of Innovo Group common stock with an exercise price of $1.00 per share, with a
4−year term and equal−monthly vesting over the first 24 months. The entire
purchase price was allocated to license rights that are being amortized over the
10−year term of the license.

4.       Inventories


Inventories are stated at the lower of cost, as determined by the first−in, first−out method,
or market. Inventories consisted of the following (in thousands):

                                                       2003              2002
                                                     −−−−−−−−−−−−−−−−−−−−−−−−−−

Finished goods                                       $ 10,189           $ 5,741
Work in progress                                          199                −−
Raw materials                                           1,329                74
                                                     −−−−−−−−−−−−−−−−−−−−−−−−−−
                                                     $ 11,717           $ 5,815
Less allowance for obsolescence and
slow moving items                                      (4,193)             (105)
                                                     −−−−−−−−−−−−−−−−−−−−−−−−−−
                                                     $ 7,524            $ 5,710
                                                     ==========================

                                       F−13
5.        Real Estate Transactions



In April 2002, Innovo Group's wholly−owned subsidiary IRI acquired a 30% limited partnership
interest in each of 22 separate partnerships. These partnerships simultaneously acquired 28
apartment complexes at various locations throughout the United States consisting of
approximately 4,000 apartment units (the Properties). A portion of the aggregate $98,080,000
purchase price was paid through the transfer of 195,295 shares of our $100, 8% Series A
Redeemable Cumulative Preferred Stock (the Series A Preferred Shares) to the sellers of the
Properties. The balance of the purchase price was paid by Metra Capital, LLC (Metra Capital) in
the amount of $5,924,000 (the Metra Capital Contribution) and through proceeds from a Bank of
America loan, in the amount $72,625,000.

Innovo Group had originally issued the Series A Preferred Shares to IRI in
exchange for all shares of its common stock. IRI then acquired a 30% limited
partnership interest in each of the 22 separate limited partnerships in exchange
for the Series A Preferred Stock, which then transferred the Series A Preferred
Shares to the sellers of the Properties.


Each of Messrs. Hubert Guez and Simon Mizrachi and their affiliates have invested in each of the
22 separate partnerships. Each of Messrs. Guez and Mizrachi, together with their respective
affiliates, own 50% of the membership interests of Third Millennium. Third Millennium is the
managing member of Metra Capital, which owns 100% of the membership interest in each of the 22
separate limited liability companies collectively the General Partners and together with Metra
Capital, the Metra Partners, that hold a 1% general partnership interest in each of the 22
separate limited partnerships that own the Properties. Metra Capital also owns 69% of the
limited partnership interest in each of the 22 separate limited partnerships. At the time of the
transaction, Messrs. Guez and Mizrachi and their affiliates owned more than 5 percent of Innovo
Group's outstanding shares.

Pursuant to each of the limited partnership agreements, the Metra Partners
receive at least quarterly (either from cash flow and/or property sale proceeds)
an amount sufficient to provide the Metra Partners (1) a 15% cumulative compound
annual rate of return on the outstanding         amount of the Metra Capital
Contribution that has not been previously returned to them through prior
distributions of cash flow and/or property sale proceeds and (2) a cumulative
annual amount of .50% of the average outstanding balance of the average
outstanding balance of the mortgage indebtedness secured by any of the
Properties. In addition, in the event of a distribution solely due to a property
sale proceeds after the above distributions have been made to the Metra
Partners, Metra Partners also receive an amount equal to 125% of the amount of
the Metra Capital Contribution allocated to the Property sold until the Metra
Partners   have   received   from all previous cash flow or property sale
distributions an amount equal to its Metra Capital Contribution.


Third Millenium receives on a quarterly basis from cash flows and/or property sale proceeds an
amount equal to $63,000 until it receives an aggregate of $252,000.

After the above distributions have been made, and if any cash is available for
distribution, IRI. is to receive at least quarterly in the case of cash flow
distributions and at the time of property sale distributions an amount
sufficient for it to pay the 8% coupon on the Series A Preferred Shares and then
any remaining amounts left for distribution to redeem a portion or all of the
Series A Preferred Shares.


After all of the Series A Preferred Shares have been redeemed ($19.5 million), future
distributions are split between Metra Partners and IRI, with Metra Partners receiving 70% of
such distribution and Innovo Realty, Inc. receiving the balance. In addition, IRI. receives a
quarterly sub−asset management fee of $85,000.

IRI may also be liable to the holders of the Series A Preferred Shares for the
breach of certain covenants, including, but not limited to, failure (i) to
deposit distributions from the partnerships into a sinking fund which funds are
to be distributed to the holders of the Preferred Shares as a dividend or
redemption of Series A Preferred Shares or (ii) to enforce its rights to receive
distributions from the partnerships.


Innovo Group has not given accounting recognition to the value of its investment in the Limited
Partnerships, because Innovo Group has determined that the asset is contingent and will only
have value to the extent that cash flows from the operations of the properties or from the sale
of underlying assets is in excess of the 8% coupon and redemption of the Series A Preferred
Shares. Innovo Group is obligated to pay the 8% coupon and redeem the Series A Preferred Shares
from its partnership distributions, prior to Innovo Group being able to recover the underlying
value of its investment. Additionally, Innovo Group has determined that the Series A Preferred
Shares will not be accounted for as a component of equity as the shares are redeemable outside
of Innovo Group's control. No value has been ascribed to the Series A Preferred Shares for
financial reporting purposes as Innovo Group is obligated to pay the 8% coupon or redeem the
shares only if Innovo Group receives cash flow from the Limited Partnerships adequate to make
the payments. Innovo Group has included the quarterly management fee paid to IRI in other
income using the accrual basis of accounting. During 2002 and 2003, IRI recorded $329,000 and
$173,000, respectively, as management fee income. As of November 29, 2003, $175,000 was due to
Innovo Group representing unpaid sub−management fees.

194,000   shares   of   the   Series   A   Preferred   Shares   remain   outstanding   and
redeemable at November 29, 2003 and the cumulative amount of the unpaid 8%
coupon aggregated $822,000. Such amount has not been recorded as an obligation
by Innovo Group as the funds had not been received by IRI from the Limited
Partnerships.

                                      F−14
6.        Accounts Receivable

Accounts receivable consist of the following (in thousands):



                                                           2003            2002
                                                         −−−−−−−−−−−−−−−−−−−−−−−

Nonrecourse receivables assigned to factor, net of
advances                                                 $     453      $     307
Nonfactored accounts receivable                              3,388          2,813

Allowance for customer credits and doubtful accounts      (2,158)           (383)
                                                         −−−−−−−−−−−−−−−−−−−−−−−
                                                         $ 1,683         $ 2,737
                                                         =======================




As of November 29, 2003, there were $600,000 of client recourse receivables assigned to factor
for which Innovo Group bears collection risk in the event of non−payment by the customers.

CIT Commercial Services


On June 1, 2001, Innovo Group's subsidiaries, Innovo and Joe's, entered into accounts
receivable factoring agreements with CIT Commercial Services, a unit of CIT Group, Inc. (CIT)
which may be terminated with 60 days notice by CIT, or on the anniversary date, by Innovo or
Joe's. Under the terms of the agreements, Innovo or Joe's has the option to factor receivables
with CIT on a non−recourse basis, provided that CIT approves the receivable in advance. Innovo
or Joe's may, at their option, also factor non−approved receivables on a recourse basis. Innovo
or Joe's continue to be obligated in the event of product defects and other disputes, unrelated
to the credit worthiness of the customer. Innovo or Joe's has the ability to obtain advances
against factored receivables up to 85% of the face amount of the factored receivables. The
agreement calls for a 0.8% factoring fee on invoices factored with CIT and a per annum rate
equal to the greater of the Chase prime rate plus 0.25% or 6.5% on funds borrowed against the
factored receivables. On September 10, 2001, IAA entered into a similar factoring agreement with
CIT upon the same terms.

On or about August 20, 2002, Innovo Group's Innovo and Joe's subsidiaries each
entered into certain amendments to their respective factoring agreements, which
included inventory security agreements, to permit the subsidiaries to obtain
advances of up to 50% of the eligible inventory up to $400,000 each. According
to the terms of the agreements, amounts loaned against inventory are to bear an
interest rate equal to the greater of the bank's prime rate plus 0.75% or 6.5%
per annum.

On or about June 10, 2003, the existing financing facilities with CIT for these
subsidiaries were amended, to be effective as of April 11, 2003, primarily to
remove the fixed aggregate cap of $800,000 on their inventory security agreement
to allow for Innovo and Joe's to borrow up to 50% of the value of certain
eligible inventory calculated on the basis of the lower of cost or market, with
cost calculated on a first−in−first out basis. In connection with these
amendments, IAA, entered into an inventory security agreement with CIT based on
the same terms as Joe's and Innovo. IAA did not previously have an inventory
security agreement with CIT. Under the factoring arrangements, Innovo Group
through its subsidiaries may borrow up to 85% of the value of eligible factored
receivables outstanding. The factoring rate that Innovo Group pays to CIT to
factor accounts, on which CIT bears some or all of the credit risk, was lowered
to 0.4% and the interest rate associated with borrowings under the inventory
lines and factoring facility were reduced to the bank's prime rate. Innovo Group
has also established a letter of credit facility with CIT whereby Innovo Group
can open letters of credit, for 0.125% of the face value, with international and
domestic suppliers provided Innovo Group has availability on its inventory line
of credit. In addition, Innovo Group also may elect to factor with CIT its
receivables by utilizing an adjustment of the interest rate as set on a
case−by−case basis, whereby certain allocation of risk would be borne by Innovo
Group, depending upon the interest rate adjustment. Innovo Group records its
accounts receivables on the balance sheet net of receivables factored with CIT,
since the factoring of receivables is non−recourse to Innovo Group. Further, in
the event Innovo Group's loan balance with CIT exceeds the face value of the
receivables factored with CIT, Innovo Group records the difference between the
face value of the factored receivables and the outstanding loan balance as a
liability on Innovo Group's balance sheet as "Due to Factor". At November 29,
2003, Innovo Group's loan balance with CIT was $8,786,000 and Innovo Group had
$8,536,000 of factored receivables with CIT. At November 29, 2003, an aggregate
amount of $2,149,000 of unused letters of credit were outstanding. Cross
guarantees were executed by and among the subsidiaries, Innovo, Joe's, and IAA
and Innovo Group entered into a guarantee for its subsidiaries' obligations in
connection with the amendments to the existing credit facilities.

In connection with the         agreements    with CIT,   receivables   and     inventory are
pledged to CIT.

                                             F−15
7.            Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):




                                                          Useful Lives
                                                             (years)                     2003                2002
                                                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Building, land and improvements                                8−38                    $ 1,679             $ 1,582
Machinery and equipment                                        5−10                        394                 258
Furniture and fixtures                                          3−8                        760                 212
Transportation equipment                                         5                          13                  13
Leasehold improvements                                          5−8                        116                  14
                                                                                       −−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                                                         2,962               2,079
     Less accumulated depreciation and amortization                                       (895)               (660)
                                                                                       −−−−−−−−−−−−−−−−−−−−−−−−−−−
Net property, plant and equipment                                                      $ 2,067             $ 1,419
                                                                                       ===========================




Depreciation expense aggregated $232,000,                              $86,000    and $88,000 for the years
ended 2003, 2002 and 2001, respectively.

8.            Intangible Assets

Identifiable intangible assets                        resulting       from   acquisitions       consist      of the
following (in thousands):



                                                                                                 2003        2002
                                                                                               −−−−−−−−−−−−−−−−−−−

License rights, net of $136 and $88 accumulated
amortization for 2003 and 2002, respectively                                                   $     344              $392

Covenant not to compete, net of $250 and $155
accumulated amortization for 2003 and 2002, respectively                                              −−                95

Customer relationship, net of $486 and $0 accumulated
amortization for 2003 and 2002, respectively                                                    12,714          −−
                                                                                               −−−−−−−−−−−−−−−−−−−
                                                                                               $13,058        $487
                                                                                               ===================




Amortization expense related to the license rights, covenant not to compete, customer
relationships and acquired purchase orders total $991,000 $168,000 and $75,000 for the years
ended 2003, 2002 and 2001, respectively. Aggregate amortization expense will be approximately
$1,368,000, $1,368,000, $1,368,000, $1,368,000, $1,368,000 and $6,218,000 for fiscal years
ending November 29, 2004 through November 30, 2008 and thereafter, respectively.

9.            Long−Term Debt

Long−term debt consists of the following (in thousands):

                                                                                2003          2002
                                                                              −−−−−−−−−−−−−−−−−−−−−

First mortgage loan on Springfield property                                   $   476        $ 558
Promissory note to Azteca (Blue Concepts)                                      21,800            −−
Promissory note to Azteca (Knit Div. Note 1)                                       68           786
Promissory note to Azteca (Knit Div. Note 2)                                       −−         2,043
                                                                              −−−−−−−−−−−−−−−−−−−−−
Total long−term debt                                                          $22,344        $3,387
Less current maturities                                                           168           756
                                                                              −−−−−−−−−−−−−−−−−−−−−
Total long−term debt                                                          $22,176        $2,631
                                                                              =====================


First Mortgage Loan on Springfield, Tennessee property


The first mortgage loan is collateralized by a first deed of trust on real property in
Springfield, Tennessee (with a carrying value of $1.2 million at November 29, 2003), and by an
assignment of key−man life insurance on the President of Innovo in the amount of $1 million. The
loan bears interest at 2.75% over the lender's prime rate per annum (which was 6.75% at November
29, 2003 and 7.50% at November 30, 2002) and requires monthly principal and interest payments
of $9,900 through February 2008. The loan is also guaranteed by the Small Business
Administration (SBA). In exchange for the SBA guarantee, Innovo Group and certain subsidiaries
and the

                                                          F−16
President of Innovo have also agreed to act as   guarantors   for the   obligations
under the loan agreement.

Promissory Note to Azteca in connection with Blue Concept Division Acquisition


In connection with the purchase of the Blue Concept Division from Azteca, IAA issued a
seven−year unsecured, convertible promissory note for $21.8 million. The Blue Concept Note
bears interest at a rate of 6% and requires payment of interest only during the first 24 months
and then is fully amortized over the remaining five−year period. The terms of the transaction
further allow Innovo Group, upon shareholder approval, to convert a portion of the Blue Concept
Note into equity through the issuance of 3,125,000 shares of common stock valued at the greater
of $4.00 per share or the market value of Innovo Group's common stock on the day prior to the
date of the shareholder meeting at which approval for this conversion is sought and up to an
additional 1,041,667 shares upon the occurrence of certain future contingencies relating to
Innovo Group's stock price for the thirty day period ending March 6, 2005. Presently, a special
stockholder meeting is scheduled for March 5, 2004 to vote on the approval of this conversion
of the Blue Concept Note into equity. In the event shareholder approval is obtained, the Blue
Concept Note will be reduced by an amount equal to the product of the Conversion Price and
3,125,000, so long as the principal amount of the Blue Concept Note is not reduced below $9.3
million and the shares issued pursuant to the conversion will be subject to certain lock−up
periods. The Blue Concept Note is subject to further reduction as a result of other events. See
Note 3.

Promissory Notes to Azteca in connection with acquisition of Knit Division


In connection with the acquisition of the Knit Division from Azteca (see Note 3), Innovo Group
issued promissory notes in the face amounts of $1.0 million and $2.6 million, which bear
interest at 8.0% per annum and require monthly payments of $20,000 and $53,000, respectively.
The notes have a five−year term and are unsecured.

At the election of Azteca, the balance of the promissory notes may be offset
against monies payable by Azteca or its affiliates to Innovo Group for the
exercise of issued and outstanding stock warrants that are owned by Azteca or
its affiliates, including Commerce. During 2003, Azteca offset $2.1 million in
face amount of the notes in connection with the exercise of 1 million warrants
for Innovo Group common stock.

Principal maturities of long−term debt, assuming none of the Blue Concept Note
is converted into equity, as of November 29, 2003 are as follows (in thousands):

2004                              $    168
2005                                 1,355
2006                                 4,035
2007                                 4,284
2008                                 4,500
Thereafter                           8,002
                                  −−−−−−−−
Total                             $ 22,344
                                  ========



                                      F−17
10.        Income Taxes

The provision (credit) for domestic and foreign income taxes is as follows:


                                              (in thousands)
                          −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                2003                2002                 2001
                          −−−−−−−−−−−−−−−−    −−−−−−−−−−−−−−−−−    −−−−−−−−−−−−−−−−

Current:
Federal                   $             −−      $              −−      $             −−
State                                   27                     94                    89
Foreign                                 17                     46                    −−
                          −−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−
                                        44                    140                    89

Deferred:
Federal                                 −−                     −−                    −−
State                                   −−                     −−                    −−
Foreign                                 −−                     −−                    −−
                          −−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−
                                        −−                     −−                    −−

                          −−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−−      −−−−−−−−−−−−−−−−
Total                     $             44      $             140      $             89
                          ================      =================      ================



The source of income (loss) before the provision for taxes is as follows:

                                                        Year Ended
                                                      (in thousands)
                                       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                         2003               2002              2001
                                       −−−−−−−              −−−−             −−−−−

Federal                                $(7,259)                 $599             $(529)
Foreign                                 (1,014)                  113                −−
                                       −−−−−−−                  −−−−             −−−−−
Total                                  $(8,273)                 $712             $(529)
                                       =======                  ====             =====


Net deferred tax assets result from the following temporary differences between
the book and tax bases of assets and liabilities at (in thousands):

                                                              2003            2002
                                                            −−−−−−−−−−−−−−−−−−−−−−−−

Deferred tax assets:
Allowance for doubtful accounts                             $     −−        $     102
Inventory                                                        234              310
Benefit of net operating loss carryforwards                    7,411           13,129
Capital loss carryfowards                                        280              280
Amortization of intangibles                                       (9)             (77)
Other                                                            282              174
                                                            −−−−−−−−−−−−−−−−−−−−−−−−
Gross deferred tax assets                                      8,198           13,918
Valuation allowance                                           (8,198)         (13,918)
                                                            −−−−−−−−−−−−−−−−−−−−−−−−
Net deferred tax assets                                     $     −−        $      −−
                                                            ========================


                                         F−18
The reconciliation of the effective income tax rate to the federal statutory
rate for the years ended is as follows:




                                                                            Year Ended
                                                                           (in thousands)
                                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                                  2003           2002         2001
                                                               −−−−−−−−−−−     −−−−−−−−−    −−−−−−−−

Computed tax provision (benefit) at the statutory rate               (34%)          (34%)       (34%)
State income tax                                                      −−             13          18
Foreign taxes in excess of statutory rate                             −−              2          −−
Utilization of unbenefitted net operating loss carryforwards          −−             45          −−
Change in valuation allowance                                         34             16          34
                                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                                       0%            20%         18%
                                                               =====================================




Innovo Group has consolidated net operating loss carryforwards of approximately $20.8 million
expiring through 2023. Such net operating loss carryforwards have been reduced as a result of
"changes in control" as defined in Section 382 of the Internal Revenue Code. Such limitation has
had the effect of limiting annual usage of the carryforwards in future years. Additional changes
in control in future periods could result in further limitations of Innovo Groups's ability to
offset taxable income. Management has determined that realization of the net deferred tax
assets does not meet the more likely than not criteria. As a result, a valuation allowance has
been provided for.


                                                      F−19
11.      Stockholders' Equity

Private Placements and Stock Issuances

In fiscal 2003, Innovo Group consummated five private placements of its common
stock resulting in net proceeds of approximately $17,540,000, after deducting
commissions. During its first private placement completed on March 19, 2003,
Innovo Group issued 165,000 shares of common stock to 17 accredited investors at
$2.65 per share, raising net proceeds of approximately $407,000. During its
second private placement completed on March 26, 2003, Innovo Group issued 63,500
shares of common stock to 5 accredited investors at $2.65 per share, raising net
proceeds of approximately $156,000. During its third private placement completed
on July 1, 2003, Innovo Group issued 2,835,000 shares to 34 accredited investors
at $3.33 per share, raising net proceeds of approximately $8,751,000. As part of
this private placement, and in addition to commissions paid, warrants to
purchase 300,000 shares of common stock at $4.50 per share were issued to the
placement agent, Sanders Morris Harris, Inc. During its fourth private placement
completed on August 29, 2003, Innovo Group issued 175,000 shares of common stock
to 5 accredited investors at $3.62 per share, raising net proceeds of
approximately $592,000. As part of this private placement, and in addition to
commissions paid, warrants to purchase 17,500 shares of common stock at $3.62
per share were issued to the placement agent, Pacific Summit Securities. During
its fifth private placement funded on or before November 29, 2003, but completed
on December 1, 2003, Innovo Group issued 2,997,000 shares of common stock to 14
accredited investors at $3.00 per share and warrants to purchase an additional
599,333 shares of common stock at $4.00 per share to certain of these investors,
raising net proceeds of approximately $10,704,000.


During fiscal 2002, Innovo Group did not issue any shares of common stock. During fiscal 2002,
Innovo Group issued preferred shares in association with the purchase of limited partnerships
in certain real estate properties. See Note 5.

During fiscal 2001, in connection with the Acquisition of the Knit Division from
Azteca (see Note 3), Innovo Group issued 700,000 shares of its common stock, and
in connection with the acquisition of the Joe's Jeans license from JD Design,
Innovo Group issued 500,000 shares of its common stock and a warrant to purchase
250,000 shares of its common stock at a price of $1.00 per share, provided
certain sales and gross margin targets are met.



                                      F−20
Warrants


Innovo Group has issued warrants in conjunction with various private placements of its common
stock, debt to equity conversions, acquisitions and in exchange for services. All warrants are
currently exercisable. As of November 29, 2003, outstanding common stock warrants are as
follows:

Exercise Price          Shares                Issued              Expiration
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

$2.10                     300,000          October   2000        October   2005
$1.50                     100,000            March   2001          March   2004
$2.00                     100,000            March   2001          March   2004
$2.50                      50,000            March   2001          March   2004
$0.90                      20,000         December   2001       December   2005
$2.75                     100,000              May   2002            May   2004
$2.50                      75,000             June   2002            May   2004
$3.00                      75,000             June   2002            May   2004
$4.50                     300,000             June   2003           June   2008
$3.62                      17,500           August   2003         August   2008
$4.00                     599,333         November   2003       November   2008
                    −−−−−−−−−−−−−
                        1,736,833
                    =============



During fiscal 2000, Innovo Group issued 1,787,365 shares of common stock and warrants to
purchase an additional 1,500,000 shares of common stock at $2.10 per share to the Sam Furrow and
Jay Furrow (collectively, the Furrow Group) in exchange for the Furrow Group's assumption of
$1,000,000 of Innovo Group's debt and the cancellation of $1,000,000 of indebtedness owed to
members of the Furrow Group. The issuance of the shares of common stock and warrants resulted
in a $1,095,000 charge for the extinguishment of debt. During fiscal 2003, the warrants issued
to the Furrow Group to purchase an additional 1,500,000 shares were exercised pursuant to a
cashless exercise provision contained in the warrants and the members of the Furrow Group were
issued an aggregate of 1,061,892 shares of common stock.

During fiscal 2000, Innovo Group issued warrants to purchase an additional
102,040 shares at $1.75 per share to private investors for $179,000. Commerce
received warrants to purchase an additional 3,300,000 shares of common stock
with warrants for 3,000,000 shares of common stock exercisable over a three−year
period at $2.10 per share and the remaining warrants for 300,000 shares of
common stock subject to a two−year vesting period and exercisable over a
five−year period at $2.10 per share. The proceeds from the sale of these
warrants were used to purchase inventory and services from Commerce and its
affiliates and to repay certain outstanding debt.


In October and November 2000, Innovo Group issued warrants to purchase an additional 1,700,000
shares of common stock in private placements to JAML, LLC, Innovation, LLC and Third Millennium
Properties, Inc. (collectively, the Mizrachi Group) for $1,700,000 in cash. During fiscal 2003,
prior to the scheduled expiration date, the warrants issued to the Mizrachi Group to purchase
an additional 1,696,875 shares were exercised pursuant to cashless exercise provision contained
in the warrants and the members of the Mizrachi Group were issued an aggregate of 1,195,380
shares of common stock.

During fiscal 2001, Innovo Group issued a warrant related to the Joe's License
to purchase 250,000 shares of common stock at a price of $1.00 per share, in the
event that certain future sales and gross margin performance criteria are met.
The sales targets are $2 million, $4 million, $8 million and $15 million for
each of the years ended December 31, 2001, 2002, 2003, and 2004, respectively,
provided, that the sales have a minimum gross profit of 55%. In the event that
both net sales and gross margin targets are achieved in any one of the scheduled
years, JD Design will receive a warrants for 250,000 shares of Innovo Group
common stock with an exercise price of $1.00 per share, with a 4−year term and
equal−monthly vesting over the first 24 months. When a revenue target is
achieved, the warrants will be issued immediately following the year end of the
year in which the Net Sales Target is achieved and the vesting period and term
will commence immediately upon issuance. JD Designs will not be entitled to any
additional warrants if the Net Sales Targets are reached in more than one of the
scheduled years. This warrant has not been included in the table above as the
performance criteria has not been met.


During fiscal 2001, Innovo Group also issued warrants to a company in exchange for certain
services. Warrants to purchase 20,000, 100,000, 100,000 and 50,000, shares exercisable at
$0.90, $1.50, $2.00 and $2.50 per share, respectively, which were vested on the date of
issuance and have a term of three years, were issued in exchange for services which are to be
rendered over a four−year term.

During fiscal 2002, Innovo Group issued warrants to companies in exchange for
certain services. Warrants to purchase 100,000, 75,000 and 75,000 shares
exercisable at $2.75, $2.50 and $3.00 per share, respectively, which were vested
on the date of issuance and have a


                                      F−21
term of two years, were issued in exchange for     services to be rendered   over
three, four and four year terms, respectively.


During fiscal 2003, Innovo Group issued warrants to its placement agents as compensation
pursuant to a private placement in August 2003 and other certain investors on or before November
29, 2003. Innovo Group issued warrants to purchase 300,000 shares of common stock at $4.50 per
share, warrants to purchase 17,500 shares of common stock at $3.62 per share and warrants to
purchase 599,333 shares at $4.00 per share.

During fiscal 2003, warrants to purchase an aggregate of 5,298,915 shares were
exercised pursuant to cashless exercise provisions contained in the warrants and
an aggregate of 3,597,938 shares of common stock was issued in fiscal 2003.


During fiscal 2003, Commerce elected to exercise warrants to purchase 1,000,000 shares and in
lieu of payment therefore, Commerce elected to offset $2.1 million in debt due from Innovo
Group pursuant to certain promissory notes.

As of November 29, 2003, 4,500,000 shares of common stock of Innovo Group were
reserved for the exercise of warrants, options, conversion of debt.

Stock Based Compensation


In March 2000, Innovo Group adopted the 2000 Employee Stock Option Plan ("2000 Employee Plan").
In May, 2003, the 2000 Employee Plan was amended to provide for incentive and nonqualified
options for up to 3,000,000 shares of common stock that may be granted to employees, officers,
directors and consultants. The 2000 Employee Plan limits the number of shares that can be
granted to any employee in one year to 1,250,000 and the total market value of common stock that
becomes exercisable for the first time by any grantee during a calendar year. Exercise price for
incentive options may not be less than the fair market value of Innovo Group's common stock on
the date of grant and the exercise period may not exceed ten years. Vesting periods and option
terms are determined by the Board of Directors. The 2000 Employee Plan will expire in March
2010.

In September 2000, Innovo Group adopted the 2000 Director Stock Incentive Plan
("2000 Director Plan"), under which nonqualified options for up to 500,000
shares of common stock may be granted. At the first annual meeting of
stockholders following appointment to the board and annually thereafter during
their term, each director will receive options for common stock with aggregate
fair value of $10,000. These options are exercisable beginning one year from the
date of grant and expire in ten years. Exercise price is set at 50% of the fair
market value of the common stock on the date of grant. The discount is lieu of
cash director fees. The 2000 Director Plan will expire in September 2010.

The following summarizes option grants to members of the Board of Directors for
the fiscal years 2001 through 2003:

                        Number of
                        Options         Exercise Price
                        −−−−−−−         −−−−−−−−−−−−−−
        2001            102,564            $0.39
        2002             40,000            $1.00
        2003             30,768            $1.30


                                      F−22
Stock option activity, including grants to members of the Board of Directors,
during the periods indicated is as follows:



                                            2003                         2002                          2001
                                 −−−−−−−−−−−−−−−−−−−−−−−−−    −−−−−−−−−−−−−−−−−−−−−−−−−−    −−−−−−−−−−−−−−−−−−−−−−−−
                                                  Weighted                     Weighted                      Weighted
                                                  Average                      Average                       Average
                                                  Exercise                     Exercise                      Exercise
                                   Options         Price        Options          Price        Options         Price
                                 −−−−−−−−−−      −−−−−−−−−−   −−−−−−−−−−      −−−−−−−−−−    −−−−−−−−−−      −−−−−−−−−−

Outstanding at beginning of
year                              1,257,981     $     2.07     1,517,981      $     2.33       685,417     $     3.89
Granted                           1,330,768           2.74        40,000            1.00       832,564           1.06
Exercised                            50,000           1.64            −−              −−            −−             −−
Forfeited                          (185,417)         (3.93)     (300,000)          (3.28)           −−             −−
                                 −−−−−−−−−−     −−−−−−−−−−    −−−−−−−−−−      −−−−−−−−−−    −−−−−−−−−−     −−−−−−−−−−
Outstanding at end of year        2,353,332     $     2.31     1,257,981      $     2.07     1,517,981     $     2.33

Exercisable at end of year        1,686,665                    1,220,452                     1,305,443

Weighted average per option
fair value of options granted
during the year                                 $      1.21                   $     1.26                   $     0.59

Weighted average contractual
life remaining                                   6.1 years                     3.7 years                    3.4 years




Exercise prices for options outstanding as of November 29, 2003 are as follows:

         Number of
          Options           Exercise Price
       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

           102,564                      $0.39
           290,000                      $1.00
           480,768              $1.25 − $1.30
           280,000              $2.40 − $2.60
         1,000,000                      $2.86
           200,000                      $4.75
       −−−−−−−−−−−
         2,353,332
       ===========


                                                F−23
Earnings (Loss) Per Share


Earnings (loss) per share are computed using weighted average common shares and dilutive common
equivalent shares outstanding. Potentially dilutive securities consist of outstanding options
and warrants. A reconciliation of the numerator and denominator of basic earnings per share and
diluted earnings per share is as follows:



                                                     Year Ended
                                        (in thousands, except per share data)
                                      −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                        2003            2002            2001
                                      −−−−−−−−         −−−−−−−        −−−−−−−−

Basic EPS Computation:
Numerator                             $ (8,317)       $   572        $     (618)
Denominator:
Weighted average common shares
outstanding                             17,009         14,856          14,315
                                      −−−−−−−−        −−−−−−−        −−−−−−−−

Total shares                            17,009         14,856          14,315
                                      −−−−−−−−        −−−−−−−        −−−−−−−−

Basic EPS                             $ (0.49)        $ 0.04         $ (0.04)
                                      ========        =======        ========

Diluted EPS Calculation:
Numerator                             $ (8,317)       $   572        $     (618)
Denominator:
Weighted average common shares
outstanding                             17,009         14,856            14,315

Incremental shares outstanding from
assumed exercise of options and
warrants                                    −−          1,253              −−
                                      −−−−−−−−        −−−−−−−        −−−−−−−−

Total shares                            17,009         16,109          14,315
                                      −−−−−−−−        −−−−−−−        −−−−−−−−

Diluted EPS                           $ (0.49)        $ 0.04         $ (0.04)
                                      ========        =======        ========




Potentially dilutive options and warrants in the aggregate of 4,090,000 and 8,397,000 in fiscal
2003 and fiscal 2001, respectively, have been excluded from the calculation of the diluted loss
per share as their effect would have been anti−dilutive.

12.         Commitments and Contingencies

Leases


Innovo Group leases certain properties, buildings, office spaces, showrooms and equipment.
Certain leases contain provisions for renewals and escalations. Rental expense for the years
ended November 29, 2003, November 30, 2002, and December 1, 2001 was approximately $367,000,
$136,000, and $107,000, respectively. During September 2000, Innovo Group entered into a lease
agreement with a related party, which is owned by Innovo Group's Chairman, Sam Furrow, to lease
office space in Knoxville, Tennessee. The lease rate is $3,500 per month for approximately
5,000 square feet of office space, has a ten−year term and is cancelable with six months written
notice.

Innovo Group also utilizes office space and office equipment under a cost
sharing arrangement with Commerce and its affiliates. Under the terms of the
verbal arrangement, Innovo Group is allocated a portion of costs incurred by
Commerce and its affiliates for rent, insurance, office supplies, certain
employees' wages and benefits, security and utilities.

Expenses for the years ended 2003, 2002 and 2001 under this              arrangement   were
$343,000, $25,000, and $25,000, respectively.


                                         F−24
12.      Commitments and Contingencies (continued)

The future minimum rental commitments under operating leases as of November 29,
2003 are as follows (in thousands):

2004                                    $       616
2005                                            568
2006                                            500
2007                                            411
2008                                            401
Thereafter                                      316
                                        −−−−−−−−−−−
Total future minimum lease payments     $     2,812
                                        −−−−−−−−−−−

License Agreements

         Joe's Jeans

On February 7, 2001, in connection with the acquisition of the Joe's Jeans
license rights, Innovo Group entered into a ten− year license agreement that
requires the payment of a royalty based upon 3% of net sales, subject to
additional royalty amounts in the event certain sales and gross profit
thresholds are met on an annual basis.

         Bongo(R).


On March 26, 2001, Innovo Group entered into a license agreement with IP Holdings LLC, the
licensor of the Bongo(R) mark, pursuant to which Innovo Group obtained the right to design,
manufacture and distribute bags, belts and small leather/pvc goods bearing the Bongo(R)
trademark. The agreement was amended on July 26, 2002 that extended the term of the license
agreement commencing as of April 1, 2003 and continuing through March 31, 2007, unless the
Bongo(R) brand is sold in its entirety, in which case the license agreement would terminate
immediately. Innovo Group pays a 5% royalty and a 2% advertising fee on the net sales of Innovo
Group's goods bearing the Bongo(R) trademark.

         Mattel, Inc.


In fiscal 2002, IAA entered into a five−year license agreement with Mattel, Inc. to produce Hot
Wheels(R) branded adult apparel and accessories in the United States, Canada and Puerto Rico.
Under the terms of the license agreement, IAA may produce apparel and accessory products
targeted to men and women in the junior and contemporary markets. The products lines may include
active wear, sweatshirts and pants, outerwear, t−shirts, "baby tees" for women, headwear, bags,
backpacks and totes, which will be emblazoned with the Hot Wheels(R) flame logo.

IAA may terminate the agreement in any year by paying the remaining balance of
that years minimum royalty guarantees plus the subsequent years minimum royalty
guarantees. Royalties paid by IAA earned in excess of the minimum royalty
requirements for any one given year, may be credited towards the shortfall
amount of the minimum required royalties in any subsequent period during the
term of the license agreement.


According to the terms of the agreement, IAA has the right to sublicense the accessory product's
category to Innovo. The agreement calls for a royalty rate of seven percent and a two percent
advertising fee on the net sales of goods bearing the Hot Wheels(R) trademark. In the event IAA
defaults upon any material terms of the agreement, the licensor shall have the right to
terminate the agreement. As of November 29, 2003, Innovo Group had not yet commenced sales of
the Hot Wheels(R) apparel and accessory products. Innovo Group has accrued for the minimum
royalties under the terms of the agreement.

         Bow Wow


On August 1, 2002, IAA entered into an exclusive 42−month worldwide agreement for the Bow Wow
license, granting IAA the right to produce and market products bearing the mark and likeness of
the popular stage and screen performer. The IAA division has created and market a wide range of
apparel and coordinating accessories for boys and plans on creating and marketing a wide range
of apparel and coordinating accessories for girls. The license agreement between IAA, Bravado
International Group, the agency with the master license rights to Bow Wow, and LBW
Entertainment, Inc. calls for the performer to make at least one public appearance every six
months during the term of the agreement to promote the Bow Wow products, as well as use his best
efforts to promote and market these products on a daily basis.

Additional terms of the license agreement allows IAA to market boys and girls
products bearing the Bow Wow brand to all distribution channels, the right of
first refusal on all other Bow Wow related product categories during the term of
the license agreement,     and the


                                      F−25
right of first of refusal on proposed transactions by the licensor with third
parties upon the expiration of the agreement. The agreement calls for IAA to pay
an eight percent royalty on the nets sales of goods bearing Bow Wow related
marks. In the event IAA defaults upon any material terms of the agreement, the
licensor shall have the right to terminate the agreement. Furthermore, IAA has
the right to sublicense the accessory product's category to Innovo.


         Fetish(TM)


On February 13, 2003, IAA entered into a 44 month exclusive license agreement for the United
States, its territories and possessions with the recording artist and entertainer Eve for the
license of the Fetish(TM) trademark for use with the production and distribution of apparel and
accessory products. IAA has guaranteed minimum net sales obligations of $8,000,000 in the first
18 months of the agreement, $10,000,000 in the following 12 month period and $12,000,000 in the
12 month period following thereafter. According to the terms of the agreement, IAA is required
to pay an 8% royalty and a 2% advertising fee on the net sales of products bearing the
Fetish(TM) logo. In the event IAA does not meet the minimum guaranteed sales, IAA will be
obligated to make royalty and advertising payments equal to the minimum guaranteed sales
multiplied by the royalty rate of 8% and the advertising fee of 2%. IAA also has the right of
first refusal with respect to the license rights for the Fetish(TM) trademark in the apparel and
accessories category upon the expiration of the agreement, subject to meeting certain sales
performance targets during the term of the agreement. Additionally, IAA has the right of first
refusal for the apparel and accessory categories in territories in which it does not currently
have the license rights for the Fetish(TM) trademark.

In connection with the launch and subsequent promotion of the Fetish(TM) brand,
IAA incurrent certain advertising and promotion expenses in excess of the
required 2% advertising royalty, which the licensor has agreed represent a
prepayment against future advertising royalties under the license. Accordingly,
Innovo Group has recorded approximately $985,000 of advertising expenses as
prepaid royalties in the accompanying balance sheet.


Innovo Group displays names and logos on its products under license agreements that require
royalties ranging from 3% to 8% of sales and required annual advance payments (included in
prepaid expenses) and certain annual minimum payments. Royalty expense was $1,338,000, $463,000,
and $132,000 for the years ending 2003, 2002, and 2001, respectively.

The future minimum royalty commitments under royalty      agreements as of November
29, 2003 are as follows (in thousands):

2004                                        $       832
2005                                              1,188
2006                                                885
2007                                                417
                                            −−−−−−−−−−−
Total future minimum royalty payments       $     3,322
                                            −−−−−−−−−−−


Litigation


Innovo Group is involved from time to time in routine legal matters incidental to its business.
In the opinion of Innovo Group's management, resolution of such matters will not have a material
effect on its financial position or results of operations.

13.      Segment Disclosures

Current Operating Segments


During fiscal 2003, Innovo Group operated in two segments, accessories and apparel. The
Accessories segment represents Innovo Group's historical line of business as conducted by
Innovo Group. The apparel segment is comprised of the operations of Joe's and IAA, both of
which began in fiscal 2001, as a result of acquisitions. Innovo Group's real estate operations
and real estate transactions of Innovo Group's Leasall and IRI subsidiaries do not require
substantial management oversight and have therefore been treated as "other" for purposes of
segment reporting. The operating segments have been classified based upon the nature of their
respective operations, customer base and the nature of the products sold.

Innovo Group evaluates performance and allocates resources based on gross
profits, and profit or loss from operations before interest and income taxes.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.

                                        F−26
Information for each reportable segment during the three years ended November
29, 2003, is as follows (in thousands):



            November 29, 2003     Accessories      Apparel      Other (A)        Total
                                  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                      (in thousands)

Net Sales                          $14,026        $69,103        $   −−        $83,129
Gross Profit                         3,095          9,881            −−         12,976
Depreciation &Amortization             39          1,087           101          1,227
Interest Expense                       214            946            56          1,216
Segment Assets                       4,218         33,571         8,576         46,365
Expenditures for Segment Assets        186            563           146            895



(A) Other includes corporate      expenses and assets and expenses         related to real
estate transactions.



            November 30, 2002     Accessories      Apparel      Other (A)        Total
                                  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                      (in thousands)

Net Sales                          $12,072        $17,537        $   −−        $29,609
Gross Profit                         3,393          6,144            −−          9,537
Depreciation &Amortization             21            183            52            256
Interest Expense                       140            339            59            538
Segment Assets                       3,820          9,343         1,980         15,143
Expenditures for Segment Assets         70             97           455            622



(A) Other includes corporate      expenses and assets and expenses         related to real
estate transactions.



             December 1, 2001     Accessories      Apparel      Other (A)        Total
                                  −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                      (in thousands)

Net Sales                          $ 5,642        $ 3,650        $    −−       $ 9,292
Gross Profit                         1,749          1,208             −−         2,957
Depreciation &Amortization             45             35             87           167
Interest Expense                        32             79            100           211
Segment Assets                       2,705          6,658            884        10,247
Expenditures for Segment Assets         32             −−             29            61



(A) Other includes corporate      expenses and assets and expenses         related to real
estate transactions.

                                          F−27
Operations by Geographic Areas


Information about Innovo Group's operations in the United States and Asia is presented below (in
thousands). Inter− company revenues and assets have been eliminated to arrive at the
consolidated amounts.



                                                       Adjustments &
                         United States     Asia         Eliminations    Total
                         −−−−−−−−−−−−−   −−−−−−−−      −−−−−−−−−−−−−   −−−−−−−−
                                            (in thousands)

Novmeber 29, 2003

Sales                      $ 80,111      $  3,018       $     −−       $ 83,129
Intercompany sales              959            −−           (959)            −−
                           −−−−−−−−      −−−−−−−−       −−−−−−−−       −−−−−−−−
Total sales                $ 81,070      $ 3,018        $   (959)      $ 83,129
                           ========      ========       ========       ========
Income from operations     $ (6,964)     $ (1,093)      $    541       $ (7,516)
                           ========      ========       ========       ========
Total assets               $ 48,386      $   (743)      $ (1,278)      $ 46,365
                           ========      ========       ========       ========

Novmeber 30, 2002

Sales                      $ 27,707      $  1,902       $     −−       $ 29,609
Intercompany sales            2,228            −−         (2,228)            −−
                           −−−−−−−−      −−−−−−−−       −−−−−−−−       −−−−−−−−
Total sales                $ 29,935         1,902       $ (2,228)      $ 29,609
                           ========      ========       ========       ========
Income from operations     $ 1,558       $    115       $   (484)      $ 1,189
                           ========      ========       ========       ========
Total assets               $ 13,693      $ 1,974        $   (524)      $ 15,143
                           ========      ========       ========       ========

December 1, 2001

Sales                      $  9,292      $     −−       $     −−       $  9,292
Intercompany sales               −−            −−             −−             −−
                           −−−−−−−−      −−−−−−−−       −−−−−−−−       −−−−−−−−
Total sales                $ 9,292       $     −−       $     −−       $ 9,292
                           ========      ========       ========       ========
Income from operations     $   (399)     $     −−       $     −−       $   (399)
                           ========      ========       ========       ========
Total assets               $ 10,247      $     −−       $     −−       $ 10,247
                           ========      ========       ========       ========




14.       Related Party Transactions

Innovo Group has adopted a policy requiring that any material transaction
between Innovo Group and persons or entities affiliated with officers, directors
or principal stockholders of Innovo Group be on terms no less favorable to
Innovo Group than reasonably      could have been obtained in arms' length
transactions with independent third parties.

Anderson Stock Purchase Agreement


Pursuant to a Stock Purchase Right Award granted in February 1997, Innovo Group's president
purchased 250,000 shares of common stock (the Award Shares) with payment made by the execution
of a non−recourse note (the Note) for the exercise price of $2.81 per share ($703,125 in the
aggregate). The Note was due, without interest, on April 30, 2002, and was collateralized by the
1997 Award Shares. The Note may be paid or prepaid (without penalty) by (i) cash, or (ii) the
delivery of Innovo Group's common stock (other than the Award Shares) held for a period of at
least six months, which shares would be credited against the Note on the basis of the closing
bid price for the common stock on the date of delivery.

On July 18, 2002, the Board of Directors voted in favor of extending the term of
Note until April 30, 2005. The remaining provisions of the Note remained the
same. As of November 29, 2003, $703,125 remains outstanding under this
promissory note.

Crossman Loan

On February 7, 2003 and on February 13, 2003, Innovo Group entered into a loan
agreement with Marc Crossman, then a member of our Board of Directors and now
also our Chief Financial Officer. The loan was funded in two phases of $250,000
each on February 7, 2003 and February 13, 2003 for an aggregate loan value of
$500,000. In the event of default, each loan is collateralized by 125,000 shares
of Innovo Group common stock as well as a general unsecured claim on the assets
of Innovo Group, subordinate to existing lenders. Each loan matures six months
and one day from the date of its respective funding, at which point the
principal amount loaned and any unpaid accrued interest is due and payable in
full without demand. The loan carries an 8% annualized interest rate with
interest payable in equal monthly installments. The loan may be repaid by us at
any time during the term of the loan without penalty. Further, prior to the
maturity of the loan and the original due dates, Innovo Group elected, at its
sole option, to extend the term of the loan for an additional period of six
months and one day. Innovo Group's disinterested directors approved the loan
from Mr. Crossman. Subsequent to the year ended November 29, 2003 and prior to
the maturity of the loans in February 2004, the parties agreed to extend the
term of the loan for an additional period of ninety days. Further, pursuant to
the extension of the loan, the loan was amended to provide Mr. Crossman with the


                                      F−28
sole and exclusive option to continue to extend the term of the loan for three
additional ninety day periods by giving notice of such extension on or before
the due date of the loan.


Purchases of Goods and Services


The Innovo, Joe's and IAA subsidiaries purchased goods and distribution and operational services
from Commerce and its affiliates in fiscal 2003, fiscal 2002 and fiscal 2001. The services
purchased included but were not limited to accounts receivable collections, certain general
accounting functions, inventory management and distribution logistics. The following schedule
represents Innovo's, Joe's and IAA's purchases from Commerce and its affiliates during fiscal
2003, fiscal 2002 and fiscal 2001 (in thousands):

                                                              Innovo
                                             −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                           Year Ended
                                                         (in thousands)
                                             −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                               2003             2002             2001
                                             −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Goods                                        $ 2,898          $ 3,317          $ 2,320
Distribution Services                            615              644              362
Operational Services                             228              203              112
                                             −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Total                                        $ 3,741          $ 4,164          $ 2,794
                                             =========================================




                                      Joe's                                 IAA
                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−   −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                   Year Ended                            Year Ended
                                 (in thousands)                        (in thousands)
                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−   −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                         2003          2002          2001      2003          2002          2001
                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−   −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Goods                   $2,195        $6,102        $1,102   $41,798        $6,171        $1,794
Distribution Services      127           107            20        −−            −−            −−
                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−   −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Total                   $2,322        $6,209        $1,122   $41,798        $6,171        $1,794
                        ==================================   ===================================




Additionally, Innovo Group is charged an allocation expense from Commerce for expenses
associated with Innovo Group occupying space in Commerce's Commerce, California facility and the
use of general business machines and communication services. These expenses totaled
approximately $343,000 for fiscal 2003 and $25,000 for fiscal 2002 and fiscal 2001. Innovo
Group also utilizes office space and office equipment under a cost sharing arrangement with
Commerce and its affiliates.

Innovo Group believes that all the transactions conducted between Innovo Group
and Commerce were completed on terms that were competitive and at market rates.
Included in due to related parties is $390,000 and $4,159,000 at November 29,
2003 and November 30, 2002, respectively, relating to amounts due to Commerce
and affiliated entities for goods and services described above.

Azteca Production International, Inc.

In the third quarter of fiscal 2001, Innovo Group acquired Azteca Productions
International, Inc.'s Knit Division and formed the subsidiary Innovo Azteca
Apparel, Inc. Pursuant to equity transactions completed in fiscal 2000, the
principals of Azteca Production International, Inc. became affiliates of Innovo
Group. Innovo Group purchased the Division's customer list, the right to
manufacture and market all of the Knit Division's current products and entered
into certain non−compete and non− solicitation agreements and other intangible
assets associated with the Knit Division. As consideration, Innovo Group issued
to Azteca, 700,000 shares of Company's common stock valued at $1.27 per share
based upon the closing price of the common stock on August 24, 2001, and
promissory notes in the amount of $3.6 million.


As part of the acquisition of the Blue Concept Division from Azteca in July 2003, IAA and AZT
entered into a two−year, renewable, non−exclusive Supply Agreement for products to be sold by
the Blue Concept Division. In addition to the customary obligations, the Supply Agreement
requires that AZT will receive payment immediately upon receipt of invoices for our purchase
orders and that AZT will charge a per unit price such that IAA will have a guaranteed profit
margin of 15 percent on a "per unit" basis. In addition, AZT is responsible for all quality
defects in merchandise manufactured.

IAA also utilizes AZT to distribute goods manufactured under the Supply
Agreement, and temporarily has AZT invoice and collect payments from AEO, for
goods manufactured in Mexico, until such time that we can establish a Mexican
subsidiary to invoice and collect payments from AEO.


                                                 F−29
JD Design, LLC


Pursuant to the license agreement entered into with JD Design, LLC under which Innovo Group
obtained the license rights to Joe's Jeans, Joe's is obligated to pay a 3% royalty on the net
sales of all products bearing the Joe's Jeans or JD trademark or logo. For fiscal 2003, fiscal
2002 and fiscal 2001, this amount totaled $339,000, $277,000 and $46,000, respectively. Included
in due to related parties on our balance sheet are accrued royalties of $189,000 and $91,000 for
fiscal 2003 and fiscal 2002, respectively.

15.       Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the three
years ended November 29, 2003, November 30, 2002 and December 1, 2001,
respectively: (in thousands, except per share amounts)



2003                                                      Quarter Ended
                                               (in thousands, except per share data)
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                    March 1           May 31         August 30       November 29
                                    −−−−−−−−         −−−−−−−−        −−−−−−−−−       −−−−−−−−−−−

Net Sales                           $ 11,915        $ 12,013         $ 21,906         $ 37,295
Gross Profit                           3,310           3,456            3,893            2,317
Income (Loss) before Income Taxes        345            (503)          (2,288)          (5,827)
Net Income (Loss)                        282            (493)          (2,312)          (5,794)
Net Income (Loss) per Share:
Basic                               $   0.02        $   (0.03)       $   (0.14)       $   (0.34)
Diluted                             $   0.02        $   (0.03)       $   (0.14)       $   (0.34)


2002                                                      Quarter Ended
                                               (in thousands, except per share data)
                                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                    March 2           June 1         August 31       November 30
                                    −−−−−−−−         −−−−−−−−        −−−−−−−−−       −−−−−−−−−−−

Net Sales                           $   3,201       $   6,802        $ 10,148         $   9,458
Gross Profit                              912           2,345           3,357             3,156
Income (Loss) before Income Taxes        (475)            223             932                32
Net Income (Loss)                        (496)            207             820                41
Net Income (Loss) per Share:
Basic                               $   (0.03)      $    0.01        $    0.06        $    0.00
Diluted                             $   (0.03)      $    0.01        $    0.05        $    0.00




16.       Employee Benefit Plans

On December 1, 2002,      Innovo Group established a tax qualified defined
contribution 401(k) Profit Sharing Plan (the "Plan"). All employees who have
worked for Innovo Group for 30 consecutive days may participate in the Plan and
may contribute up to 100% of their salary to the plan. Innovo Group's
contributions may be made on a discretionary basis. All employees who have
worked 500 hours qualify for profit sharing in the event at the end of each year
Innovo Group decides to do so. Costs of the plan charged to operations were
$20,000 for the year ended November 29, 2003.

                                        F−30
17.      Other Income and Expense.

Other income and expense consist of the following:



                                                             Year Ended
                                                           (in thousands)
                                                     −−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                     2003        2002       2001
                                                     −−−−        −−−−       −−−−

Rental, real estate, and management fee income       $366        $217        $71
Unrealized gain on foreign currency                   154          −−         −−
Other items                                             6          18         13
                                                     −−−−        −−−−       −−−−
Total other income                                   $526        $235        $84
                                                     ====        ====       ====

Rental expense                                       $ 58        $ 43        $−−
Unrealized loss on foreign currency                    −−          41         −−
Other items                                            10          90          3
                                                     −−−−        −−−−       −−−−
Total other expense                                  $ 68        $174        $ 3
                                                     ====        ====       ====


                                      F−31
                                              ITEM 16.2
                                 Innovo Group Inc. and Subsidiaries

                                             Schedule II
                                  Valuation of Qualifying Accounts



                                                                       Additions
                                                       Balance at     Charged to
                                                      Beginning of      Costs &         Charged to                   Balance at End
Description                                              Period        Expenses       Other Accounts     Deductions      of Period
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Allowance for customer credits and allowances:
Year ended November 29, 2003                         $   383,000     $ 1,775,000        $        −−     $        −−     $ 2,158,000
Year ended November 30, 2002                             164,000          56,000            163,000 (A)          −−         383,000
Year ended December 1, 2001                               36,000         128,000                 −−              −−         164,000

Allowances   for inventories:
Year ended   November 29, 2003                           105,000       4,088,000                 −−              −−       4,193,000
Year ended   November 30, 2002                           125,000          19,000                 −−         (39,000)        105,000
Year ended   December 1, 2001                             78,000          47,000                 −−              −−         125,000

Allowance for deferred taxes:
Year ended November 29, 2003                          13,918,000      (5,720,000)                −−              −−       8,198,000
Year ended November 30, 2002                           7,316,000       6,602,000                 −−              −−      13,918,000
Year ended December 1, 2001                            6,032,000       1,284,000                 −−              −−       7,316,000




(A) Uncollected receivables written off, net of recoveries


                                                 End of Filing



                                                      F−32

</TEXT>
</DOCUMENT>
                 SECOND AMENDMENT TO TRADEMARK LICENSE AGREEMENT

         This SECOND AMENDMENT to the TRADEMARK LICENSE AGREEMENT is dated and
effective as of February 18, 2004 ("Second Amendment") by and between BLONDIE
ROCKWELL, INC., a New York corporation with offices at c/o Erving Wonder
Management, 1500 Samson Street, Philadelphia, PA 19102 (the "Licensor") and
INNOVO AZTECA APPAREL, INC., a California corporation with offices at 5804 E.
Slauson Ave., Commerce, CA 90040 (the "Licensee"). Capitalized terms not defined
herein shall have the meanings ascribed to them in the Agreement (defined
below).


WHEREAS, Licensor   and Licensee have entered into that certain Trademark License Agreement dated
February 13, 2003   ("Trademark License Agreement"), as amended by that First Amendment to
Trademark License   Agreement dated September 8, 2003 ("First Amendment") (together the Trademark
License Agreement   and First Amendment shall be referred to hereinafter as the "Agreement"); and

         WHEREAS, Licensor acknowledges and Licensee warrants and represents
that it has incurred expenditures and/or made payments to Licensor as of
November 29, 2003 (the "Determination Date") totaling $1,047,474 pursuant to
Sections 4(f)(i),    4(f)(ii) and 4(f)(iii) of the Agreement ("Advertising
Expenditure Amount"), which such amounts are reflected on Schedule A attached
hereto and incorporated herein by reference and are hereby verified by an
officer of the Licensee in the certificate on Schedule B attached hereto and
incorporated herein by reference; and

         WHEREAS,   Licensor and Licensee acknowledge that the Advertising
Expenditure Amount expended by Licensee and/or paid to Licensor is in excess of
the amount Licensee is obligated to expend pursuant to Sections 4(f)(i),
4(f)(ii) and 4(f)(iii) of the Agreement during the first Annual Period; and

         WHEREAS, Licensor and Licensee desire to, amend the Agreement to
clarify and recognize that, as of November 29, 2003, $953,458 of the Advertising
Expenditure Amount has been expended by Licensee and/or paid to Licensor in
excess of Licensee's obligations under Sections 4(f)(i), 4(f)(ii) and 4(f)(iii)
of the Agreement ("Additional Advertising Expenditure Amount") and that said
Additional Advertising Expenditure Amount shall satisfy a prepayment of a future
obligation owed by Licensee to Licensor for the remainder of the term of the
Agreement solely pursuant to Sections 4(f)(i), 4(f)(ii) and 4(f)(iii) of the
Agreement, so long as Licensee shall resume advertising payments in accordance
with these Sections at such date that an amount equal to the Additional
Advertising Expenditure Amount shall have been credited in full to Licensee for
its obligations under Sections 4(f)(i), 4(f)(ii) and 4(f)(iii) of the Agreement
(the "Recoupment Date"); and


WHEREAS, Licensor and Licensee desire to amend the Agreement to provide that: (i) following the
Recoupment Date, the Advertising Payment, as defined in said Agreement, shall be increased from
one percent (1%) to two percent (2%); and (ii) the

                                         1
Licensee's Advertising Expense obligation,   as defined in said Agreement,   shall
be eliminated.


NOW, THEREFORE, the parties hereto, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
and intending to be legally bound hereby, stipulate and agree as follows:

         1. Section 4(f)(i) of the Agreement shall be amended by deleting the
third sentence thereof in its entirety and replacing it with the following:

         "Licensor shall spend the Advertising Payments received by it from
Licensee for the marketing,      advertising and promoting the Property and
Trademarks in general in any manner determined by Licensor in its discretion."

         2. A new Section 4(l) shall be added to the Agreement as follows:

         "4(l) Beginning on the Determination Date, all amounts expended by
Licensee to pay for the services of Paul Wilmot shall be deemed an advance
against Royalties payable to Licensor hereunder."

         3. Licensor and Licensee shall agree that Licensor shall accept the
Additional Advertising Expenditure Amount paid by Licensee as a pre−payment for
future obligations of Licensee solely pursuant to Sections 4(f)(i), (4)(f)(ii)
and 4(f)(iii) of the Agreement       and allow   Licensee,   beginning on the
Determination Date, to apply such excess to reduce the Advertising Payment
obligation and Advertising Expense obligation as required in Sections 4(f)(i),
4(f)(ii) and 4(f)(iii) to zero until the Recoupment Date, so long as Licensee
shall resume payments in accordance with Sections 4(f)(i), 4(f)(ii) and
4(f)(iii) after the Recoupment Date.


4. Following the Recoupment Date, (i) the parties hereto agree that the Advertising Payment
required to be paid to Licensor in accordance with the terms of Section 4(f)(i) of the
Agreement, shall be increased from the greater of one percent (1%) of Minimum Net Sales or one
percent (1%) of actual Net Sales to the greater of two percent (2%) of Minimum Net Sales or two
percent (2%) of actual Net Sales, to paid to Licensor in accordance with the terms of the
Agreement, and (ii) Section 4(f)(iii) of the Agreement shall be deleted in its entirety.

         5. Except as specifically modified by this Second Amendment, all other
terms and conditions of the Agreement shall remain in full force and effect.

         6. This Second Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which, taken together,
shall constitute one and the same instrument.

     [remainder of page intentionally left blank, signature page to follow]

                                       2
         IN WITNESS WHEREOF, each of the Licensor and Licensee has caused this
Second Amendment to be executed by its duly authorized officer effective as of
February 18, 2004.


                                       LICENSOR:

                                       BLONDIE ROCKWELL, INC.



                                       By:    /s/ Eve Jeffers
                                              −−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                              Eve Jeffers

                                       Title: President




                                       LICENSEE:

                                       INNOVO AZTECA APPAREL, INC.



                                       By:    /s/ Samuel J. Furrow, Jr.
                                              −−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                              Samuel J. Furrow, Jr.


                                       Its:   Chief Executive Officer




                                      3



</TEXT>
</DOCUMENT>
                                SECOND AMENDMENT
                                       TO
                                 PROMISSORY NOTE

         THIS SECOND AMENDMENT TO PROMISSORY NOTE is made and entered into this
the 9th day of February, 2004 by and between Innovo Group Inc., a Delaware
corporation ("Maker") and MARC CROSSMAN ("Payee") (the "Second Amendment").

         WHEREAS, Maker has executed that certain promissory note in favor of
Payee for the principal sum of Two Hundred Fifty           Thousand and No/100
($250,000.00) Dollars, together with interest thereon as set forth in the
Promissory Note dated February 7, 2003 (the "Promissory Note");

         WHEREAS, the Promissory Note was originally due on August 8, 2003 with
an option to extend the Promissory Note until February 9, 2004 at Maker's option
and sole discretion prior to the original due date;

         WHEREAS, the due date for the Promissory Note was extended by Maker
until February 9, 2004 pursuant to the terms in the Promissory Note by the First
Amendment thereto;

         WHEREAS, Maker and Payee have agreed to extend the due date of the
Promissory Note for an initial additional period of 90 days;

         WHEREAS, upon the expiration of the Extended Due Date (as defined
herein), Payee may, at his option and sole discretion elect to further extend
the due date of the Promissory Note for up to three (3) successive periods of 90
days each which such first successive period shall commence at 12:00 am on May
10, 2004 and expire at 11:59 pm 90 days thereafter and such additional extension
shall continue at Payee's option and sole discretion until all such successive
periods have been utilized;

         WHEREAS, Maker and Payee   believe   this Second   Amendment to be in the
best interest of the parties; and

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

         1.       The due date of the Promissory Note shall be extended until
                  11:59 pm on May 9, 2005. (the "Extended Due Date"). Upon the
                  expiration of the Extended Due Date, the Payee may, at his
                  option and sole discretion, elect to further extend the due
                  date of the Promissory Note for up to three (3) successive
                  periods of 90 days each which such first successive period
                  shall commence at 12:00 am on May 10, 2004 and expire at 11:59
                  p.m. 90 days thereafter and such additional extensions may
                  continue at Payee's option and sole discretion until all such
                  successive periods have been utilized.
        2.      Evidence of Payee's successive extensions shall be made in
                writing signed by the Payee and acknowledged by the Maker in
                the form set forth on Exhibit A attached hereto.

        3.      In the event Payee does not wish to extend the Promissory Note
                for any successive 90 day period, then the Promissory Note
                shall immediately become due and fully payable with all
                interest due thereunder in accordance with the terms of the
                Promissory Note.

        4.      Interest shall continue to accrue at the rate and in the
                manner set forth in the Promissory Note. 5. All terms
                capitalized but not defined herein shall have the same meaning
                as set forth in the Promissory Note. 6. Except as modified
                herein, all other terms and conditions of the Promissory Note
                shall remain in full force and effect.

         IN WITNESS WHEREOF, Maker has caused   this   Second   Amendment   to be
executed as of the date first written above.


                                   MAKER:

                                   INNOVO GROUP INC.

                                   By:      /s/ Samuel J. Furrow, Jr.
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                            Samuel J. Furrow, Jr.

                                   Its:     Chief Executive Officer



                                   PAYEE:


                                   By:      /s/ Marc B. Crossman
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                            Marc B. Crossman



                                     2
                                                                       EXHIBIT A
                                                                       −−−−−−−−−


                    Election of Extension of Promissory Note
                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         I, Marc B. Crossman, ("Payee") hereby elect to extend that certain
Promissory Note executed in my favor by Maker for the principal sum of Two
Hundred Fifty Thousand and No/100 ($250,000.00) Dollars, together with interest
thereon as set forth in the Promissory Note dated February 7, 2003, for an
additional 90 day period commencing on                         and expiring on
                                          −−−−−−−−−−−−−−−−−−−−
−−−−−−−−−−−−−−−−−−−−.

                                        PAYEE:


                                        By:
                                                 −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                 Marc B. Crossman


Acknowledged and agreed to by MAKER:

INNOVO GROUP INC.


By:
         −−−−−−−−−−−−−−−−−−−−−−−−−−−
         Samuel J. Furrow, Jr.
Its:     Chief Executive Officer




</TEXT>
</DOCUMENT>
                                SECOND AMENDMENT
                                       TO
                                 PROMISSORY NOTE

         THIS SECOND AMENDMENT TO PROMISSORY NOTE is made and entered into this
the 9th day of February, 2004 by and between Innovo Group Inc., a Delaware
corporation ("Maker") and MARC CROSSMAN ("Payee") (the "Second Amendment").

         WHEREAS, Maker has executed that certain promissory note in favor of
Payee for the principal sum of Two Hundred Fifty           Thousand and No/100
($250,000.00) Dollars, together with interest thereon as set forth in the
Promissory Note dated February 13, 2003 (the "Promissory Note");


WHEREAS, the Promissory Note was originally due on August 14, 2003 with an option to extend the
Promissory Note until February 15, 2004 at Maker's option and sole discretion prior to the
original due date;

         WHEREAS, the due date for the Promissory Note was extended by Maker
until February 15, 2004 pursuant to the terms in the Promissory Note by the
First Amendment thereto;

         WHEREAS, Maker and Payee have agreed to extend the due date of the
Promissory Note for an initial additional period of 90 days;

         WHEREAS, upon the expiration of the Extended Due Date (as defined
herein), Payee may, at his option and sole discretion elect to further extend
the due date of the Promissory Note for up to three (3) successive periods of 90
days each which such first successive period shall commence at 12:00 am on May
16, 2004 and expire at 11:59 pm 90 days thereafter and such additional extension
shall continue at Payee's option and sole discretion until all such successive
periods have been utilized;

         WHEREAS, Maker and Payee   believe   this Second   Amendment to be in the
best interest of the parties; and

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

         1.       The due date of the Promissory Note shall be extended until
                  11:59 pm on May 15, 2005. (the "Extended Due Date"). Upon the
                  expiration of the Extended Due Date, the Payee may, at his
                  option and sole discretion, elect to further extend the due
                  date of the Promissory Note for up to three (3) successive
                  periods of 90 days each which such first successive period
                  shall commence at 12:00 am on May 16, 2004 and expire at 11:59
                  pm 90 days thereafter and such additional extensions may
                  continue at Payee's option and sole discretion until all such
                  successive periods have been utilized.
        2.      Evidence of Payee's successive extensions shall be made in
                writing signed by the Payee and acknowledged by the Maker in
                the form set forth on Exhibit A attached hereto.

        3.      In the event Payee does not wish to extend the Promissory Note
                for any successive 90 day period, then the Promissory Note
                shall immediately become due and fully payable with all
                interest due thereunder in accordance with the terms of the
                Promissory Note.

        4.      Interest shall continue to accrue at the rate and in the
                manner set forth in the Promissory Note.

        5.      All terms capitalized but not defined herein shall have the
                same meaning as set forth in the Promissory Note.

        6.      Except as modified herein, all other terms and conditions of
                the Promissory Note shall remain in full force and effect.

         IN WITNESS WHEREOF, Maker has caused   this   Second   Amendment   to be
executed as of the date first written above.


                                   MAKER:

                                   INNOVO GROUP INC.

                                   By:      /s/ Samuel J. Furrow, Jr.
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                            Samuel J. Furrow, Jr.

                                   Its:     Chief Executive Officer



                                   PAYEE:


                                   By:      /s/ Marc B. Crossman
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                            Marc B. Crossman


                                     2
                                                                         EXHIBIT A
                                                                         −−−−−−−−−


                    Election of Extension of Promissory Note
                    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         I, Marc B. Crossman, ("Payee") hereby elect to extend that certain
Promissory Note executed in my favor by Maker for the principal sum of Two
Hundred Fifty Thousand and No/100 ($250,000.00) Dollars, together with interest
thereon as set forth in the Promissory Note dated February 13, 2003, for an
additional 90 day period commencing on                        and expiring on
                                           −−−−−−−−−−−−−−−−−−
−−−−−−−−−−−−−−−−.

                                       PAYEE:


                                       By:
                                                −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                                Marc B. Crossman


Acknowledged and agreed to by MAKER:

INNOVO GROUP INC.


By:
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
         Samuel J. Furrow, Jr.
Its:     Chief Executive Officer




                                         3

</TEXT>
</DOCUMENT>
         SUBLEASE

          Between

      WRC MEDIA INC.

       as Sublessor

            and

    INNOVO GROUP, INC.

       as Sublessee




Premises: Entire 23d floor

    512 Seventh Avenue

    New York, NY 10018
                                    SUBLEASE

                  SUBLEASE, dated as of July 28, 2003 between WRC Media Inc., a
Delaware corporation ("Sublessor"), having an office at 512 Seventh Avenue, New
York, NY 10018 and Innovo Group Inc., a Texas corporation ("Sublessee"), at the
time of execution having an office at 5900 S. Eastern Avenue, Suite 104,
Commerce, CA 90040.

                                   WITNESSETH

                  WHEREAS, by Agreement of Lease ("Master Lease"), dated as of
__ March 2000, between 500−512 Seventh Avenue Limited Partnership, as landlord,
("Landlord") and Sublessor, as tenant, Landlord leased to Sublessor the entire
21st, 22nd and 23rd floors (the "Master Premises") in accordance with the terms
of the Master Lease, of the building ("Building") known as 512 Seventh Avenue,
New York, NY (a true and complete copy of which Master Lease (with certain
financial terms omitted is attached hereto); and

                  WHEREAS,   Sublessor desires to sublet to Sublessee, and
Sublessee desires to hire from Sublessor, a portion of the premises demised
under the Master Lease upon the terms and conditions hereinafter set forth;

                  NOW, THEREFORE, in consideration of the mutual covenants
hereinafter provided, Sublessor and Sublessee hereby agree as follows:

1.       Demised Premises
         −−−−−−−−−−−−−−−−

         1.1. Sublessor hereby sublets to Sublessee, and Sublessee hereby
sublets and hires from Sublessor, the premises ("Premises") comprising the
entire 23rd floor of the Building as leased to Sublessor under the Master Lease,
for the sublease term hereinafter stated and for the Fixed Rent and Additional
Rent (both as hereinafter defined) hereinafter reserved, subject to all of the
terms and provisions hereinafter provided or incorporated in this Sublease by
reference. The parties agree that the rentable space comprising the entire 23rd
floor is deemed to be10,886 square feet.

         1.2. Sublessee agrees to accept the Premises broom clean and vacant on
the Commencement Date (as hereinafter defined) in its "as−is" condition on the
date thereof. The furniture listed on the annexed Schedule 1.2 shall be
available to Sublessee for use during the Term. Sublessor has not made and does
not make any representations or warranties as to the physical condition of the
Premises, or any other matter affecting or relating to the Premises. Sublessee
represents and warrants to Sublessor that, as of the Effective Date, Sublessee
shall examine and inspect all matters with respect to taxes, income and expense
data, insurance costs, bonds, permissible uses, the Master Lease, zoning,
covenants,   conditions and    restrictions and all other matters which in
Sublessee's judgment bear upon the value and suitability of the Sublet Space for
Sublessee's purposes. Sublessee has and will rely solely upon Sublessee's own
inspection and examination of such items and not on any representations of
Sublessor, express


                                       −2−
or implied. By entering the Premises Sublessee shall be deemed to accept the same in its
condition existing as of the date of such entry and subject to all municipal, state and federal
statutes, laws, ordinances, including zoning ordinances, and regulations governing and relating
to the use, occupancy or possession of the Premises.

         1.3. Any and all alterations to, work to be performed in or materials
to be supplied for the Premises shall be made, performed and supplied at the
sole cost and expense of Sublessee and in conformance with all of the terms and
provisions of this Sublease and the Master Lease.


1.4. Throughout the Term, Sublessee shall allow to Sublessor access to the telephone equipment
room located in the Premises at reasonable times, and in the event of emergency.

2.       Term
         −−−−

         2.1. The term ("Term") of this Sublease shall commence on the date (the
"Commencement Date") which is the later of (i) the date Sublessor shall have
obtained Landlord's written consent to this Sublease in accordance with the
provisions of Article 20, and (ii) August 1, 2003, and unless earlier terminated
as herein provided, shall expire on July 31, 2009 (the "Expiration Date"). By
notice given on or before September 1, 2008, and provided Sublessee is not in
breach and has not been in breach more than twice during the Term, Sublessee may
elect to renew the Term of this Sublease for a period ending February 28, 2015,
in which event the Fixed Rent for such renewal term shall be the greater of (i)
Fixed Rent paid by Sublessor from time to time during that renewal term plus 2%
or (ii) the fair market value of the space, determined by an industry expert
acceptable to both parties in August, 2008; and Additional Rent shall continue
to be calculated as provided herein. Until Subtenant exercises the foregoing
option, Sublessor shall have the right to show the Premises to prospective
subtenants from July 1, 2008 upon reasonable notice and during regular business
hours.

         2.2. If the term of the Master Lease is terminated for any reason prior
to the Expiration Date, this Sublease shall thereupon be terminated ipso facto
without any liability of Sublessor to Sublessee by reason of such early
termination. Except as otherwise expressly provided in this Sublease with
respect to those obligations of Sublessee and Sublessor which by their nature or
under the circumstances can only be, or under the provisions of this Sublease
may be, performed after the termination of this Sublease, the Term and estate
granted hereby shall end at noon on the date of termination of this Sublease as
if such date were the Expiration Date, and neither party shall have any further
obligation or liability to the other after such termination. Notwithstanding the
foregoing, any liability of Sublessee to make any payment under this Sublease,
whether of Fixed Rent, Additional Rent (both as hereinafter defined) or
otherwise,   which shall have accrued prior to the expiration or sooner
termination of this Sublease, shall survive the expiration or sooner termination
of this Sublease.


                                       −3−
         2.3. Sublessee waives the right to recover any damages which may result
from Sublessor's    failure to deliver possession of the Premises on the
Commencement Date. If Sublessor shall be unable to deliver possession of the
Premises on such scheduled date, and provided Sublessee is not responsible for
such inability to give possession, the Rent reserved and guaranteed to be paid
herein shall not commence until Sublessor shall be able to so deliver possession
of the Premises to Sublessee, and no such failure to deliver possession on such
scheduled date shall in any way affect the validity of this Sublease or the
obligations of Sublessee hereunder or give rise to any claim for damages by
Sublessee or claim for rescission of this Sublease, nor shall the same in any
way be construed to extend the Term.

         2.4. The parties agree that this Article 2 constitutes an express
provision as to the time at which Sublessor shall deliver possession of the
Premises to Sublessee, and Sublessee hereby waives any rights to rescind this
Sublease which Sublessee might otherwise have pursuant to Section 223−a of the
Real Property Law of the State of New York or any other law of like import now
or hereafter in force.

3.       Rent
         −−−−

         3.1.   The rent   ("Rent")   reserved   for the Term   shall   consist of the
following:

                   (i)       subject to Section 3.3, for the first three years of
                             the Term, annual fixed rent ("Fixed Rent") at the
                             rate of THREE HUNDRED FORTY EIGHT THOUSAND THREE
                             HUNDRED FIFTY−TWO DOLLARS AND NO CENTS ($348,352.00)
                             per annum     for the    period  commencing   on the
                             Commencement Date and ending on the thirty−first day
                             of the 36th month after the Effective Date, payable
                             in equal monthly installments of TWENTY NINE THOUSAND
                             TWENTY   NINE    DOLLARS   AND THIRTY   THREE   CENTS
                             ($29,029.33) each.

                   (ii)      for the next succeeding three years of the Term,
                             annual Fixed Rent at the rate of THREE HUNDRED FIFTY
                             NINE THOUSAND TWO HUNDRED      THIRTY EIGHT DOLLARS
                             ($359,238.00), payable in equal monthly installments
                             of TWENTY NINE THOUSAND NINE HUNDRED THIRTY SIX
                             DOLLARS FIFTY CENTS ($29,936.50) each.

                             for any additional term pursuant to the exercise of
                             the option described in Section 2.1, annual fixed
                             rent at the Fixed Rent determined according to
                             Section 2.1.


Installments of Fixed Rent shall be payable in advance and without setoff of any kind on the
first day of each month of the Term following the abatement period described in Section 3.3; and

                             additional rent ("Additional Rent") in an amount
                             equal to that portion attributable to the Premises of
                             any and all sums of money other than


                                         −4−
                           annual Fixed Rent which is or may become payable by
                           Sublessor   to Landlord    under the Master    Lease
                           including, without limiting the generality of the
                           foregoing: the Tenant' s Tax Payment, as defined in
                           Section 3.03 of the Master Lease (including any item
                           described in Section 3.04 of the Master Lease), and
                           the payment described in Section 3.02 of the Master
                           Lease (as fixed below).

                  Notwithstanding the foregoing or any provision of the Master
Lease, the payment described in Section 3.02 of the Master Lease applicable to
the premises shall conclusively be determined as three one−hundredths (0.03) of
the sum of (x) the then current Fixed Rent and (y) the payment for the previous
Operating Year pursuant to Section 3.02 of the Master Lease.

                  The payment of the Tenant' s Tax Payment and the payment
described by Section 3.02 of the Master Lease shall be made in accordance with
the terms of Article 3 of the Master Lease except that, as of the Commencement
Date, the term "Operating Year", as defined in Section 3.01(e) of the Master
Lease, shall mean the calendar year ending on December 31, 2003 and each
succeeding calendar year thereafter, and the term "Base Tax", as defined in
Section 3.01 (a) of the Master Lease, shall mean the Taxes (as defined in
Section 3.01(c) of the Master Lease) payable for the twelve month period ending
on June 30, 2003.

                  Additional Rent under this subsection shall be payable by
Sublessee to Sublessor on the date five (5) days before the date on which such
amounts are payable by Sublessor to Landlord under the Master Lease. Sublessor
shall have the same remedies with respect to any default by Sublessee in the
payment of Additional Rent as are provided in this Sublease, the Master Lease or
applicable law with respect to any nonpayment of rent.

         3.2. The Fixed Rent and, except as otherwise specifically provided in
this Sublease, the Additional Rent, shall be paid by Sublessee to Sublessor at
the office of Sublessor set forth above or such other place as Sublessor may
designate in writing, without prior notice or demand therefore without any
abatement, deduction or setoff.


3.3. Notwithstanding any language to the contrary contained herein, the Fixed Rent payable
hereunder shall be abated during the period commencing August 1, 2003 and ending on October 31,
2003. In the event the Commencement Date occurs after August 1, 2003, the period of abatement
shall be extended so that it embraces a total of three months' Fixed Rent.

         3.4. Sublessee shall pay all Rent when due, in lawful money of the
United States which shall be legal tender for the payment of all debts, public
and private, at the time of payment. Any payment of Rent or other amount from
Sublessee to Sublessor under this Sublease which is not paid on the date due
shall accrue interest from the date due until the date paid at the lesser of:
(i) the interest rate for late payments set forth in the

                                      −5−
Lease plus 2%, or (ii) the maximum lawful interest rate. In addition, Sublessee
acknowledges that the late payment of any installment of Rent will cause
Sublessor to incur certain costs and expenses not contemplated under this
Sublease, the exact amount of which are extremely difficult or impractical to
fix. These costs and expenses will include, without limitation, administrative
and collection costs and processing and accounting expenses. Therefore, if any
installment of Rent is not received by Sublessor from Sublessee within five (5)
days after the installment is due, Sublessee shall immediately pay to Sublessor
a late payment charge equal to Five Percent (5%) of the amount of such
delinquent payment of Rent, in addition to the installment of Rent then owing.
In the event on nonpayment arrearages that exceed the amount of the Security
Deposit held by Sublessor at any time, such late payment fee shall be increased
to an amount equal to the difference between the amount of the Security Deposit
and the arrearage. This Section 3.4 shall not relieve Sublessee of Sublessee's
obligation to pay any amount owing hereunder at the time and in the manner
provided. All interest accrued and any late payment charges due under this
subsection as hereinabove provided shall be deemed to be Additional Rent payable
hereunder and due at such time or times as the Rent with respect to which such
interest shall have accrued shall be payable under this Sublease.

4.       Use
         −−−

         4.1. Sublessee may occupy and use the Premises only for general and
executive offices and showroom space uses incidental thereto in connection with
the conduct of a fashion and accessories business by itself and wholly−owned
subsidiaries, and for no other purpose, provided that any use of the Premises
shall in all respects be only as permitted under the terms and provisions of
this Sublease and the Master Lease, including the rules and regulations under
the Master Lease, and any and all laws, statutes,          ordinances, orders,
regulations and requirements of all federal, state and local governmental,
public or quasi−public authorities, whether now or hereafter in effect, which
may be applicable to or in any way affect the Building or the Premises or any
part thereof (collectively, "Legal Requirements"). Sublessee shall at all times
conduct its business within noise limits reasonable and customary for general
office space and as otherwise provided in the Master Lease and any Rules and
Regulations of the Landlord.

         4.2. Sublessee shall not, without the prior consent of Sublessor and
Landlord, knowingly do or permit anything to be done which may result in a
violation of the terms of this Sublease or the Master Lease or which may make
Sublessor liable for any damages, claims, fines, penalties, costs or expenses
thereunder.

5.       Master Lease
         −−−−−−−−−−−−

         5.1. This Sublease and all of Sublessee's rights hereunder are and
shall remain in all respects subject and subordinate to (i) all of the terms and
provisions of the Master Lease, a copy of which (except for the rent and certain
other financial provisions) has been delivered to Sublessee, (ii) any and all
amendments of the Master Lease or supplemental agreements relating thereto
hereafter made between Landlord and

                                      −6−
Sublessor (copies of which Sublessor agrees to deliver to Sublessee except for the rent and
certain other financial provisions which may be contained therein), provided, however, that
Sublessor shall not enter into any such amendments or supplemental agreements that shall (1)
materially adversely affect Sublessee's rights hereunder, (2) increase Sublessee's obligations
hereunder other than in an immaterial way, (3) decrease the size of the Premises, or (4) shorten
the term hereof (except as described in subsection 5.2 below) and (iii) any and all matters to
which the tenancy of Sublessor, as tenant under the Master Lease, is or may be subordinate.
Sublessee shall in no case have any rights under this Sublease greater than Sublessor's rights
as tenant under the Master Lease. The foregoing provisions shall be self−operative and no
further instrument of subordination shall be necessary to effectuate such provisions unless
required by Landlord or Sublessor, in which event Sublessee shall, upon demand by Landlord or
Sublessor at any time and from time to time, execute, acknowledge and deliver to Sublessor and
Landlord any and all instruments that Sublessor or Landlord may deem reasonably necessary or
proper to confirm such subordination of this Sublease, and the rights of Sublessee hereunder.
Sublessee hereby appoints Sublessor its attorney in fact, coupled with an interest, for the
purpose of executing any such instrument of subordination if Sublessee shall fail to execute,
acknowledge and/or deliver any such instrument of subordination within ten (10) business days
after Landlord's or Sublessor's demand therefor.

         5.2. Sublessee acknowledges that in the event of a (i) termination of
the Master Lease for any reason, including but not limited to a agreement
between Sublessor and Landlord terminating the Master Lease, or (ii) re−entry or
dispossess by Landlord under the Master Lease, Landlord may, at its option, take
over all of the right, title and interest of Sublessor hereunder and Sublessee
agrees that it shall, at Landlord's option, attorn to Landlord pursuant to the
then executory provisions of this Sublease, except that Landlord shall not (i)
be liable for any previous act or omission of Sublessor under this Sublease,
(ii) be subject to any offset not expressly provided in this Sublease, which
theretofore accrued to the Sublessee against Sublessor, or (iii) be bound by any
previous modification of this Sublease (which is made without Landlord's
consent) or by any previous prepayment of more than one month's rent.

         5.3. Sublessee shall observe and perform for the benefit of Landlord
and Sublessor, each and every term, covenant, condition and agreement of the
Master Lease which Sublessor is required to observe or perform with respect to
the Premises as tenant under the Master Lease, except for the covenants of
Sublessor to pay Landlord the "Rental" (as such term is defined in the Master
Lease). Except as otherwise specifically provided in this Sublease, all of the
terms, covenants, conditions and agreements which Landlord or Sublessor are
required to observe or perform with respect to the Premises as parties to the
Master Lease are hereby incorporated herein by reference and deemed to
constitute terms, covenants, conditions and agreements which Sublessor and
Sublessee are required to observe or perform under this Sublease as if set forth
herein at length, mutatis mutandis, with the exception of the following articles
and provisions of the Master Lease: 1.01; 1.05; 2.01; 2.02; 2.03; 2.04; 11.09;
21.01 (the parties will cooperate to secure


                                       −7−
appropriate listings); 42.01; 42.04; 47.01; 48.01; Article 50; Exhibit F.

Sublessor may exercise all of the rights, powers, privileges and remedies
reserved to Landlord under the Master Lease to the same extent as if fully set
forth herein at length, including, without limitation, all releases from
liability to Landlord thereunder except as may be provided otherwise herein, and
all rights and remedies arising out of or with respect to any default by
Sublessee in the payment of Rent hereunder or the observance or performance of
the terms, covenants, conditions and agreements of this Sublease (including
those portions of the Master Lease that are incorporated herein). In the event
of any inconsistency between the terms of this Sublease and the Master Lease,
the terms of this Sublease shall govern.

         5.4. The consent of Landlord shall be required in connection with any
act which requires the consent of Landlord pursuant to the terms of the Master
Lease, notwithstanding that a particular provision herein may not require
Sublessor's consent or states that only Sublessor's consent is required.

6.       Services
         −−−−−−−−

          6.1. Except as otherwise specifically provided in this Sublease,
Sublessee shall be entitled during the Term to receive all services, utilities,
repairs and facilities which Landlord is required to provide insofar as such
services,    utilities,  repairs and    facilities   pertain to the Premises.
Notwithstanding anything to the contrary in this Sublease, Sublessor shall have
no liability of any nature whatsoever to Sublessee as a consequence of the
failure or delay on the part of Landlord in performing any or all of its
obligations under the Master Lease, unless such failure or delay is caused by
Sublessor, and under no circumstances shall Sublessee have any right to require
or obtain the performance by Sublessor of any obligations of Landlord under the
Master Lease or otherwise. Sublessee's obligations under this Sublease shall not
be impaired, nor shall the performance thereof be excused, because of any
failure or delay on the part of Landlord in performing its obligations under the
Master Lease.

         6.2. If at any time during the Term Landlord shall default in any of
its obligations to furnish facilities, services or utilities or to make repairs
to the Premises, then, upon Sublessor's receipt of a written notice from
Sublessee specifying such default, Sublessor shall, at Sublessee's sole cost and
expense, use its reasonable efforts to cause Landlord to cure such default. Any
action or proceeding instituted by Sublessor against Landlord to enforce such
rights shall be conducted at the expense of Sublessee; provided, however, that
if the failure by Landlord also pertains to that portion of the Master Premises
that are retained by Sublessor, such expense shall be equitably apportioned
between the parties.

                                      −8−
7.       Electricity
         −−−−−−−−−−−

         7.1. Sublessee shall comply with all of the obligations of Sublessor
under the Master Lease with respect to electricity. Bills therefor shall be
rendered by Sublessor to Sublessee at such times as Landlord submits bills to
Sublessor therefor pursuant to the Master Lease, in an amount equal to 1.05
times the amount billed to Sublessor for the Premises as shall be fixed by
submetering or (in the event submetering is not effected) by proration in the
ratio of the square footage of the Premises to the total rentable square footage
of the Master Premises. The amounts thereof shall be Additional Rent and shall
be due and payable to Sublessor, without set−off or deduction, upon the
rendition of such bills. Sublessor shall make any objection to any proration
within thirty days of invoice, or the calculation will be conclusive.

         7.2. Sublessee acknowledges that (i) Sublessor is not responsible for
providing or installing any equipment necessary for Sublessee's electrical
requirements, and (ii) Sublessor and Landlord shall have no liability to
Sublessee for any loss, damage or expense which Sublessee may sustain or incur
by reason of any change, failure, inadequacy or defect in the supply or
character of the electrical energy furnished to the Premises or if the quantity
or character of the electrical energy is no longer available or suitable for
Sublessee's requirements.

8.       Alterations and Repairs
         −−−−−−−−−−−−−−−−−−−−−−−


8.1. Sublessee shall make no alterations, installations, additions or improvements, including
Sublessee's initial leasehold improvements (collectively, "Alterations") in or about the
Premises without the prior written consent of Sublessor and Landlord in each instance, which
consent shall not be unreasonably withheld by Sublessor as to nonstructural Alterations which
do not affect building systems provided any required consent of Landlord shall have first been
obtained. Any Alterations consented to by Sublessor shall be performed by Sublessee, at its sole
cost and expense, and in compliance with the following requirements:

         (a) Sublessee, at its sole expense, shall comply with all of the
provisions of this Sublease and the Master Lease pertaining to the making of
Alterations, including, without limiting the generality of the foregoing, the
provisions   requiring the prior written      consent of Landlord before any
Alterations may be made in or about the Premises;

         (b) Sublessee shall submit to Sublessor for its and Landlord's prior
written approval all plans and specifications for such proposed Alterations,
together   with the name of the       proposed   contractor   and all proposed
subcontractors, and all other documentation required to be submitted by
Sublessor to Landlord under the Master Lease in respect of such Alterations;

         (c) Sublessee,   at its sole expense,   and prior to commencing any work,

                                       −9−
shall deliver to Sublessor at Sublessor's option either (i) a performance bond and a labor and
materials bond (issued by a surety company satisfactory to Sublessor and licensed to do business
in New York State), in an amount equal to 125% of the estimated cost of such Alteration and
otherwise in form reasonably satisfactory to Sublessor or (ii) such other security as shall be
satisfactory to Sublessor;

         (d) Sublessee shall furnish Sublessor with certificates of insurance as
shall be reasonably satisfactory to Sublessor as to coverage and insurer (who
shall be licensed to do business in the State of New York), including, but not
limited to, liability, property damage, and worker's compensation insurance to
protect Sublessor, Landlord, their agents, employees, successors and assigns and
Sublessee during the period of the performance of such Alteration;

         (e) All such Alterations shall be performed in a good and workmanlike
manner and in compliance with all Legal Requirements and with all requirements
of any insurance policies affecting the Premises or the Building and so as to
cause as little interference as possible with Sublessor's or its sublessees'
use, occupancy and enjoyment of the premises of which the Premises are a part;
and

         (f) Sublessee, at its sole expense, shall obtain all municipal and
other governmental licenses, permits, authorizations, approvals and certificates
required in connection with such Alteration.


8.2. Sublessor shall have no obligations whatsoever to make any repairs or Alterations in the
Premises to any systems serving the Premises or to any equipment, fixtures or furnishing in the
Premises, or to restore the Premises in the event of a fire or other casualty therein or to
perform any other duty with respect to the Premises which Landlord is required to perform
pursuant to certain obligations which Landlord has to Sublessor under the Master Lease.
Sublessee shall look solely to Landlord for the making of any and all repairs in the Premises
and the performance of all such other work and responsibilities and only to the extent required
by the terms of the Master Lease.

9.       Insurance
         −−−−−−−−−

         9.1. Sublessee, at Sublessee's sole expense, shall maintain for the
benefit of Sublessee, Sublessor and Landlord such policies of insurance required
by the Master Lease or reasonably satisfactory to Sublessor as to coverage and
insurer (who shall be licensed to do business in the State of New York),
provided that such insurance shall at a minimum (i) meet all requirements of
Section 9.09 of the Master Lease and (ii) to the extent not categorized in the
Master Lease include comprehensive general liability insurance protecting and
indemnifying Sublessor, Landlord and Sublessee against any and all claims and
liabilities for injury or damage to persons or property or for the loss of time
or of property occurring upon, in or about the Premises, and the public portions
of the Building, caused by or resulting from or in connection with any act or
omission of Sublessee, Sublessee's employees, agents or invitees. Sublessee
shall furnish to Sublessor certificates of insurance evidencing such coverage
prior to the Commencement Date.

                                      −10−
         9.2. Nothing contained in this Sublease shall relieve Sublessee or
Sublessor from any liability as a result of damage from fire or other casualty,
but each parry shall look first to any property insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty. To the extent that such insurance is in
force and collectible and to the extent permitted by law, Sublessor and
Sublessee each hereby releases and waives all right to recovery against the
other or anyone claiming through or under the other by way of subrogation or
otherwise. The foregoing release and waiver shall be in force only if the
insurance policies of Sublessor and Sublessee provide that such release or
waiver does not invalidate the insurance; each party agrees to use its best
efforts to include such a provision in its applicable insurance policies. If the
inclusion of said provision would involve an additional expense, either party,
at its sole expense, may require such provision to be inserted in the other's
policy.

10.      Assignment, Subletting and Encumbrances
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         10.1. Except as otherwise provided herein,       Sublessee shall not
sublease, mortgage, pledge or otherwise encumber all or any part of the
Premises, assign this Sublease (by operation of law or otherwise) or permit the
Premises to be used or occupied by anyone other than Sublessee, without the
prior written approval of both Sublessor and Landlord in each instance, which
approvals shall not be unreasonably withheld or delayed. If Sublessor consents
to an assignment of this Sublease or a subletting of the Premises, no such
assignment or subletting shall be or be deemed to be effective until the
following conditions have been met:

                  (i)      Landlord shall have consented     in   writing to such
                           assignment or subletting;

                  (ii)     in the case of an assignment, the assignee shall have
                           assumed in writing, directly for the benefit of
                           Sublessor,   all of the obligations of Sublessee
                           hereunder and Sublessor shall have been furnished
                           with a duplicate     original of the agreement of
                           assignment and assumption, in form and substance
                           reasonably satisfactory to Sublessor; and

                  (iii)    in the case of a subletting, Sublessor shall have
                           been furnished with a duplicate original of the
                           sublease prior to the commencement of the term of
                           such sublease, which sublease shall be in form and
                           substance reasonably satisfactory to Sublessor, and
                           shall be subject and subordinate to all of the terms,
                           covenants and conditions of this Sublease and the
                           Master Lease and shall restrict the right of the
                           subtenant thereunder to assign such sublease or
                           further sublet its subleased premises.


Notwithstanding Sublessor's consent to any such assignment or subletting, the provisions of this
subsection shall be applicable to each and every subsequent assignment or

                                      −11−
subletting, and Sublessee   shall not be released from any of its obligations or
liabilities hereunder.

         10.2. If this Sublease be assigned or if the Premises or any part
thereof be further sublet or occupied by anybody other than Sublessee or
affiliates or subsidiaries of Sublessee authorized in advance by Sublessor and
by Landlord, Sublessor may, after default by Sublessee, collect rent from the
assignee, subtenant or occupant, and, if Sublessor does so, it shall apply the
net amount collected to the Fixed Rent, Additional Rent and other charges herein
reserved, but no such assignment, subletting, occupancy or collection shall be
deemed a waiver of Sublessee's covenants under this Article 10, or the
acceptance by Sublessor of the assignee, subtenant or occupant as tenant
hereunder or a release of Sublessee from the further performance by Sublessee of
any of the terms, covenants and conditions of this Sublease on the part of
Sublessee to be performed hereunder.

         10.3. Sublessee shall pay on demand the actual costs and expenses
reasonably incurred by Sublessor and Landlord, including, without limitation,
reasonable architect,    engineer and attorneys' fees and disbursements in
connection with any proposed or actual assignment of this Sublease or subletting
of the Premises or any part thereof and the review and/or preparation of
documents in connection therewith.

11.      Indemnification
         −−−−−−−−−−−−−−−

         11.1. Sublessor,    Landlord,   their respective employees,     agents,
contractors, licensees and invitees, shall not be liable to Sublessee, its
employees, agents, contractors, licensees or invitees, and Sublessee shall
indemnify and hold harmless Sublessor and Landlord and their respective
employees, contractors, licensees or invitees for any and all loss, cost,
liability, claim, damage and expense, including, without limiting the generality
of the foregoing, attorneys' fees and expenses and court costs, penalties and
fines incurred in connection with or arising from any injury to Sublessee or any
other person or for any damage to, or loss (by theft or otherwise) of, any of
the property of Sublessee and/or any other person, (i) irrespective of the cause
of such injury, damage or loss if occurring in or about the Premises, and (ii)
to the extent caused by the acts, omissions or negligence of Sublessee, its
employees, agents, contractors, licensees, or invitees, if occurring in or about
the Building.

          11.2. Sublessee shall indemnify and hold harmless Sublessor and
Landlord, and their respective employees, agents, contractors, licensees and
invitees, from and against any and all loss, cost, liability, claims, damage and
expenses,    including,  without limiting the generality of the foregoing,
attorneys' fees and expenses and court costs, penalties and fines, incurred in
connection with or arising from (i) any default by Sublessee in the observance
or performance of, or compliance with, any of the terms, covenants or conditions
of this Sublease or the Master Lease on Sublessee's part to be observed,
performed or complied with, (ii) the use or occupancy or manner of use or
occupancy of the Premises by Sublessee or any person claiming through or under
Sublessee or the

                                      −12−
exercise by Sublessee or any person claiming through or under Sublessee of any
rights granted to Sublessee hereunder,       including,   without limiting the
generality of the foregoing, those rights provided under Article 6 above, (iii)
any acts, omissions or negligence of Sublessee or any person claiming through or
under Sublessee, or the employees, agents, contractors, licensees or invitees of
Sublessee or any such person, in or about the Premises or the Building either
prior to, during, or after the termination of this Sublease or (iv) the
condition of the Premises for which Sublessee is liable. If any action or
proceeding shall be brought against Sublessor or Landlord by reason of any such
claim, Sublessee, upon notice from Sublessor or Landlord, shall resist and
defend such action or proceeding and employ counsel therefor reasonably
satisfactory to Sublessor and Landlord. Sublessee shall pay to Sublessor on
demand all sums which may be owing to Sublessor and Landlord by reason of the
provisions of this subsection. Sublessee's obligations under this subsection
shall survive the Expiration Date or other termination of this Sublease.

12.      Time Limits
         −−−−−−−−−−−

         12.1. Except with respect to actions to be taken by Sublessee for which
shorter time limits are specifically set forth in this Sublease, which time
limits shall control for the purposes of this Sublease, the time limits provided
in those portions of the Master Lease that are incorporated herein for the
giving or making of any Notice (as hereinafter defined) by the tenant thereunder
to Landlord, the holder of any leasehold mortgage or any other party, or for the
performance of any act, condition or covenant by the tenant thereunder, or for
the exercise of any right, remedy or option by the tenant thereunder, are
changed for the purpose of incorporation into this Sublease, by shortening the
same in each instance by (i) fifteen (15) days with respect to all such periods
of sixty (60) or more days, (ii) seven (7) days with respect to all such periods
of thirty (30) or more days but less than sixty (60) days, (iii) five (5) days
with respect to all such periods of twenty (20) or more but less than thirty
(30) days and (iv) three (3) days with respect to all such periods of less than
twenty (20) days, provided, however, that in no event shall any such period be
shortened to less than five (5) days, so that any Notice may be given or made,
or any act, condition or covenant performed, or option hereunder exercised, by
Sublessor within the time limit relating thereto contained in the Master Lease.

         12.2. Except with respect to actions to be taken by Sublessor for which
longer time limits are specifically set forth in this Sublease, which time
limits shall control for the purposes of this Sublease, the time limits provided
in the Master Lease for the giving or making of any Notice by Landlord or the
performance of any act, covenant or condition by Landlord for the exercise of
any right, remedy or option by Landlord thereunder are changed for the purposes
of this Sublease, by lengthening the same in each instance by (i) ten (10) days
with respect to all such periods of sixty (60) or more days (ii) seven (7) days
with respect to all such periods of thirty (30) or more but less than sixty (60)
days, (iii) five (5) days with respect to all such periods of twenty (20) or
more but less than thirty (30) days and (iv) three (3) days with respect to all
such periods of less than twenty (20) days so that any Notice may be given or
made, or any act, condition or

                                      −13−
covenant performed or option hereunder exercised by Landlord within the number of days
respectively set forth above, after the time limits relating thereto contained in the Master
Lease.

13.      Remedies Cumulative
         −−−−−−−−−−−−−−−−−−−

         13.1. Each right and remedy of Sublessor under this Sublease shall be
cumulative and be in addition to every other right and remedy of Sublessor under
this Sublease and now or hereafter existing at law or in equity, by statute or
otherwise.

14.      Quiet Enjoyment
         −−−−−−−−−−−−−−−

         14.1. Sublessor covenants that, as long as Sublessee shall pay the
Fixed Rent and Additional Rent and all other amounts due hereunder and shall
duly observe, perform, and comply with all of the terms, covenants and
conditions of this Sublease on its part to be observed, performed or complied
with, Sublessee shall, subject to all of the terms of the Master Lease and this
Sublease, peaceably have, hold and enjoy the Premises during the Term without
molestation or hindrance by Sublessor, except as otherwise provided in Section
5.2 hereof.

15.      Release of Sublessor
         −−−−−−−−−−−−−−−−−−−−

         15.1. The term "Sublessor", as used in this Sublease shall be limited
to mean and include only the owner or owners at the time in question of the
tenant's interest under the Master Lease, and in the event of any transfer or
transfers of the tenant's interest in the Master Lease, Sublessor herein named
(and in case of any subsequent transfer or conveyance, the then transferor of
the tenant's interest in the Master Lease) shall be automatically freed and
relieved from and after the date of such transfer of all liability with respect
to the performance of any covenants or obligations on the part of Sublessor
contained in this Sublease thereafter to be performed.

16.      Surrender of Premises
         −−−−−−−−−−−−−−−−−−−−−

         16.1. Sublessee shall, no later than the termination of this Sublease
and in accordance with all of the terms of this Sublease and the Master Lease,
vacate and surrender to Sublessor the Premises, together with all Alterations,
in good order, condition and repair, reasonable wear and tear excepted and loss
by fire or other casualty excepted. Sublessee acknowledges that Sublessee shall
be solely responsible for any and all restoration obligations imposed upon the
tenant under the Master Lease. Sublessee's obligation to observe or perform this
covenant shall survive the termination of this Sublease.

         16.2. Sublessee expressly waives, for itself and for any person
claiming through or under Sublessee, any rights which Sublessee or any such
person may have under the provisions of Section 2201 of the New York Civil
Practice Law and Rules and any successor law of like import then in force in
connection with any holdover summary

                                      −14−
proceedings which Sublessor may institute to enforce the foregoing provisions of
this Article 16.

17.      Estoppel Certificates
         −−−−−−−−−−−−−−−−−−−−−

         17.1. At any time and from time to time within ten (10) days after a
written request from Sublessor, Sublessee shall execute, acknowledge and deliver
to the Sublessor a written statement certifying (i) that this Sublease has not
been modified and is in full force and effect or, if there has been a
modification of this Sublease, that this Sublease is in full force and effect as
modified, and stating such modifications, (ii) the dates to which the Fixed
Rent, Additional Rent and other charges hereunder have been paid, (iii) that to
the best of Sublessee's knowledge, no defaults exist under this Sublease or, if
any defaults do exist, specifying the nature of each such default and (iv) as to
such other matters pertaining to the terms of this Sublease as Sublessor may
reasonably request.

18.      Security       (a) Simultaneously with the later of execution of this
         −−−−−−−−
Sublease or its approval by Landlord, Sublessee shall deposit with Sublessor the
sum of FIFTY EIGHT THOUSAND FIFTY EIGHT DOLLARS SIXTY SEVEN CENTS ($58,058.67)
("Security Deposit") as security for the faithful performance and observance by
Sublessee of all of the terms, covenants and conditions of this Sublease on
Sublessee's part to be performed and observed. Sublessor may use, apply or
retain the whole or any part of the Security Deposit or letter of credit to the
extent required for the payment of any Rent and any other sums as to which
Sublessee may be in default hereunder beyond the expiration of applicable grace
and notice periods and for any sum which Sublessor may expend or may be required
to expend by reason of Sublessee's default beyond the expiration of applicable
grace and notice periods in respect of any of the terms, covenants and
conditions of this Sublease, including, without limiting the generality of the
foregoing, any and all damages and deficiencies in the reletting of the
Premises, whether such damages or deficiencies shall accrue before or after
summary proceedings or other re−entry by Sublessor. In the event that Sublessee
shall fully and faithfully comply with all of the terms, provisions, covenants
and conditions of this Sublease, the Security Deposit, or so much thereof as
shall not have been applied by Sublessor as aforesaid, together with accrued
interest thereof, shall be returned to Sublessee promptly following the
Expiration Date or date of earlier termination and delivery of the entire
possession of the Premises to Sublessor. In the event of an assignment by
Sublessor of its interest under the Master Lease, Sublessor shall have the right
to transfer the Security Deposit to the assignee and Sublessor shall thereupon
be released by Sublessee from all liability for the return of such Security
Deposit. In such event, Sublessee shall look solely to its new landlord for the
return of said Security Deposit. The foregoing provisions shall apply to every
transfer or assignment made of the Security Deposit to anew landlord. Sublessee
further covenants that it will not assign or encumber or attempt to assign or
encumber the Security Deposit and that neither Sublessor nor its successors and
assigns shall be bound by any such assignment, encumbrance, attempted assignment
or attempted encumbrance.

                                      −15−
         (b) The Security Deposit shall be placed by Sublessor in an interest
bearing account. Interest that accrues thereon shall belong to Sublessee.
Provided Sublessee is not in default hereunder and Sublessee supplies Landlord
with its Tax I.D. Number, interest shall be paid to Sublessee once annually. The
obligation to pay any taxes, whether income or otherwise, related to or
affecting any interest earned on the Security Deposit shall be the sole
responsibility of Sublessee and Sublessee hereby agrees to pay same. Sublessee
represents that its Tax I.D. Number is .

         (c) The Security Deposit shall be increased, from time to time, upon
demand by Sublessor, to reflect any increase in Rent (including the increase in
Fixed Rent described by Section 3.1 and any Additional Rent), and to replenish
any amounts that may be drawn against the Security Deposit, so that at all times
during the Term the Security Deposit shall be equal to two months' Rent.

19.      Notices
         −−−−−−−

         19.1. All notices,     consents,   approvals or other communications
(collectively, a "Notice") required to be given under this Sublease or pursuant
to law shall be in writing and, unless otherwise required by law, shall be given
by registered or certified mail, return receipt requested, postage prepaid,
addressed:

         (a) if to Sublessor, at Sublessor's address set forth in this Sublease
or at such other address as Sublessor may designate by Notice to Sublessee,

         (b) if to Sublessee, at the Premises.


Any Notice to the Landlord shall be delivered in accordance with the provisions of the Master
Lease. Except with respect to notices to the Landlord, which shall be governed by the terms of
the Master Lease, either party may designate a new address to which Notices may be sent by
Notice to the other party. Any Notice given pursuant hereto shall be deemed to have been
received at the earlier of actual receipt or the conclusion of the first business day after the
first attempt at delivery by the United States Postal Service.

20.      Landlord's Consent Required
         −−−−−−−−−−−−−−−−−−−−−−−−−−−

         20.1. This Sublease shall be of no force or effect unless and until
Sublessor shall have obtained Landlord's consent to this Sublease.

                                       −16−
21.      Broker
         −−−−−−

         21.1. Sublessee and Sublessor represent and warrant to each other that
they have not dealt with any broker in connection with this Sublease other than
Millenium Realty Group LLC, and Insignia/ESG, Inc. (the "Brokers") and that no
broker or person other than the Brokers had any part or was instrumental in any
way in bringing about this transaction. Sublessee and Sublessor shall indemnify
and hold each other harmless from and against any and all loss, claims,
liabilities, damages and expenses, including, without limitation, attorneys'
fees and expenses and court costs, arising out of or in connection with any
breach or alleged breach of the above representations or any claim by any person
or entity other than Brokers for brokerage commissions or other compensation in
connection with the consummation of this Sublease. The provisions of this
Article shall survive the expiration or sooner termination of this Sublease. The
parties shall pay the Brokers any brokerage commission due the Brokers pursuant
to separate agreement in connection with this Sublease, if any.

22.      Waiver of Rights to Jury and Counterclaim
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         22.1. Sublessor and Sublessee each hereby waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties against the
other on any matters whatsoever arising out of or in any way connected with this
Sublease, the relationship of Sublessor and Sublessee, Sublessee's use or
occupancy of the Premises, and/or any claim of injury or damage, or for the
enforcement of any remedy under any statute, emergency or otherwise. Sublessor
and Sublessee further agree that in the event Sublessor commences any summary
proceeding for    non−payment   of Rent,    Sublessee will not interpose any
counterclaim of whatever nature or description in any such proceeding.

23.      Miscellaneous
         −−−−−−−−−−−−−

         23.1. This Sublease shall be governed by and construed in accordance
with the laws of the State of New York.

         23.2. The section headings in this Sublease and the table of contents
are inserted only as a matter of convenience for reference and are not to be
given any effect in construing this Sublease.

         23.3. If any of the provisions of this Sublease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Sublease, or the application of such
provision or provisions to persons or circumstances other than those as to whom
or which it is held invalid or unenforceable, shall not be affected thereby, and
every provision of this Sublease shall be valid and enforceable to the fullest
extent permitted by law.

         23.4. All of the terms and provisions of this Sublease shall be binding
upon and inure to the benefit of the parties hereto and, subject to the
provisions of Article 10 hereof, their respective successors and assigns.

         23.5. Sublessor has made no representations, warranties or covenants to
or

                                      −17−
with Sublessee with respect to the subject matter of this Sublease except as expressly provided
herein and all prior negotiations and agreements relating thereto are merged into this Sublease.
This Sublease may not be amended or terminated, in whole or in part, nor may any of the
provisions be waived, except by a written instrument executed by the party against whom
enforcement of such amendment, termination or waiver is sought and unless the same is permitted
under the terms and provisions of the Master Lease.

         23.6. Unless specifically provided herein, all capitalized terms used
in this Sublease which are defined in the Master Lease shall be deemed to have
the respective meanings set forth therein.

         23.7. The submission by Sublessor to Sublessee of this Sublease in
draft form shall be deemed submitted solely for Sublessee's consideration and
not for acceptance and execution. Such submission shall have no binding force
and effect, shall not constitute an option for the leasing of the Premises, and
shall not confer any rights or impose any obligation upon either party. The
submission by Sublessor of this Sublease for execution by Sublessee and the
actual execution and delivery by Sublessee to Sublessor shall similarly have no
binding force and effect unless and until Sublessor and Sublessee shall have
executed this Sublease and a counterpart thereof shall have been delivered to
Sublessee. In consideration of Sublessor's administrative expense in considering
this Sublease and the terms of Sublessee's proposed tenancy hereunder and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Sublessee's submission to Sublessor of this Sublease, duly
executed by Sublessee, shall constitute an irrevocable offer for the leasing of
the Premises, to continue for ten (10) business days from and after receipt by
Sublessor of this Sublease duly executed by Sublessee.

24.      GUARANTY
         −−−−−−−−

                  As a material inducement to the execution of this Sublease by
Sublessor, Sublessee shall obtain a Guaranty of Sublease in the form of Exhibit
24 executed and delivered by each of Innovo Inc., Innovo Azteca Apparel, Inc.,
and Joe's Jeans, Inc. Sublessee will secure and deliver an instrument adhering
to such Guaranty by each entity that who becomes a subsidiary of Sublessee
within twenty days of Sublessee's acquisition (directly or through another under
the control of Sublessee) of a majority shareholder interest in such subsidiary.

                  IN WITNESS WHEREOF, Sublessor and Sublessee have executed this
Sublease as of the day and year first above written.

                           (Signature Page to Follow)




                                      −18−
Sublessee's acquisition (directly or through another under the        control of
Sublessee) of a majority shareholder interest in such subsidiary.

                  IN WITNESS WHEREOF, Sublessor and Sublessee have executed this
Sublease as of the day and year first above written.

                                   WRC MEDIA INC.
                                   as Sublessor

                                   By: /s/ Richard Nota
                                       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                   Title   VP, Finance




                                   INNOVO GROUP INC.
                                   as Sublessee

                                   By: /s/ Samuel J. Furrow
                                       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                   Title   CEO
                                           SCHEDULE 1.2



Workstation (office): 10
Workstation (cubicle): 15
Chair (rolling high back): 6
Chair (rolling low back): 8
Chair (stationary): 23
File cabinet (2 drawers): 2
File cabinet (3 drawers): 2
File cabinet (4 drawers): 4
File cabinet (5 drawers): 1
Leather Sofa: 1
Cloth Sofa: 1
Glass Coffee table: 1
Wood Coffee table: 1
Black Leather Credenza: 1
Round top tables (small): 5
Tall supply cabinet: 1
Conference room table: 2
Conference room chair: 16
Marble Board room table: 1
Leather Board room chair: 14
Book shelf: 1
Free standing desk: 2
Microwave: 1
Dish washer: 1
Refrigerator: 1
Ice maker: 1
Lobby phones (built into wall): 2


                                    −20−
                                                                      EXHIBIT 24

                                    GUARANTY


The undersigned INNOVO, INC., INNOVO AZTECA APPAREL, INC., and JOE'S JEANS, INC. (individually
and collectively, "Guarantor"), in order to induce WRC MEDIA INC. ("Sublessor") to enter into
that certain Sublease, dated as of February 2003 with INNOVO GROUP, INC. ("Sublessee") for the
entire 23d floor of the building located at 512 Seventh Avenue, New York, New York (the
"Building"),does hereby, subject to the limitations set forth below, absolutely, unconditionally
and irrevocably guarantee to Sublessor the full and prompt payment by Sublessee of all amounts
due, and the full and prompt performance by Sublessee of each of its obligations, under the
Sublease as the same may be renewed, extended, amended or modified (the "Sublease"). Terms
defined in the Sublease and not otherwise defined herein shall have the same meaning where used
herein as such terms have in the Sublease.

         This Guaranty shall be a continuing guaranty, and liability hereunder
shall in no way be affected or diminished by any renewal, extension, amendment
or modification of the Sublease or any waiver of any of the provisions thereof
(except to the extent agreed to by Sublessor in such renewal, extension,
amendment, modification or waiver). Guarantor hereby waives any notice of
default under the Sublease. Sublessor may exercise its remedies under this
Guaranty without first resorting to any security or any other remedies to
enforce Sublessee's obligations under the Sublease. Guarantor agrees to pay to
Sublessor any reasonable costs and expenses, including without limitation
reasonable attorneys' fees and expenses, incurred in connection with the
collection of any amount due under this Guaranty or the enforcement of this
Guaranty. In addition, Guarantor waives (a) trial by jury in any action brought
by Sublessor arising under the terms of this Guaranty; (b) any defense based
upon any legal disability or other defense of Sublessee, any other guarantor or
other person, or by reason of the cessation or limitation of the liability of
Sublessee from any cause other than full payment of all sums payable under or in
respect of the Sublease; (c) any defense based upon any lack of authority of the
officers, directors, partners, members or agents acting or purporting to act on
behalf of Sublessee or any principal of Sublessee or any defect in the formation
of Sublessee or any partner or member in Sublessee; (d) any and all rights and
defenses arising out of an election of remedies by Sublessor, even though that
election of remedies might impair or destroy any right, if any, of Guarantor of
subrogation, indemnity or reimbursement against Sublessee; (e) any defense based
upon Sublessor's failure to disclose to Guarantor any information concerning
Sublessee's financial condition or any other circumstances bearing on
Sublessee's ability to pay all sums payable under or in respect of the Sublease;
(f) any defense based upon any statute or rule of law which provides that the
obligation of a surety must be neither larger in

                                      −21−
amount nor in any other respects more burdensome than that of a principal; (g) any defense
based upon Sublessor's election in any proceeding instituted under 11 U.S.C. Section 101 et
seq., or any successor statute (the "Bankruptcy Code"); (h) any right of subrogation, indemnity
or reimbursement against Sublessee, any right to enforce any remedy which Sublessor may have
against Sublessee and any right to participate in, or benefit from, any security for the
Sublease now or hereafter held by Sublessor; (i) presentment, demand, protest, notice of
dishonor and notice of limitations affecting the liability of Guarantor hereunder or the
enforcement hereof or the liability of Sublessee under the Sublease or the enforcement thereof,
and (k) any right or claim of right to cause a marshaling of Sublessee's or Guarantor's assets.
Guarantor further agrees that the payment of all sums payable under the Sublease or in respect
thereof or any other act which toils any statute of limitations applicable to the Sublease
shall similarly operate to toll the statute of limitations applicable to Guarantor's liability
hereunder. Subject to the last paragraph hereof, this Guaranty shall be binding upon and shall
inure to the benefit of the successors and assigns of each Guarantor and Sublessor.

         Guarantor further agrees that if Sublessee becomes insolvent or shall
be adjudicated a bankrupt or shall file for reorganization or similar relief or
if such petition is filed by creditors of Sublessee under any present or future
Federal or State law, Guarantor's obligations hereunder may nevertheless be
enforced against the Guarantor. The rejection or termination of the Sublease
pursuant to the exercise of any rights of a trustee or receiver in any of the
foregoing proceedings shall not affect Guarantor's obligation hereunder or
create in Guarantor any setoff against such obligation. Neither Guarantor's
obligation under this Guarantee nor any remedy for enforcement thereof, shall be
impaired, modified, or limited in any manner whatsoever by any impairment,
rejection, modification, waiver or discharge resulting from the operation of any
present or future operation of any present or future provision under the
Bankruptcy Code or any other statute or decision of any court.


Subject to the last paragraph hereof this Guaranty may not be changed, terminated modified or
waived orally, but only in writing signed by Sublessor and the Guarantor with respect to whom
such change, termination, modification or waiver is to be effective if this Guaranty is signed
by more than one person the obligations hereunder shall be joint and several. This Guaranty
shall be effective as and against each Guarantor notwithstanding that any other Guarantor named
herein has failed to execute, this Guaranty. This Guaranty shall remain and continue in full
force and effect notwithstanding, and the liability of Guarantor hereunder shall in no way be
affected, modified, diminished or extinguished by reason of (x) any bankruptcy, insolvency,
reorganization, arrangement, assignment for the benefit of creditors, receivership or
trusteeship or other similar action or proceeding affecting Sublessee whether or not notice of
any of the foregoing is given to Guarantor or (y) any increase, decrease, amendment, extension,
release, modification or change in the obligations of Sublessee under the Sublease, any
assignment of or subletting under the Sublease, or

                                      −22−
any waiver or forbearance by Landlord under the Sublease or (z) any change in Guarantor's
relationship to or interest in Sublessee. No payment by Guarantor hereunder shall entitle
Guarantor to be subrogated to any right of Sublessor.

          This Guaranty shall be deemed to have been made and fully performed in
the State of New York, irrespective of the domicile or residence of any
Guarantor. The rights and liabilities of Sublessor and Guarantor shall be
determined in accordance with the laws of the State of New York. Guarantor
hereby consents to the jurisdiction of the federal and state courts sitting in
the County and State of New York, in connection with any action or proceeding
related to this Guaranty; and Guarantor agrees that the appropriate venue for
any such action would lie in such courts. Guarantor consents to service of
process upon it by registered or certified mail, return receipt requested, or by
receipted overnight courier addressed to Guarantor at the addresses set forth
below, which service shall be effective upon the earlier of receipt or the first
business day following the first attempt at delivery by the United States Postal
Service or such courier. This Guaranty shall be limited in the following
respects:


(i) Guarantor shall have no liability or obligations under this Guaranty unless and until there
is a default in the payment of any amount due under the Sublease (such default being
hereinafter referred to as the "triggering event");

         (ii) This Guaranty is a guaranty of the full and prompt (a) payment of
(1) all amounts due under the Sublease which arise or accrue from and after the
date the triggering event occurs until such date as Sublessee vacates and
surrenders to Sublessor the Demised Premises, or Sublessor otherwise cedes sole
and exclusive occupancy and possession of the Demised Premises, vacant, broom
clean, in good order and condition except for ordinary wear and tear and damage
for which Sublessee is not responsible under the terms of the Sublease, and
otherwise in the condition required under the Sublease at the date the Demised
Premises are returned by Sublessee to Sublessor (the "Required Condition"); and


(iii) No recovery shall be available under this Guaranty until Sublessor shall have applied the
proceeds, if any are available, of any security deposit delivered by Sublessee

                                      −23−
to Sublessor in lieu thereof) and shall have applied such proceeds to any unpaid
liabilities of Sublessee under the Sublease.

         IN WITNESS WHEREOF, the undersigned have executed this Guaranty.


Dated: As of July 28, 2003

INNOVO, INC.:



By: /s/ Samuel J. Furrow               Fed. I.D. No.: 76−0198471
    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−                  −−−−−−−−−−−−−−−−−−−−−−−−−−



INNOVO AZTECA APPAREL, INC.:



By: /s/ Samuel J. Furrow               Fed. I.D. No.: 95−4874795
    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−                  −−−−−−−−−−−−−−−−−−−−−−−−−−



JOE'S JEANS, INC.:



By: /s/ Samuel J. Furrow               Fed. I.D. No.: 95−4846315
    −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−                  −−−−−−−−−−−−−−−−−−−−−−−−−−



</TEXT>
</DOCUMENT>
            ************************************************************




                                 AGREEMENT OF LEASE


                                        between


                     500−512 SEVENTH AVENUE LIMITED PARTNERSHIP


                                       Landlord,


                                          and


                                   WRC MEDIA, INC.

                                        Tenant,


                                 Dated: March , 2000


                                      PREMISES:
                The Entire Twenty−First (21st), Twenty−Second (22nd)
                           and Twenty−Third (23rd) Floors
                                 512 Seventh Avenue
                                 New York, New York




            *************************************************************

                                  TABLE OF CONTENTS

ARTICLE 1
     RENT                                                                    1

ARTICLE 2
     PREPARATION OF THE DEMISED PREMISES                                     4

ARTICLE 3
     ADJUSTMENTS OF RENT                                                     6

ARTICLE 4
     ELECTRICITY                                                            12

ARTICLE 5
     USE

ARTICLE 6
     ALTERATIONS AND INSTALLATIONS

ARTICLE 7
     REPAIRS

ARTICLE 8
     REQUIREMENTS OF LAW                                                    22

ARTICLE 9
     INSURANCE, LOSS, REIMBURSEMENT, LIABILITY                              23

ARTICLE 10
     DAMAGE BY FIRE OR OTHER CAUSE                                          29

ARTICLE 11
     ASSIGNMENT, MORTGAGING, SUBLETTING, ETC

ARTICLE 12
     CERTIFICATE OF OCCUPANCY

ARTICLE 13
     ADJACENT EXCAVATION     SHORING                                        40

                                          −i−
ARTICLE 14
     CONDEMNATION

ARTICLE 15
     ACCESS TO DEMISED PREMISES; CHANGES                42

ARTICLE 16
     CONDITIONS OF LIMITATION

ARTICLE 17
     RE−ENTRY BY LANDLORD, INJUNCTION

ARTICLE 18
     DAMAGES

ARTICLE 19
     LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS

ARTICLE 20
     QUIET ENJOYMENT

ARTICLE 21
     SERVICES AND EQUIPMENT                             50

ARTICLE 22
     DEFINITIONS                                        52

ARTICLE 23
     INVALIDITY OF ANY PROVISION

ARTICLE 24
     BROKERAGE                                          53

ARTICLE 25
     SUBORDINATION                                      54

ARTICLE 26
     CERTIFICATE OF TENANT                              56

                                        −ii−
ARTICLE 27
     LEGAL PROCEEDINGS WAIVER OF JURY TRIAL

ARTICLE 28
     SURRENDER OF PREMISES                    57

ARTICLE 29
     RULES AND REGULATIONS

ARTICLE 30
     CONSENTS AND APPROVALS

ARTICLE 31
     NOTICES                                  59

ARTICLE 32
     NO WAIVER                                59

ARTICLE 33
     CAPTIONS                                 60

ARTICLE 34
     INABILITY TO PERFORM                     61

ARTICLE 35
     NO REPRESENTATIONS BY LANDLORD           61

ARTICLE 36
     NAME OF BUILDING                         61

ARTICLE 37
     RESTRICTIONS UPON USE                    61

ARTICLE 38
     ARBITRATION                              62

ARTICLE 39
     INDEMNITY                                62

ARTICLE 40
     MEMORANDUM OF LEASE                      63

                                      −iii−
ARTICLE 41
     MISCELLANEOUS

ARTICLE 42
     SECURITY DEPOSIT                                                          65

ARTICLE 43
     PARTNERSHIP                                                               67

ARTICLE 44
     SUBLEASE

ARTICLE 45
     INTENTIONALLY OMITTED


ARTICLE 46
     INTENTIONALLY OMITTED

ARTICLE 47
     FIRST OFFERING SPACE

ARTICLE 48
     EXTENSION OF TERM OPTION                                                  73

ARTICLE 49
     INTENTIONALLY OMITTED                                                     77

ARTICLE 50
     LAYOUT AND FINISH; TENANT WORK CREDIT                                     77

EXHIBIT
  A       Floor Plan .........................................................A−1
  B       Property Description................................................B−1
  C       Rules and Regulations...............................................C−1
  D       List of Approved Contractors and Subcontractors.....................D−1
  E       First Offering Space................................................E−1
  F       Form of Security Letter.............................................F−1
  G       Alterations Rules and Regulations...................................G−1

                                       −iv−
         AGREEMENT OF LEASE made as of this _____ day of March, 2000, between
500−512 SEVENTH AVENUE LIMITED PARTNERSHIP, a New York limited partnership, with
its office at c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New
York, New York 10017 (hereinafter referred to as "Landlord") and WRC MEDIA,
INC., a Delaware corporation, with its office at c/o Ripplewood Holdings, 1
Rockefeller Plaza, 32nd Floor, New York, New York 10020, Attention: Chief
Financial Officer (hereinafter referred to as "Tenant").

                               W I T N E S S E T H


Landlord hereby leases and Tenant hereby hires from Landlord, in the building (hereinafter
referred to as the "Building") known as 512 Seventh Avenue, New York, New York 10016, the
following space: the entire twenty−first (21st), twenty−second (22nd) and twenty−third (23rd)
floors as shown on the plans annexed hereto as Exhibit A (which space is hereinafter referred
to as the "demised premises"); for a term of approximately fifteen (15) years, to commence on
the date hereof (hereinafter referred to as the "Commencement Date"), and to end on the last day
of the month in which occurs the fifteenth (15th) anniversary of the Rent Commencement Date
(such date on which the term of the Lease expires is hereinafter referred to as the "Expiration
Date") or on such date as such term shall sooner cease and terminate as hereinafter provided.
The Building is located on the land (herein called the "Land") described on Exhibit B annexed
hereto).

         The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, trustees, successors and
assigns, hereby covenant as follows:

                                    ARTICLE 1

                                      RENT

         1.01 Tenant shall pay to Landlord a fixed annual rent (hereinafter
referred to as "fixed annual rent") at the annual rate of:

               (a) One Million Two Hundred Eighty−Five Thousand Two Hundred
Sixty−Nine and 00/100 Dollars ($1,285,269.00) per annum, commencing on the Rent
Commencement Date until the last day of the month

                                      −1−
preceding the month in which occurs the fifth (5th) anniversary of the Rent
Commencement Date;

               (b) One Million Three Hundred Fifty−Four Thousand Seven Hundred
Forty−Three and 00/100 Dollars ($1,354,743.00) per annum, commencing on the
first day of the month in which occurs the fifth (5th) anniversary of the Rent
Commencement Date until the last day of the month preceding the month in which
occurs the tenth (10th) anniversary of the Rent Commencement Date; and

               (c) One Million Four Hundred Fifty−Eight Thousand Nine Hundred
Fifty−Four and 00/100 Dollars ($1,458,954.00) per annum, commencing on the first
day of the month in which occurs the tenth (10th) anniversary of the Rent
Commencement Date and ending on the Expiration Date.

         Tenant agrees to pay the fixed annual rent in lawful money of the
United States of America, in equal monthly installments in advance on the first
day of each calendar month during said term, at the office of Landlord or such
other place in the United States of America as Landlord may designate, without
any setoff or deduction whatsoever, except such deduction as may be occasioned
by the occurrence of any event permitting or requiring a deduction from or
abatement of rent as specifically set forth herein. Should the obligation to pay
fixed annual rent commence on any day other than on the first day of a month,
then the fixed annual rent for such month shall be prorated on a per diem basis.

         The first month's installment of fixed annual rent due under this Lease
shall be paid by Tenant upon the execution of this Lease.

         If this lease be a renewal of any existing lease any rent due
thereunder after the expiration of the term of such lease shall be deemed
additional rent under this lease.

          1.02 Tenant shall pay the fixed annual rent and additional rent as
above and as hereinafter provided, by good and sufficient check (subject to
collection) drawn on The Bank of New York or such other bank which is a member
of the New York Clearinghouse Association or a successor thereto. All sums other
than fixed annual rent payable by Tenant hereunder shall be deemed additional
rent (for default in the payment of which Landlord shall have the same remedies
as for a default in the payment of fixed annual rent), and shall be payable
twenty (20) days after demand, unless other payment dates are hereinafter
provided.

                                      −2−
         1.03 If Tenant shall fail to pay when due any installment of fixed
annual rent or any payment of additional rent for a period of five (5) days
after such installment or payment shall have become due, Tenant shall pay
interest thereon at the Interest Rate (as such term is defined in Article 22
hereof), from the date when such installment or payment shall have become due to
the date of the payment thereof, and such interest shall be deemed additional
rent.

         1.04 If any of the fixed annual rent or additional rent payable under
the terms and provisions of this Lease shall be or become uncollectible, reduced
or required to be refunded because of any Legal Requirement (as such term is
defined in Article 22 hereof), Tenant shall enter into such agreement(s) and
take such other steps (without additional expense to Tenant) as Landlord may
request and as may be legally permissible to permit Landlord to collect the
maximum rents which from time to time during the continuance of such legal rent
restriction may be legally permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal rent
restriction, (a) the rents shall become and thereafter be payable in accordance
with the amounts reserved herein for the periods following such termination and
(b) Tenant shall pay to Landlord, to the maximum extent legally permissible, an
amount equal to (i) the rents which would have been paid pursuant to this Lease
but for such legal rent restriction less (ii) the rents paid by Tenant during
the period such legal rent restriction was in effect.


1.05 (a) Notwithstanding any language to the contrary contained herein, the fixed annual rent
payable hereunder shall be abated during the period commencing on the Commencement Date and
ending on August 31, 2000 (the date following the expiration of the Abatement Period is
hereinafter called the "Rent Commencement Date").

               (b) If Landlord shall not have substantially completed Landlord's
Work in the demised premises as set forth in Section 2.01 herein by May 31, 2000
(the "Landlord's Work Completion Date") and such failure results in a delay in
the completion of Tenant's Work (as hereinafter defined), then the Rent
Commencement Date shall be extended one (1) day for each day thereafter that
Landlord's Work is not so substantially completed (except for minor or
insubstantial details of construction, mechanical adjustment, decoration, or
other punch−list items which remain to be performed). Notwithstanding any
language to the contrary contained in this Lease, the Landlord's Work Completion
Date shall be extended by one day for each day that Landlord is prevented from
performing or completing such work by reason of a Tenant Delay. A "Tenant Delay"
shall mean: (a) delays in submitting the final plan (as defined in Section 50.02
herein) with

                                      −3−
respect to Tenant's Work, or in approving any drawings or specifications, giving authorizations
or supplying information; or (b) additional time needed by Landlord, as a result of Tenant
requesting Landlord to make a change or addition to Landlord's Work or change in the final
plan.

                                      ARTICLE 2

                         PREPARATION OF THE DEMISED PREMISES


2.01 Tenant has examined the demised premises and agrees to accept the same in their condition
and state of repair existing as of the date hereof subject to normal wear and tear and to the
removal therefrom of the property of the existing tenant or occupant thereof, if any, and
understands and agrees that Landlord shall not be required to perform any work, supply any
materials or incur any expense to prepare the demised premises for Tenant's occupancy, except
that Landlord, at Landlord's sole cost and expense, shall:

               (a) demolish the demised premises other than core areas therein
and remove asbestos in the demised premises in accordance with applicable legal
requirements to facilitate Tenant's Work in and to the demised premises, except
for any vinyl asbestos tile ("VAT") which shall be Tenant's obligation to remove
or encapsulate at Tenant's expense, and, following receipt from Tenant of
Tenant's plans and specifications showing the proposed Tenant's Work, deliver to
Tenant an original ACP−5 or ACP−7 form, as applicable, in connection therewith;

               (b) provide a reasonable number of connection points to the
Building life safety system for Tenant to connect its devices in the demised
premises, provided that the cost for such connection shall be at Tenant's
expense; and

               (c) remove all existing exterior windows in the demised premises;
and supply and install new Building Standard (as defined herein) exterior
windows throughout the demised premises; and

                 (d) deliver all existing radiators within the demised premises in
working order.

                                        −4−
2.02 Landlord shall use all reasonable efforts to complete items (a), (b), and (d) of
Landlord's Work prior to May 1, 2000 and item (c) by June 30, 2000.

         2.03 If the Commencement Date is other than the specific date
hereinabove set forth then Tenant shall at Landlord's request, execute a written
agreement confirming the Commencement Date. Any failure of the parties to
execute such written agreement shall not affect the validity of the Commencement
Date as fixed and determined by Landlord as aforesaid.

         2.04 (a) Tenant agrees that part of the twenty−first (21st) floor of
the demised premises (the "21st Floor") is currently occupied and that Tenant
shall occupy ("Pre−Work 21st Floor") the balance of the twenty−first (21st)
floor while Tenant's Work is being performed in the balance of the demised
premises. Tenant agrees that the term of this lease shall commence on the date
hereof notwithstanding Landlord's inability to deliver to Tenant on the
Commencement Date vacant possession of the entire 21st Floor. Except as
otherwise expressly set forth in this lease, Tenant shall have no claim against
Landlord, and Landlord shall have no liability to Tenant, by reason of the
delivery of possession of any portion of the 21st Floor to Tenant after the
Commencement Date. The parties hereto further agree that the failure to have the
entire 21st Floor available for occupancy by Tenant on the Commencement Date
shall in no way affect the obligations of Tenant hereunder except as hereinafter
expressly set forth, nor shall the same be construed in any way to extend the
term of this lease. Landlord shall use reasonable efforts to obtain and deliver
possession of the 21st Floor to Tenant, including commencement of summary
proceedings against the tenant(s) currently occupying the 21st Floor and
holding−over under expired leases. In the event Landlord fails to deliver any
portion of the 21st Floor to Tenant on the Commencement Date, Landlord shall not
be required to perform any of Landlord's Work on the 21st Floor until the entire
21st Floor is vacant and has been delivered to Tenant and the fixed annual rent
for that portion of the 21st Floor not so delivered to Tenant shall abate for
three (3) months following delivery of the respective portion(s) of the 21st
Floor not initially delivered to Tenant; provided, however, in no event shall
Tenant be required to any fixed annual rent on any portion of the 21st Floor
prior to the date provided under Section 1.05 (a) above. The amount of such
abatement shall be the product of (i) the rentable square feet of the 21st Floor
not delivered to Tenant, multiplied by (ii) the rate per rentable square foot of
fixed annual rent then payable for the remainder of the demised premises,
calculated on a per diem basis.

               (b) As provided in Section 2.04 (a) above, Landlord and Tenant
agree that there shall be no fixed annual rent payable with respect to any

                                      −5−
portion of the twenty−first (21st) floor until three (3) months after the date such portion of
the twenty−first (21st) floor shall be delivered to Tenant vacant with the item of Landlord's
Work specified in Section 2.01(a) completed; provided that Tenant shall vacate the Pre−Work 21st
Floor within twenty (20) days after Landlord's notice to vacate same so that Landlord can
perform Landlord's Work therein. Any fixed annual rent payable with respect to any such portion
of the twenty−first (21st) floor shall be abated during the period Tenant is required to vacate
same for Landlord to perform Landlord's Work and for the three (3) month period after the
completion of same and the delivery of such portion of the twenty−first (21st) floor to Tenant
in the condition herein provided. In the event Tenant fails to vacate the Pre−Work 21st Floor
as provided in this Section 2.04(b), any abatement applicable to payment of the fixed annual
rent for that portion of the Pre−Work 21st Floor shall be reduced for each day after twenty (20)
days Tenant shall not vacate the Pre−Work 21st Floor.

                                    ARTICLE 3

                               ADJUSTMENTS OF RENT

         3.01 For the purposes of this Article 3, the following definitions
shall apply

               (a) The term "Base Tax" shall mean the amount obtained by
multiplying (i) the assessed value of the Building and the parcel of land on
which the Building is constructed (hereinafter called the "Land") for the
purpose of establishing real estate taxes to be paid by Landlord for the Tax
Year commencing July 1, 2000, and ending on June 30, 2001 by (ii) the real
property tax rate for such Tax Year for each $100.00 of such assessed value.

               (b) The term "Tenant' s Proportionate Share" shall be deemed to
mean 6.79 % percent.

               (c) The term "Taxes" shall mean (i) all real estate taxes,
assessments, sewer rents and water charges, governmental levies, municipal
taxes, county taxes or any other governmental charge, general or special,
ordinary or extraordinary, unforeseen as well as foreseen, of any kind or nature
whatsoever, which are or may be assessed levied or imposed upon all or any part
of the Land, the Building and the sidewalks, plazas or streets in front of or
adjacent thereto, including any tax, excise or fee measured by or payable with
respect to any rent, and levied against Landlord and/or the Land and/or
Building, under the laws of the

                                      −6−
United States, the State of New York, or any political subdivision thereof, or by the City of
New York or any political subdivision thereof and any charge imposed by any business
improvement district, and (ii) any expenses incurred by Landlord in contesting any of the
foregoing set forth in clause (i) of this sentence or the assessed valuations of all or any part
of the Land and Building, etc. or collecting any refund. If, due to a future change in the
method of taxation or in the taxing authority, a new or additional real estate tax, or a
franchise, income, transit, profit or other tax or governmental imposition, however designated,
shall be levied against Landlord, and/or the Land and/or Building, in addition to, or in
substitution in whole or in part for any tax which would constitute "Taxes", or in lieu of
additional Taxes, such tax or imposition shall be deemed for the purposes hereof to be included
within the term "Taxes", if in accordance with the general practice of owners of real estate in
New York City. Except as set forth in the immediately preceding sentence, Taxes shall not
include sales, transfer, income, franchise, estate or inheritance taxes or any penalties or
interest imposed on Landlord in connection with late payment thereof. Currently there are no tax
exemptions or abatements in effect affecting the Taxes.

               (d) The term "Tax Year" shall mean each period of twelve (12)
months, commencing on the first day of July of each such period, in which occurs
any part of the term of this Lease or such other period of twelve months
occurring during the term of this Lease as hereafter may be duly adopted as the
fiscal year for real estate tax purposes of the City of New York.

               (e) The term "Operating Year" shall mean the calendar year 2000
and each succeeding calendar year thereafter.

               (f) The term "Wage Rate" with respect to any Operating Year shall
mean the regular average hourly wage rate (excluding fringe benefits) required
to be paid to Porters in Class A Office Buildings pursuant to any agreement
between the Realty Advisory Board on Labor Relations, Incorporated or any
successor thereto (hereinafter referred to as "R.A.B.") and local 32B/32J of the
Building Service Employees International Union AFL−CIO, or any successor thereto
(hereinafter referred to as "Local 32B") in effect during such Operating Year,
provided that if any such agreement shall require Porters to be regularly
employed on days or during hours when overtime or other premium pay rates are in
effect, then the term "regular average hourly wage rate" shall mean the regular
average hourly wage rate for the hours in a calendar week which Porters are
required to be regularly employed (whether or not actually at work in the
Building), e.g., if, for example, as of January 1, 2000, an agreement between
R.A.B. and Local 32B would require the regular employment of Porters for 40
hours during a calendar

                                      −7−
week at a regular average hourly wage of $4.00 for the first 30 hours and at an overtime hourly
average wage of $5.00 for the remaining 10 hours, then the regular average hourly wage rate
under this subsection, as of January 1, 2000, would be the sum arrived at by dividing the total
weekly average wages of $170.00 by the total number of required hours of employment which is 40
and resulting in a regular average hourly wage rate of $4.25. The computation of the regular
average hourly wage rate shall be on the same basis whether based on an hourly or other pay
scale but predicated on the number of hours in such respective work weeks, whether paid by
Landlord or any independent contractor. If there is no such agreement in effect as of the date
of any Escalation Statement on which such regular average hourly wage rate is determinable, the
computations shall be made on the basis of the regular average hourly wage rate being paid by
Landlord or by the contractor performing porter or cleaning services for Landlord as of the date
of such Escalation Statement and appropriate retroactive adjustments shall be made when the
regular average hourly wage rate paid as of such Escalation Statement is finally determined. If
length of service shall be a factor in determining any element of wages it shall be
conclusively presumed that all employees have at least three years of service. The Wage Rate is
intended to be an index in the nature of a cost of living index, and is not intended to reflect
the actual costs of wages or expenses for the Building.

               (g) The term "Porters" shall mean that classification of employee
engaged in the general maintenance and operation of Class A Office Buildings
most nearly comparable to the classification now applicable to porters in the
current agreements between R.A.B. and Local 32B/32J (which classification is
presently termed "others" in said agreement).

               (h) The term "Class A Office Buildings" shall mean office
buildings in the same class or category as the Building under any building
operating agreement between R.A.B. and Local 32B/32J, regardless of the
designation given to such office buildings in any such agreement.

               (i) The term "Base Wage Rate" shall mean the Wage Rate in effect
on January 1, 2000.

               (j) The term "Escalation Statement" shall mean a statement
setting forth the amount payable by Tenant for a specified Tax Year or Operating
Year (as the case may be) pursuant to this Article 3. Upon Tenant's request
therefore, Landlord shall furnish to Tenant a copy of the tax bills upon which
an Escalation Statement was based.

                                      −8−
               (k) The term "Wage Rate Multiple" shall mean 34,737.

         3.02 If the Wage Rate for any Operating Year shall be greater than the
Base Wage Rate, then Tenant shall in the case of such an increase pay to
Landlord as additional rent for the demised premises for such Operating Year an
amount equal to the product obtained by multiplying one hundred (100%) percent
of the difference between the Wage Rate for such Operating Year and the Base
Wage Rate, by the Wage Rate Multiple.

         3.03 A. Tenant shall pay as additional rent for each Tax Year a sum
(hereinafter referred to as "Tenant's Tax Payment") equal to Tenant's
Proportionate Share of the amount by which the Taxes for such Tax Year exceed
the Base Tax. Tenant's Tax Payment for each Tax Year shall be due and payable in
two (2) equal installments, in advance, (i.e., on the first day of each June and
December during each Tax Year) based upon the Escalation Statement furnished
prior to the commencement of such Tax Year, until such time as a new Escalation
Statement for a subsequent Tax Year shall become effective. If an Escalation
Statement is furnished to Tenant after the commencement of a Tax Year in respect
of which such Escalation Statement is rendered, Tenant shall, within fifteen
(15) days thereafter, pay to Landlord an amount equal to the amount of any
underpayment of Tenant's Tax Payment with respect to such Tax Year and, in the
event of an overpayment, Landlord shall permit Tenant to credit against
subsequent payments under this lease the amount of Tenant's overpayment or if
there are no subsequent payments coming due under the lease, Landlord shall pay
such amount to Tenant. If there shall be any increase in Taxes for any Tax Year,
whether during or after such Tax Year, Landlord shall furnish a revised
Escalation Statement for such Tax Year, and Tenant's Tax Payment for such Tax
Year shall be adjusted and paid in the same manner as provided in the preceding
sentence. If during the term of this Lease, Taxes are required to be paid
(either to the appropriate taxing authorities or as tax escrow payments to a
superior mortgagee) in full or in monthly, quarterly, or other installments, on
any other date or dates than as presently required, then at Landlord's option,
Tenant's Tax Payments shall be correspondingly accelerated or revised so that
said Tenant's Tax Payments are due at least thirty (30) days prior to the date
payments are due to the taxing authorities or the superior mortgagee. The
benefit of any discount for any early payment or prepayment of Taxes shall
accrue solely to the benefit of Landlord and such discount shall not be
subtracted from Taxes.

               B. If the real estate tax fiscal year of The City of New York
shall be changed during the term of this Lease, any Taxes for such fiscal year,
a part of which is included within a particular Tax Year and a part of which is
not so

                                      −9−
included, shall be apportioned on the basis of the number of days in such fiscal year included
in the particular Tax Year for the purpose of making the computations under this Section 3.03.

               C. If Landlord shall receive a refund of Taxes for any Tax Year,
Landlord shall permit Tenant to credit against subsequent payments under this
Lease Tenant's Proportionate Share of the refund but not to exceed Tenant's Tax
Payment paid for such Tax Year, or if there are no subsequent payments coming
due under the Lease, Landlord shall pay such amount to Tenant.

               D. If the Base Tax is reduced as a   result of a certiorari
proceeding or otherwise Landlord shall adjust the   amounts previously paid by
Tenant pursuant to the provisions of this Section   3.03 and Tenant shall pay the
amount of said adjustment within thirty (30) days   after demand setting forth the
amount of said adjustment.


3.04 Tenant shall pay to Landlord upon demand, as additional rent, any occupancy tax or rent tax
now in effect or hereafter enacted, if payable by Landlord in the first instance or hereafter
required to be paid by Landlord.

         3.05 Any such adjustment payable by reason of the provisions of Section
3.02 shall commence as of the first day of the relevant Operating Year and,
after Landlord shall furnish Tenant with an Escalation Statement relating to
such Operating Year, all monthly installments of rental shall reflect
one−twelfth (1/12) of the annual amount of such adjustment until a new
adjustment becomes effective pursuant to the provisions of this Article 3,
provided, however, that if said Escalation Statement is furnished to Tenant
after' the commencement of such Operating Year, there shall be promptly paid by
Tenant to Landlord, an amount equal to the portion of such adjustment allocable
to the part of such Operating Year which shall have elapsed prior to the first
day of the calendar month next succeeding the calendar month in which said
Escalation Statement is furnished to Tenant.

         3.06 In the event that the Commencement Date shall be other than the
first day of a Tax Year or an Operating Year or the date of the expiration or
other termination of this Lease shall be a day other than the last day of a Tax
Year or an Operating Year, then, in such event, in applying the provisions of
this Article 3 with respect to any Tax Year or Operating Year in which such
event shall have occurred, appropriate adjustments shall be made to reflect the
occurrence of such event on a basis consistent with the principles underlying
the provisions of this Article 3 taking into consideration the portion of such
Tax Year or Operating

                                      −10−
Year which shall have elapsed after the term hereof commences in the case of the Commencement
Date, and prior to the date of such expiration or termination in the case of the Expiration Date
or other termination.

         3.07 Payments shall be made pursuant to this Article 3 notwithstanding
the fact that an Escalation Statement is furnished to Tenant after the
expiration of the term of this Lease, provided that if Landlord shall fail to
furnish an Escalation Statement with respect to any Operating Year within three
(3) years following the end of such year, then Landlord shall be deemed to have
irrevocably waived its right to furnish such Escalation Statement.

         3.08 In no event shall the fixed annual rent ever be reduced by
operation of this Article 3 and the rights and obligations of Landlord and
Tenant under the provisions of this Article 3 with respect to any additional
rent shall survive the termination of this lease.


3.09 Landlord's failure to render an Escalation Statement with respect to any Tax Year or
Operating Year, respectively, shall not prejudice Landlord's right to thereafter render an
Escalation Statement with respect thereto or with respect to any subsequent Tax Year or
Operating Year. Tenant's obligation to pay escalation for any Tax or Operating Year during the
term of this Lease shall survive for three (3) years after the expiration or earlier
termination of this Lease.

         3.10 Each Escalation Statement shall be conclusive and binding upon
Tenant unless within ninety (90) days after receipt of such Escalation Statement
Tenant shall notify Landlord that it disputes the correctness of such Escalation
Statement. specifying the particular respects in which such Escalation Statement
is claimed to be incorrect. Any dispute relating to any Escalation Statement not
resolved within one hundred eighty (180) days after the giving of such
Escalation Statement may be submitted to arbitration by either party pursuant to
Article 38 hereof. Pending the determination of such dispute, Tenant shall pay
additional rent in accordance with the Escalation Statement that Tenant is
disputing, without prejudice to Tenant's position. If the dispute shall be
determined in Tenant's favor, Landlord shall forthwith pay to Tenant the amount
of Tenant's overpayment of rents resulting from compliance with Landlord's
Escalation Statement.


3.11 Notwithstanding any language to the contrary contained in this Article 3, the additional
rent payable by Tenant pursuant to Section 3.02 hereof shall be abated until the first (1st)
anniversary of the Commencement Date.

                                      −11−
                                      ARTICLE 4

                                     ELECTRICITY


4.01 Tenant   agrees that Landlord shall furnish electricity to Tenant on a "submetering" basis.
Electricity   and electric service, as used herein, shall mean any element affecting the
generation,   transmission, and/or distribution or redistribution of electricity, including. but
not limited   to, services which facilitate the distribution of service.

          4.02 Tenant covenants and agrees to purchase electricity from Landlord
or Landlord's designated agent at charges, terms and rates, including, without
limitation, fuel adjustments and taxes, equal to those specified in the Con
Edison SC#4−1 rate schedule effective on the date Landlord first provides
electricity to the demised premises on a submetering basis (the "effective"
date), or any successor rate schedule or service classification, plus ten
percent (10%) for transmission line loss and other redistribution costs. Where
more than one meter measures the service of Tenant in the Building, the service
rendered through each meter shall be aggregated and billed in accordance with
the rates herein. Bills therefore shall be rendered at such times as Landlord
may elect (but not. more frequently than monthly) and the amount, as computed
from a meter, shall be deemed to be, and be paid as, Additional Charges. If any
tax is imposed upon Landlord's receipt from the sale or resale of electrical
energy to Tenant by any Federal, State or Municipal authority, Tenant covenants
and agrees that where permitted by law, Tenant's pro−rata share of such taxes
shall be passed on to and included in the amount of, and paid by, Tenant to
Landlord.

         4.03 If all or part of the submetering additional rent payable in
accordance with this Article 4 becomes uncollectible or reduced or refunded by
virtue of any law, order or regulation, the parties agrees that, at Landlord's
option in lieu of submetering Additional Charges, and in consideration of
Tenant's use of the Building's electrical distribution system and receipt of
redistributed electricity and payment by Landlord of consultant's fees and other
redistribution costs, the fixed annual rent to be paid under this lease shall be
increased by an "alternative charge" which shall be a sum equal to $3.00 per
year per rentable square foot of the demised premises, changed in the same
percentage as any increases in the cost to Landlord for electricity for the
entire Building subsequent to January 1, 2000 because of electric rate or
service classification or market price changes.

         4.04 Landlord shall not be liable for any loss or damage or expense
which Tenant may sustain or incur if either the quantity or character of

                                        −12−
electric service is changed, unless due to negligence or willful misconduct of Landlord or its
agents or employees, or is no longer available or suitable for Tenant's requirements. Tenant
covenants and agrees that at all times its use of electric current shall never exceed the
capacity of existing feeders to the Building or wiring installation. Tenant agrees not to
connect any additional electrical equipment to the Building electric distribution system, other
than lamps and small office machines and personal computers which consume comparable amounts of
electricity, without Landlord's prior written consent, which consent shall not be unreasonably
withheld or delayed. Any riser or risers to supply Tenant's additional electrical requirements,
upon written request of Tenant, will be installed by Landlord, at the reasonable cost and
expense of Tenant, if, in Landlord's sole judgment, the same are necessary and will not cause
permanent damage or injury to the Building or demised premises or cause or create a dangerous
or hazardous condition or entail excessive or unreasonable alterations, repairs or expenses or
otherwise interfere with or disturb other tenants or occupants of the Building except to a de
minimis extent. In addition to the installation of such riser or risers, Landlord will also at
the sole cost and expense of Tenant, install all other equipment proper and necessary in
connection therewith subject to the aforesaid terms and conditions. The parties acknowledge that
they understand that it is anticipated that electric rates, charges, etc., may be changed by
virtue of time−of−day rates or other methods of billing, electricity purchases and the
redistribution thereof, and that the references in the foregoing paragraphs to changes in
methods of or rules on billing are intended to include any such changes. Anything hereinabove
to the contrary notwithstanding, in no event is the submetering additional rent or any
"alternative charge", to be less than an amount equal to the total of Landlord's payment to
public utilities and/or other providers for the electricity consumed by Tenant (and any taxes
thereon or on redistribution of same) plus ten percent (10%) for transmission line loss and
other redistribution costs. The Landlord reserves the right to terminate the furnishing of
electricity upon thirty (30) days' written notice to Tenant, in which event the Tenant may make
application direction to the public utility and/or other providers for the Tenant's entire
separate supply of electric current and Landlord shall permit its wires and conduits, to the
extent available and safely capable, to be used for such purpose, but only to the extent of
Tenant's then authorized load. Any meters, risers, or other equipment or connections necessary
to furnish electricity on a sub metering basis or to enable Tenant to obtain electric current
directly from such utility and/or other providers shall be installed by Landlord at Tenant's
sole cost and expense. On rigid conduit or electrical metal tubing (EMT) will be allowed;
provided, however, that the submeters initially required to measure Tenant's consumption of
electricity in the demised premises shall be installed by Landlord at Tenant's expense. The
Landlord, upon the expiration of the aforesaid thirty (30)

                                      −13−
days' written notice to Tenant may discontinue furnishing the electric current but this Lease
shall otherwise remain in full force and effect; provided, however, if Tenant shall be using due
diligence to obtain a direct supply of electricity from the public utility company, such thirty
(30) day period shall be extended until Tenant shall be receiving such direct service.

         4.05 Landlord shall provide six (6) watts per rentable square foot
connected load, exclusive of the Unit, to a disconnect switch in the demised
premises in a location to be designated by Landlord. Tenant's use of electric
energy in the demised premises shall not at any time exceed the capacity of any
of the electrical conductors and equipment in or otherwise serving the demised
premises. In order to insure that such capacity is not exceeded and to avert
possible adverse effect upon the Building's distribution of electricity via the
Building's electric system, Tenant shall not, without Landlord's prior consent
in each instance (which consent shall not be unreasonably withheld or delayed),
connect any fixtures, appliances or equipment (other than normal business
machines and personal computers, which do not materially increase Tenant's
electrical consumption) to the Building's electric system or make any
alterations or additions to the electric system of the demised premises existing
on the Commencement Date.


4.06 (a) Tenant agrees not to connect any additional electrical equipment of any type to the
Building electric distribution system, other than lamps, typewriters and other small office
machines which consume comparable amounts of electricity, without the Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. Any additional risers,
feeders, or other equipment proper or necessary to supply Tenant's electrical requirements, upon
written request of Tenant, will be installed by Landlord, at the sole cost and expense of
Tenant, if, in Landlord's reasonable judgment, the same are necessary and will not cause
permanent damage or injury to the Building or the demised premises, or cause or create a
dangerous or hazardous condition or entail excessive or unreasonable alterations, repair or
expense or interfere with or disturb other tenants or occupants, except to a de minimis extent.

               (b) At Landlord's option, Tenant shall purchase from Landlord or
Landlord's agent all lighting tubes, lamps, bulbs and ballasts used in the
demised premises and Tenant shall pay Landlord's reasonable charges for
providing and installing same, on demand, as additional rent.

                                      −14−
         4.07 In no event shall the fixed annual rent under this Lease be
reduced below the amount set forth in Section 1.01 hereof by virtue of this
Article 4.

                                    ARTICLE 5

                                       USE

         5.01 The demised premises shall be used solely as and for general and
executive offices and for no other purposes.

         5.02 Tenant shall not use or permit the use of the demised premises or
any part thereof in any way which would violate any of the covenants,
agreements, terms, provisions and conditions of this Lease or for any unlawful
purposes or in any unlawful manner or in violation of the Certificate of
Occupancy for the demised premises or the Building, and Tenant shall not suffer
or permit the demised premises or any part thereof to be used in any manner or
anything to be done therein or anything to be brought into or kept therein
which, in the judgment of Landlord, shall in any way impair or tend to impair
the character, reputation or appearance of the Building as a high quality office
building, impair or interfere with or tend to impair or interfere with any of
the Building services or the proper and economic heating, cleaning, air
conditioning or other servicing of the Building or the demised premises, or
impair or interfere with or tend to impair or interfere with the use of any of
the other areas of the Building by, or occasion discomfort, inconvenience or
annoyance to, any of the other tenants or occupants of the Building. Tenant
shall not install any electrical or other equipment of any kind which, in the
judgment of Landlord, might cause any such impairment, interference, discomfort,
inconvenience or annoyance.

          5.03 Portions of the demised premises may be used for one or more
pantry areas for reheating, but not for cooking, of food and beverages for
Tenant's officers and directors, employees and staff, subject to the provisions
of Article 6 below. Tenant shall be responsible, at Tenant's sole cost and
expense, for maintaining Tenant's pantries at all times in a clean and sanitary
condition and free of rodents and other vermin and for the removal of refuse and
garbage therefrom on a daily basis, using contractors therefor designated by
Landlord.

                                      −15−
                                    ARTICLE 6

                          ALTERATIONS AND INSTALLATIONS


6.01 Tenant shall make no alterations, installations, additions or improvements in or to the
demised premises without Landlord's prior written consent and then only by contractors or
mechanics first approved by Landlord. Landlord hereby approves, for use by Tenant for the
performance of Tenant's Work, the contractors, construction managers, mechanics and
subcontractors/trade contractors set forth on Exhibit D attached hereto and made a part hereof.
All such work, alterations, installations, additions and improvements shall be done at Tenant's
sole expense and at such times and in such manner as Landlord may from time to time reasonably
designate. In connection with any alterations costing in excess of $100,000 (excluding Tenant's
Work, provided Tenant shall use bonded contractors and subcontractors in connection with the
performance of Tenant's Work), Tenant shall also provide at Landlord's request such financial
security as Landlord shall require to guarantee completion of Tenant's work and payment of all
contractors and suppliers utilized in connection therewith.

         Any installations, materials and work which may be undertaken by or for
the account of Tenant other than merely decorative work such as painting or
carpeting, shall be effected solely in accordance with plans and specifications
first approved in writing by Landlord. Tenant shall reimburse Landlord promptly
upon demand for any reasonable out−of−pocket costs and expenses incurred by
Landlord in connection with Landlord's review of such Tenant's plans and
specifications. Landlord will not unreasonably withhold or delay its consent to
requests for nonstructural alterations, additions and improvements provided they
will not affect the outside of the Building or any area outside the demised
premises or adversely affect its structure, electrical, HVAC, plumbing or
mechanical systems.

         Any such approved alterations and improvements shall be performed in
accordance with the foregoing and the following provisions of this Article 6:

         (i)      All work shall be done in a good and workmanlike manner.

         (ii)     In the event Tenant shall employ any contractor to do in the
                  demised premises any work permitted by this Lease, such
                  contractor and any subcontractor shall agree to

                                      −16−
        employ only such labor as will not result in jurisdictional
        disputes or strikes or result in causing disharmony with other
        workers employed at the Building.

(iii)   All such alterations shall be effected in compliance with all
        applicable laws, ordinances, rules and regulations of
        governmental bodies having or asserting jurisdiction in the
        demised premises and in accordance with Landlord's Rules and
        Regulations with respect to alterations. Landlord's
        Alterations Rules and Regulations are set forth on Exhibit G
        attached hereto and made a part hereof.

(iv)    Tenant shall keep the Building and the demised premises free
        and clear of all liens for any work or material claimed to
        have been furnished to Tenant or to the demised premises on
        Tenant's behalf, and all work to be performed by Tenant shall
        be done in a manner which will not unreasonably interfere with
        or disturb other tenants or occupants of the Building.

(v)     During the progress of the work to be done by Tenant, said
        work shall be subject to inspection by representatives of
        Landlord who shall be permitted access to the demised premises
        and the opportunity to inspect, at all reasonable times, but
        this provision shall not in any way whatsoever create any
        obligation on Landlord to conduct such an inspection.

(vi)    With respect to alteration or improvement work other than
        Tenant's Work, costing more than Five Thousand
        Dollars($5,000), Tenant agrees to pay to Landlord's managing
        agent, as additional rent, promptly upon being billed
        therefor, a sum equal to seven (7%) percent of the cost of
        such work or alteration, for Landlord's indirect costs, field
        supervision and coordination in connection with such work.

(vii)   Prior to commencement of any work, Tenant shall furnish to
        Landlord certificates evidencing the existence of:

                            −17−
                  (1)      workmen's compensation insurance covering all persons
                           employed for such work; and

                  (2)      reasonable comprehensive general liability and
                           property damage insurance naming Landlord, its
                           designees and Tenant as insureds, with coverage of at
                           least Three Million Dollars ($3,000,000) single
                           limit.

         (viii)   Before commencing any work Tenant shall furnish to Landlord
                  such bonds for payment and completion or such other security
                  for completion thereof and payment therefor as Landlord shall
                  reasonably require and in such form as is reasonably
                  satisfactory to Landlord and in an amount which will be one
                  hundred twenty percent (120%) of the cost of performing such
                  work as specified by Tenant's general contractor in its
                  contract with Tenant for the performance of such work.

         (ix)     Any work affecting any mechanical systems of the Building,
                  including, without limitation, the electrical, plumbing and
                  life safety systems, shall be performed at Tenant's expense by
                  a contractor designated by Landlord, provided charges of such
                  contractors shall be commercially reasonable.


Notice is hereby given that Landlord shall not be liable for any labor or materials furnished
or to be furnished to Tenant upon credit, and that no mechanic's or other lien for any such
labor or materials shall attach to or affect the reversion or other estate or interest of
Landlord in and to the demised premises.

         6.02 Any mechanic's lien filed against the demised. premises or the
Building for work claimed to have been done for, or materials claimed to have
been furnished to, Tenant shall be discharged by Tenant at its expense within
thirty (30) days after Tenant receives notice of such filing, by payment, filing
of the bond required by law or otherwise.

         6.03 All alterations, installations, additions and improvements made
and installed by Landlord, including without limitation any work referred to in

                                      −18−
Article 2 hereof shall be the property of Landlord and shall remain upon and be surrendered with
the demised premises as a part thereof at the end of the term of this Lease.

         6.04 All alterations, installations, additions and improvements made
and installed by Tenant, or at Tenant's expense, upon or in the demised premises
which are of a permanent nature and which cannot be removed without damage to
the demised premises or Building shall become and be the property of Landlord,
and shall remain upon and be surrendered with the demised premises as a part
thereof at the end of the term of this Lease, except that Landlord shall have
the right and privilege at any time up to six (6) months prior to the expiration
of the Term to serve notice upon Tenant that any "Non−Standard Alterations" (as
hereinafter defined in this Section 6.04) shall be removed and, in the event of
service of such notice, Tenant will, at Tenant's own cost and expense, remove
the same in accordance with such request, repair any damage to the demised
premises caused by such removal and restore the demised premises to their
original condition, ordinary wear and tear and casualty excepted; provided that
Landlord shall have advised Tenant at the time it consented to any such
Non−Standard Alteration that Landlord may require its removal at the end of the
Term if Tenant shall have requested such advice when it requested Landlord's
consent to such Alteration. For the purposes of this Article 6, "Non−Standard
Alteration" shall mean the following non−standard Building improvements:
auditoriums or similar type special use areas, vaults, atriums, kitchen
equipment and installations, internal stairways, slab reinforcements which
reduce the height of the finished ceiling from the floor (assuming a customary
distance between the finished ceiling and the underside of the floor stab above)
or impede the installation of duct work and other normal installations above the
finished ceiling, and any other Alteration which is not suitable for normal
office occupancy or which would be unusually difficult or costly to remove in
comparison to the usual Alterations required for general office purposes.
Notwithstanding anything to the contrary in this lease, Tenant shall not be
required to remove the air−conditioning louvers in the demised premises at the
end of the Term.


6.05 All furniture, furnishings and trade fixtures, including without limitation, murals,
business machines and equipment, counters, screens, grille work, special panelled doors, cages,
movable partitions, metal railings, movable closets, panelling, lighting fixtures and
equipment, drinking fountains, refrigeration and air handling equipment, and any other movable
property shall remain the property of Tenant which may, at its option, remove all or any part
thereof at any time prior to the expiration of the term of this lease. In case Tenant shall
decide not to remove any part of such property, Tenant shall notify Landlord in writing not

                                      −19−
less than three (3) months prior to the expiration of the term of this lease, specifying the
items of property which it has decided not to remove. If, within thirty (30) days after the
service of such notice, Landlord shall request Tenant to remove any of the said property,
Tenant shall, at its expense, remove the same and at Landlord's option either repair any damage
caused by such removal and with respect to any slab penetrations, restore the affected portion
of the demised premises to its original condition. As to such property which Landlord does not
request Tenant to remove, the same shall be, if left by Tenant, deemed abandoned by Tenant and
thereupon the same shall become the property of Landlord.

If any alterations, installations, additions, improvements or other property
which Tenant shall have the right to remove or be requested by Landlord to
remove as provided in Sections 6.04 and 6.05 hereof (herein in this Section 6.06
called the "property") are not removed on or prior to the expiration of the term
of this lease, Landlord shall have the right to remove the property and to
dispose of the same without accountability to Tenant and at the sole cost and
expense of Tenant. In case of any damage to the demised premises or the Building
resulting from the removal of the property Tenant shall repair such damage or,
in default thereof, shall reimburse Landlord for Landlord's cost in repairing
such damage. This obligation shall survive any termination of this lease.


6.06 Notwithstanding any language to the contrary contained in this Article 6, Landlord's
consent shall not be required with respect to merely decorative changes to the demised premises
such as painting or the installation of carpeting or wall covering.

         6.07 Tenant shall keep records of Tenant's alterations, installations,
additions and improvements costing in excess of Five Thousand Dollars ($5,000),
and of the cost thereof. Tenant shall, within thirty (30) days after demand by
Landlord, furnish to Landlord copies of such records and cost if Landlord shall
require same in connection with any proceeding to reduce the assessed valuation
of the Building, or in connection with any proceeding instituted pursuant to
Article 16 hereof.

                                    ARTICLE 7

                                     REPAIRS

         7.01 Tenant shall take good care of the demised premises and the
fixtures, equipment and appurtenances therein and shall, at its sole cost and

                                      −20−
expense, make such repairs to the demised premises and the fixtures, equipment and
appurtenances therein as are necessitated by the (i) act, omission, occupancy or negligence of
Tenant or Tenant's employees, contractors, invitees, licensees or other occupants of the demised
premises or (ii) use of the demised premises in a manner contrary to the purposes for which same
are leased to Tenant, as and when needed to preserve them in good working order and condition.
Notwithstanding the foregoing, all damage or injury to the Building, or to its fixtures,
equipment and appurtenances, whether requiring structural or non−structural repairs, caused by
or resulting from the act, omission, occupancy or negligence of Tenant or Tenant's employees,
contractors, invitees, licensees or other occupants of the demised premises, shall be repaired
promptly by Tenant (or by Landlord, if a structural repair), at Tenant's sole cost and expense.
Except as otherwise provided in Section 9.05 hereof, all damage or injury to the demised
premises and to its fixtures, appurtenances and equipment or to the Building or to its fixtures,
appurtenances and equipment caused by Tenant moving property into or out of the Building or by
installation or removal of furniture, fixtures or other property, shall be repaired, restored
or replaced promptly by Tenant at its sole cost and expense, which repairs, restorations and
replacements shall be in quality and class equal to the original work or installations. If
Tenant fails to make such repairs, restoration or replacements, the same may be made by Landlord
at the expense of Tenant and such expense shall be collectible as additional rent and shall be
paid by Tenant within fifteen (15) days after rendition of a bill therefor.

         The exterior walls of the Building, the portions of any window sills
outside the windows, the windows, the fire stairs, utility closets and any
shafts passing through the floor on which the demised premises are located are
not part of the premises demised by this lease, and Landlord reserves all rights
to such parts of the Building.

         7.02 Tenant shall not place a load upon any floor of the demised
premises exceeding the floor load per square foot area which such floor was
designed to carry and which is allowed by law.


7.03 Business machines and mechanical equipment used by Tenant which cause vibration, noise,
cold or heat that may be transmitted to the Building structure or to any leased space to such a
degree as to be reasonably objectionable to Landlord or to any other tenant in the Building
shall be placed and maintained by Tenant at its expense in settings of cork, rubber or spring
type vibration eliminators sufficient to absorb and prevent such vibration or noise, or prevent
transmission of such cold or heat. The parties hereto recognize that the operation of
elevators, air conditioning and heating equipment will cause some

                                      −21−
vibration, noise, heat or cold which may be transmitted to other parts of the Building and
demised premises. Landlord shall be under no obligation to endeavor to reduce such vibration,
noise, heat or cold.

         7.04 Except as otherwise specifically provided in this lease, there
shall be no allowance to Tenant for a diminution of rental value and no
liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from the making of any repairs, alterations,
additions or improvements in or to any portion of the Building or the demised
premises or in or to fixtures, appurtenances or equipment thereof.


7.05 Landlord, at its expense, shall keep and maintain the Building and its systems and
facilities serving the demised premises, in good working order, condition and repair and shall
make all repairs, structural and otherwise, interior and exterior, as and when needed in or
about the demised premises, except for those repairs for which Tenant is responsible pursuant
to any other provisions of this Lease.

                                    ARTICLE 8

                               REQUIREMENTS OF LAW


8.01 Tenant, at Tenant's sole cost and expense, shall comply with all laws, orders and
regulations of federal, state, county and municipal authorities, and with any direction of any
public officer or officers, pursuant to law, which shall impose any violation, order or duty
upon Landlord or Tenant with respect to the demised premises, or the use or occupation thereof;
provided, however, that it shall be Landlord's obligation to cure any violation of law noted
against the demised premises prior to the Commencement Date. Notwithstanding the foregoing,
Tenant shall not be required to make any structural alterations in the demised premises to
comply with laws unless the necessity for same shall arise from Tenant's particular manner of
use of the demised premises or the operation of its installations, equipment or other property
in the demised premises, any cause or condition created by or at the instance of Tenant or any
breach of Tenant's obligations hereunder.

         8.02 Notwithstanding the provisions of Section 8.01 hereof, Tenant, at
its own cost and expense, may contest, in any manner permitted by law (including
appeals to a court, or governmental department or authority having jurisdiction
in the matter), the validity or the enforcement of any governmental act,

                                      −22−
regulation or directive with which Tenant is required to comply pursuant to this
Lease, and may defer compliance therewith provided that:

               (a) such non−compliance shall not subject Landlord to criminal
prosecution or subject the land and/or Building to lien or sale;

               (b) such non−compliance shall not be in violation of any fee
mortgage, or of any ground or underlying lease or any mortgage thereon;

               (c) Tenant shall first deliver to Landlord a surety bond issued
by a surety company of recognized responsibility, or other security satisfactory
to Landlord, indemnifying and protecting Landlord against any loss or injury by
reason of such non−compliance; and

               (d) Tenant shall promptly and diligently prosecute such contest


Landlord, without expense or liability to it, shall cooperate with Tenant and execute any
documents or pleadings required for such purpose, provided that Landlord shall reasonably be
satisfied that the facts set forth in any such documents or pleadings are accurate.

                                    ARTICLE 9

                    INSURANCE, LOSS, REIMBURSEMENT, LIABILITY

         9.01 Tenant shall not cause, do, or permit to be done any act or thing
upon the demised premises, which will invalidate or be in conflict with New York
standard fire insurance policies covering the Building, and fixtures and
property therein, or which would increase the rate of fire insurance applicable
to the Building to an amount higher than it otherwise would be; and Tenant shall
neither do nor permit to be done any act or thing upon the demised premises
which shall or might subject Landlord to any liability or responsibility for
injury to any person or persons or to property by reason of any business or
operation being carried on within the demised premises; but nothing in this
Section 9.01 shall prevent Tenant's use of the demised premises for the purposes
stated in Article 5 hereof.

         9.02 If, as a result of any act or omission by Tenant or violation of
this Lease, the rate of fire insurance applicable to the Building shall be
increased to

                                      −23−
an amount higher than it otherwise would be, Tenant shall reimburse Landlord for all increases
of Landlord's fire insurance premiums so caused; such reimbursement to be additional rent
payable upon the first day of the month following any outlay by Landlord for such increased fire
insurance premiums. In any action or proceeding wherein Landlord and Tenant are parties, a
schedule or "make−up" of rates for the Building or demised premises issued by the body making
fire insurance rates for the demised premises, shall be presumptive evidence of the facts
therein stated and of the several items and charges in the fire insurance rate then applicable
to the demised premises.

         9.03 Landlord or its agents shall not be liable for any injury or
damage to persons or property resulting from fire, explosion, falling plaster,
steam gas, electricity, water, rain or snow or leaks from any part of the
Building, or from the pipes, appliances or plumbing works or from the roof,
street or subsurface or from any other place or by dampness or by any other
cause of whatsoever nature, unless any of the foregoing shall be caused by or
due to the negligence or willful misconduct of Landlord, its agents, servants or
employees.

         9.04 Landlord or its agents shall not be liable for any damage which
Tenant may sustain, if at any time any window of the demised premises is broken,
or temporarily or permanently (restricted to windows on a lot line, if
permanently) closed, darkened or bricked up for any reason whatsoever, except
only Landlord's arbitrary acts if the result is permanent, and Tenant shall not
be entitled to any compensation therefor or abatement of rent or to any release
from any of Tenant's obligations under this lease, nor shall the same constitute
an eviction.


9.05 Tenant shall reimburse Landlord for all expenses, damages or fines incurred or suffered by
Landlord, by reason of any breach, violation or non−performance by Tenant, or its agents,
servants or employees, of any covenant or provision of this lease, or by reason of damage to
persons or property caused by moving property of or for Tenant in or out of the Building, or by
the installation or removal of furniture or other property of or for Tenant except as provided
in Section 6.05 of this lease, or by reason of or arising out of the carelessness, negligence
or improper conduct of Tenant, or its agents, servants or employees, in the use or occupancy of
the demised premises. Subject to the provisions of Section 8.02 hereof, where applicable,
Tenant shall have the right, at Tenant's own cost and expense, to participate in the defense of
any action or proceeding brought against Landlord, and in negotiations for settlement thereof
if, pursuant to this Section 9.05, Tenant would be obligated to reimburse Landlord for expenses,
damages or fines incurred or suffered by Landlord.

                                      −24−
         9.06 Tenant shall give Landlord notice in case of fire or accidents in
the demised premises promptly after Tenant is aware of such event.


9.07 Tenant agrees to look solely to Landlord's estate and interest in the land and Building,
or the lease of the Building, or of the land and Building, and the demised premises, for the
satisfaction of any right or remedy of Tenant for the collection of a judgment (or other
judicial process) requiring the payment of money by Landlord, in the event of any liability by
Landlord, and no other property or assets of Landlord (or the partners or members thereof if
Landlord is other than an individual or corporation) shall be subject to levy, execution,
attachment, or other enforcement procedure for the satisfaction of Tenant's remedies under or
with respect to this lease, the relationship of Landlord and Tenant hereunder, or Tenant's use
and occupancy of the demised premises, or any other liability of Landlord to Tenant.

         9.08 (a) Landlord agrees that, if obtainable at no additional cost, it
will include in its fire insurance policies appropriate clauses pursuant to
which the insurance companies (i) waive all right of subrogation against Tenant
with respect to losses payable under such policies and/or (ii) agree that such
policies shall not be invalidated should the insured waive in writing prior to a
loss any or all right of recovery against any party for losses covered by such
policies. But should any additional premiums be exacted for any such clause or
clauses, Landlord shall be released from the obligation hereby imposed unless
Tenant shall agree to pay such additional premium.

               (b) Tenant agrees to include, if obtainable at no additional
cost, in its fire insurance policy or policies on its furniture, furnishings,
improvements, fixtures and other property removable by Tenant under the
provisions of this lease appropriate clauses pursuant to which the insurance
company or companies (i) waive the right of subrogation against Landlord and any
tenant of space in the Building with respect to losses payable under such policy
or policies and/or (ii) agree that such policy or policies shall not be
invalidated should the insured waive in writing prior to a loss any or all right
of recovery against any party for losses covered by such policy or policies. But
should any additional premium be exacted for any such clause or clauses, Tenant
shall be released from the obligation hereby imposed unless Landlord or the
other tenants shall agree to pay such additional premium.

               (c) Provided that Landlord's right of full recovery under its
policy or policies aforesaid is not adversely affected or prejudiced thereby,
Landlord

                                      −25−
hereby waives any and all right of recovery which it might otherwise have against Tenant, its
servants, agents and employees, for loss or damage occurring to the Building and the fixtures,
appurtenances and equipment therein, to the extent the same is covered by Landlord's insurance,
notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its
servants, agents or employees. Provided that Tenant's right of full recovery under its aforesaid
policy or policies is not adversely affected or prejudiced thereby, Tenant hereby waives any and
all right of recovery which it might otherwise have against Landlord, its servants, agents and
employees, and against every other tenant in the Building who shall have executed a similar
waiver as set forth in this Section 9.08(c) for loss or damage to, Tenant's furniture,
furnishings, fixtures and other property removable by Tenant under the provisions hereof to the
extent that same is covered by Tenant's insurance, notwithstanding that such loss or damage may
result from the negligence or fault of Landlord, its servants, agents or employees, or such
other tenant and the servants, agents or employees thereof.

               (d) Landlord and Tenant hereby agree to advise the other promptly
if the clauses to be included in their respective insurance policies pursuant to
subdivisions 9.08 (a) and (b) hereof cannot be obtained. Landlord and Tenant
hereby also agree to notify the other promptly of any cancellation or change of
the terms of any such policy which would affect such clauses.

         9.09 Tenant covenants and agrees to provide on or before the
Commencement Date and to keep in force during the term hereof for the benefit of
Landlord and Tenant the following insurance policy naming Landlord, Landlord's
managing agent, lessors under superior leases and the holders of any mortgages
affecting the Land and/or Building as additional insureds. Tenant covenants to
provide on or before the commencement of the term of this Lease:


LIABILITY INSURANCE: Tenant shall procure and at all times during the term of this lease shall
maintain policies of commercial general and umbrella liability insurance covering the demised
premises on an occurrence basis and shall not contain any deductibles or self−insured
retentions. The policy shall provide that general and specific aggregates are per location
covered and shall further provide minimum limits, as follows:

        COMMERCIAL GENERAL LIABILITY:

        $1,000,000 per occurrence; combined single limit bodily injury and
        property damage

                                        −26−
        $ 5,000 medical payments coverage

        $50,000 fire legal liability coverage

        $2,000,000 general aggregate

        $1,000,000 per occurrence
        $2,000,000 annual aggregate; personal injury coverage

        $1,000,000 per occurrence
        $2,000,000 annual aggregate; products/completed operations coverage

        UMBRELLA LIABILITY

        $10,000,000 per occurrence

        $10,000,000 general and specific aggregates


Policy shall cover excess of general and automobile liability and shall include said policies
as underlying and provisions of the umbrella shall apply in the same manner as the primary
policies.

WORKERS' COMPENSATION


Tenant shall procure and at all times during the term of this Lease shall maintain a policy of
statutory worker's compensation insurance covering Tenant's employees with unlimited employer's
liability coverage.

UMBRELLA LIABILITY


Umbrella liability shall cover in the same manner as the primary commercial general liability
policy above and shall contain no additional exclusions or limitations than those of the general
liability policy.

PROPERTY INSURANCE


Tenant shall procure and at all times during the term of this Lease shall maintain a policy of
all risk property insurance in an amount adequate to cover the cost of replacement of all
Tenant's decorations, improvements, fixtures, furniture, stock

                                       −27−
and other contents; time element coverage including extra expense to cover Tenant's loss as a
result of a loss sustained by a peril covered under the policy.

GENERAL


Commercial general liability and any umbrella policy will provide coverage for and on behalf of
the Landlord and its designees pursuant to the provisions of this Lease as additional insured
and will reflect that sixty (60) days prior written notice of cancellation, modification or
non−renewal be provided to Landlord at the address so designated by Landlord.

Policy will provide that Tenant pays all premium under the policy. Landlord or
its agents shall not be responsible for the payment of any premiums for such
insurance.


Tenant will provide a certificate of insurances to Landlord prior to occupancy of the demised
premises and a minimum of twenty (20) days in advance for each renewal or replacement policy.
If the policy contains more than one location, Tenant may provide a certificate of insurance
reflecting and confirming that the insurance is provided in accordance with the insurance
provisions of this Lease and shall also include thereon a copy of all endorsements specifically
applicable to Landlord and the demised premises.

The minimum limits of insurance coverage required by the insurance provisions of
this Lease shall be subject to increase by Landlord from time to time, after the
Commencement Date if Landlord, in its reasonable judgment, shall deem the same
necessary for adequate protection. Within thirty (30) days of demand for such
increased coverage, Tenant shall deliver to Landlord evidence of such increased
coverage in the form of an endorsement or replacement insurance policy or
certificate and in keeping with all other insurance provisions contained herein.
In the event of Tenant's failure to procure or maintain the coverages required
hereunder in accordance with the insurance provisions contained herein, Landlord
may, but is not obligated to, procure said insurance at the cost and expense of
Tenant to be deemed additional rent hereunder, payable on demand. The minimum
limits of insurance coverage required by the insurance provisions of this Lease
shall in no way limit or diminish Tenant's liability.


Insurance companies must be satisfactory to Landlord as to an acceptable Standard & Poor's or
A.M. Best Rating with a minimum A.M. Best Rating of A + VIII.

                                      −28−
In the event of Tenant's failure to procure or maintain the coverages required hereunder in
accordance with the insurance provisions contained herein, Landlord may, but is not obligated
to, procure said insurance at the cost and expense of Tenant to be deemed additional rent
hereunder, payable on demand.

Tenant will not do   or permit anything to be done in or upon the demised premises
or the Building or   bring or keep anything therein which shall in any way
increase the rates   of all risk property or other insurance in respect of the
Building or on the   property kept therein.


Prior to the time such insurance is first required to be carried by Tenant and thereafter, at
least fifteen (15) days prior to the effective date of any such policy, Tenant agrees to deliver
to Landlord either a duplicate original of the aforesaid policy or a certificate evidencing such
insurance. Said certificate shall contain an endorsement that such insurance may not be
cancelled except upon ten (10) days' notice to Landlord. Tenant's failure to provide and keep
in force the aforementioned insurance shall be regarded as a material default hereunder
entitling Landlord to exercise any or all of the remedies provided in this lease in the event
of Tenant's default.

                                     ARTICLE 10

                            DAMAGE BY FIRE OR OTHER CAUSE

         10.01 If the Building or the demised premises shall be damaged or
destroyed by fire or other cause, Landlord, within sixty (60) days after such
damage or destruction, shall deliver to Tenant an estimate of the time
(hereinafter referred to as the "Estimated Time") required to repair or restore
the damage or destruction, prepared by an independent contractor or architect
selected by Landlord within twenty (20) days after such damage or destruction,
and reasonably approved by Tenant within ten (10) business days after written
notice from Landlord identifying such independent contractor or architect (such
estimate being hereinafter referred to as the "Estimate"). If the Building or
the demised premises shall be partially damaged or partially destroyed by fire
or other cause, the rents payable hereunder shall be abated to the extent that
the demised premises shall have been rendered untenantable or inaccessible and
for the period from the date of such damage or destruction to the date the
damage to the Building and the demised premises shall be repaired and restored
so as to render the demised premises tenantable and accessible. If the demised
premises or a major part thereof shall be totally (which shall be deemed to
include substantially totally)

                                        −29−
damaged or destroyed or rendered completely (which shall be deemed to include substantially
completely) untenantable or inaccessible on account of fire or other cause, all of the rents
shall abate as of the date of the damage or destruction and until all of the damage and
destruction to the Building and the demised premises shall be repaired and restored so as to
render the demised premises tenantable and accessible, provided, however, that should Tenant
reoccupy a portion of the demised premises during the period the restoration work is taking
place and prior to the date that the same are made completely tenantable, rents allocable to
such portion shall be payable by Tenant from the date of such occupancy.

         10.02 If the Building shall be so damaged or destroyed by fire or other
cause (whether or not the demised premises are damaged or destroyed) as to
require a reasonably estimated expenditure of more than 40% of the full
insurable value of the Building immediately prior to the casualty, Landlord may
terminate this lease by giving Tenant notice to such effect within ninety (90)
days after the date of the casualty. In case of any damage or destruction to the
Building or the demised premises mentioned in this Section 10.02 Tenant may
terminate this lease, (a) by notice to Landlord sent within sixty (60) days
after receipt of the Estimate if the Estimated Time exceeds twelve (12) months
or, (b) if Landlord has not completed the making of the required repairs and
restored and rebuilt the Building and the demised premises in such time as will
enable Tenant, commencing upon the completion of the repair and restoration
required to be performed by Landlord and prosecuting same with reasonable
diligence, to complete the restoration of the demised premises (including
Tenant's Work) within twelve {12) months from the date of such damage or
destruction, or within such period after such date (not exceeding three (3)
months) as shall equal the aggregate period Landlord may have been delayed in
doing so by labor trouble, governmental controls, act of God, or any other cause
beyond Landlord's reasonable control, by notice to Landlord sent within thirty
(30) days after such twelve (12) month period (as same may be extended pursuant
to the provisions of Section 10.02(b)).


10.03 No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of
business or annoyance arising from any repair or restoration of any portion of the demised
premises or of the Building pursuant to this Article 10.

         10.04 Tenant shall cooperate with the efforts of Landlord or the lessor
of any superior lease or the holder of any superior mortgage to collect all of
the insurance proceeds (including rent insurance proceeds) applicable to damage
or destruction of the demised premises or the Building by fire or other cause.

                                      −30−
         10.05 Landlord will not carry separate insurance of any kind on
Tenant's property and improvements, and, except as provided by law or by reason
of its breach of any of its obligations hereunder, shall not be obligated to
repair any damage thereto or replace the same. Tenant shall maintain insurance
on Tenant's property and improvements, and Landlord shall not be obligated to
repair any damage thereto or replace the same.

         10.06 Landlord and Tenant shall each look first to any insurance in its
favor before making any claim against the other party for recovery for loss or
damage resulting from fire or other casualty.


10.07 The provisions of this Article 10 shall be considered an express agreement governing any
cause of damage or destruction of the demised premises by fire or other casualty, and Section
227 of the Real Property Law of the State of New York, providing for such a contingency in the
absence of an express agreement, and any other law of like import, now or hereafter in force,
shall have no application in such case.

         10.08 If during the final two (2) years of this Lease the Building or
the demised premises shall be damaged or destroyed to the extent set forth in
Section 10.02, either party shall have the right to terminate this Lease upon
written notice to the other party given within thirty (30) days following such
casualty in accordance with the notice requirements set forth herein.

                                   ARTICLE 11

                    ASSIGNMENT, MORTGAGING, SUBLETTING, ETC.


11.01 Tenant shall not (a) assign or otherwise transfer this Lease or the term and estate
hereby granted, (b) sublet the demised premises or any part thereof or allow the same to be used
or occupied by others or in violation of Article 5 hereof, (c) mortgage, pledge or encumber this
Lease or the demised premises or any part thereof in any manner or permit any lien to be filed
against the Lease, the demised premises or the Building by reason of any act or omission on the
part of Tenant or enter into any agreement which would permit the filing of a lien by any
broker, or (d) advertise, or authorize a broker to advertise, for a subtenant or an assignee,
without, in each instance, obtaining the prior consent of Landlord, except as otherwise
expressly provided in this Article 11. For purposes of this Article 11, (i) the transfer of a

                                      −31−
majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate
subtenant, or the transfer of a majority of the total interest in any partnership tenant or
subtenant, however accomplished, whether in a single transaction or in a series of related or
unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the
case may be, except that the transfer of the outstanding capital stock of any corporate tenant,
or subtenant, shall be deemed not to include the sale of such stock by persons or parties,
through the "over−the−counter market" or through any recognized stock exchange, other than
those deemed "insiders" within the meaning of the Securities Exchange Act of 1934 as amended,
(ii) a takeover agreement shall be deemed a transfer of this Lease, (iii) any person or legal
representative of Tenant, to whom Tenant's interest under this Lease passes by operation of law,
or otherwise, shall be bound by the provisions of this Article 11, and (iv) a modification,
amendment or extension of a sublease shall be deemed a sublease.

         11.02 Landlord agrees not to unreasonably withhold it consent (and
shall grant same within thirty (30) days following Tenant's request therefor) to
transactions with a corporation or other entity into or with which Tenant is
merged or consolidated or with an entity to which substantially all of Tenant's
assets or stock are transferred (provided such merger or transfer of assets is
for a good business purpose and not principally for the purpose of transferring
the leasehold estate created hereby , and provided further, that the assignee
has a net worth a least equal to or in excess of the net worth of Tenant
immediately prior to such merger or transfer or, if Tenant is a partnership,
with a successor partnership; provided that Landlord shall not have the rights
described in Sections 11.05 and 11.07 herein with respect to the transactions
described in this Section 11.02.

         11.03 Any assignment or transfer, shall be made only if, and shall not
be effective until, the assignee shall execute, acknowledge an deliver to
Landlord a recordable agreement, in form and substance reasonably satisfactory
to Landlord, whereby the assignee shall assume the obligations and performance
of this lease and agree to be personally bound by and upon all of the covenants,
agreements, terms, provisions and conditions hereof on the part of Tenant to be
performed or observed and whereby the assignee shall agree that the provisions
of Section 11.01 hereof shall, notwithstanding such an assignment or transfer,
continue to be binding upon it in the future. Tenant covenants that,
notwithstanding any assignment or transfer, whether or not in violation of the
provisions of this lease, and notwithstanding the acceptance of fixed annual
rent by Landlord from an assignee or transferee or any other party, Tenant shall
remain fully and primarily liable for the payment of the fixed annual rent and
additional rent due and to become due under this Lease and for the performance
of all of the

                                      −32−
covenants, agreements, terms, provisions and conditions of this Lease on the
part of Tenant to be performed or observed.

         11.04 The liability of Tenant, and the due performance by Tenant of the
obligations on its part to be performed under this Lease, shall not be
discharged, released or impaired in any respect by an agreement or stipulation
made by Landlord or any grantee or assignee of Landlord, by way of mortgage, or
otherwise, extending the time of, or modifying any of the obligations contained
in this Lease, or by any waiver or failure of Landlord to enforce any of the
obligations on Tenant's part to be performed under this Lease, and Tenant shall
continue liable hereunder. If any such agreement or modification operates to
increase the obligations of a tenant under this Lease, the liability under this
Section 11.04 of the tenant named in the Lease or any of its successors in
interest, (unless such party shall have expressly consented in writing to such
agreement or modification) shall continue to be no greater than if such
agreement or modification had not been made. To charge Tenant named in this
Lease and its successors in interest, no demand or notice of any default shall
be required. Tenant and each of its successors in interest hereby expressly
waive any such demand or notice.


11.05 (a) Should Tenant agree subject to the provisions of this Lease to assign this Lease,
other than by an assignment contemplated by Sections 11.02 or 11.10, Tenant shall as soon as
that agreement is consummated, but no less than two (2) months prior to the effective date of
the contemplated assignment, deliver to Landlord a duplicate original of such agreement, and all
ancillary agreements with the proposed assignee, and Landlord shall then have the right to
elect, by notifying Tenant within thirty (30) days of such delivery, to (i) terminate this
Lease, as of such effective date as if it were the Expiration Date set forth in this Lease or
(ii) accept an assignment of this Lease from Tenant, and Tenant shall then promptly execute and
deliver to Landlord, or Landlord's designee if so elected by Landlord, in form reasonably
satisfactory to Landlord's counsel, an assignment which shall be effective as of such effective
date.

               (b) In the event that this lease shall be assigned to Landlord or
Landlord's designee or if the demised premises shall be sublet to Landlord or
Landlord's designee pursuant to this Section 11.05, the provisions of any such
sublease or assignment and the obligations of Landlord and the rights of Tenant
with respect thereto shall not be binding upon or otherwise affect the rights of
any holder of a superior mortgage or of a lessor under a superior lease unless
such holder or lessor shall elect by written notice to Tenant to succeed to the
position of Landlord or its designee, as the case may be, thereunder.

                                      −33−
               (c) Should Tenant agree subject to the provisions of this lease
to sublet the demised premises or any portion thereof, other than by a sublease
contemplated by Sections 11.02 or 11.10, Tenant shall, as soon as that agreement
is consummated, but no less than two (2) months prior to the effective date of
the contemplated sublease, deliver to Landlord, a duplicate original of the
proposed sublease and all ancillary agreements with the proposed sublessee, and
Landlord shall then have the right to elect, by notifying Tenant within thirty
(30) days of such delivery, to (i) terminate this lease as to the portion of the
demised premises affected by such subletting or as to the entire demised
premises, in the case of a subletting thereof for all or substantially the
remainder of the Term, as of such effective date, (ii) in the case of a proposed
subletting of the entire demised premises for all or substantially the remainder
of the Term, or any lesser period, either terminate this Lease or accept an
assignment of this Lease to Landlord from Tenant for all or less than the
remainder of the Term, at Landlord's option, and Tenant shall then promptly
execute and deliver to Landlord, or Landlord's designee if so elected by
Landlord, in form reasonably satisfactory to Landlord's counsel, an assignment
which shall be effective as of such effective date (there being no need to
execute an agreement more than merely confirming the date of termination in the
event of Landlord's election of same, this clause being self−operative) or,
(iii) accept a sublease from Tenant of the portion of the demised premises
affected by such proposed subletting if less than all or substantially all of
the entire demised premises in the case of a proposed subletting thereof for
less than the remaining term hereof, and Tenant shall then promptly execute and
deliver a sublease to Landlord, or Landlord's designee if so elected by
Landlord, the proposed term thereof, at Landlord's option, commencing with such
effective date, at (x) the rental terms reflected in the proposed sublease or
(y) the rental terms contained in this Lease on a per rentable square foot
basis, as elected by Landlord in such notice.

               (d) If Landlord should elect to have Tenant execute and deliver a
sublease to Landlord or its designee pursuant to any of the provisions of this
Section 11.05, said sublease shall be in a form reasonably satisfactory to
Landlord's counsel and on all the terms contained in this lease, except that:

                  (i)      The rental terms, if elected by Landlord, may be
                           either as provided in item (x) or item (y) of
                           subsection 11.05(c) hereof,

                  (ii)     The sublease shall not provide for any work to be
                           done for the subtenant or for any initial rent
                           concessions or contain provisions inapplicable to a
                           sublease, except that in

                                      −34−
                           the case of a subletting of a portion of the demised
                           premises Tenant shall reimburse subtenant for the
                           cost of erecting such demising walls as are necessary
                           to separate the subleased premises from the remainder
                           of the demised premises and to provide access
                           thereto,

                  (iii)    The subtenant thereunder shall have the right to
                           underlet the subleased premises, in whole or in part,
                           without Tenant's consent,

                  (iv)     The subtenant thereunder shall have the right to
                           make, or cause to be made, any changes, alterations,
                           decorations, additions and improvements that such
                           subtenant may desire or authorize,

                  (v)      Such sublease shall expressly negate any intention
                           that any estate created by or under such sublease be
                           merged with any other estate held by either of the
                           parties thereto.

                  (vi)     Any consent required of Tenant, as lessor under that
                           sublease, shall be deemed granted if consent with
                           respect thereto is granted by Landlord,

                  (vii)    There shall be no limitation as to the use of the
                           sublet premises by the subtenant thereunder,

                  (viii)   Any failure of the subtenant thereunder to comply
                           with the provisions of said sublease, other than with
                           respect to the payment of rent to Tenant, shall not
                           constitute a default thereunder or hereunder if
                           Landlord has consented to such non−compliance, and

                  (ix)     Such sublease shall provide that Tenant's obligations
                           with respect to vacating the demised premises and
                           removing any changes, alterations, decorations,
                           additions or improvements made in the subleased
                           premises shall be limited to those which accrued and
                           related to such as were made prior to the effective
                           date of the sublease.

               (e) If pursuant to the exercise of any of Landlord's options
pursuant to Section 11.05 hereof this Lease is terminated as to only a portion
of

                                      −35−
the demised premises, then the fixed annual rent payable hereunder and the additional rent
payable pursuant to Article 3 hereof shall be adjusted in proportion to the portion of the
demised premises affected by such termination.

          11.06 In the event that Landlord does not exercise any of the options
available to it pursuant to Section 11.05 hereof within thirty (30) days of
Tenant's delivery of a duplicate original agreement, and all ancillary
agreements with the proposed assignee or sublessee, Landlord shall not
unreasonably withhold or delay (within such thirty (30) day period) its consent
to an assignment of this Lease or a subletting of the whole or any part of the
demised premises for substantially the remainder of the term of this Lease,
provided:

               (a) Tenant shall furnish Landlord with the name and business
address of the proposed subtenant or assignee, information with respect to the
nature and character of the proposed subtenant's or assignee's business, or
activities, such references and current financial information with respect to
net worth, credit and financial responsibility as are reasonably satisfactory to
Landlord, and an executed counterpart of the sublease or assignment agreement;

               (b) The proposed subtenant or assignee is a reputable party whose
financial net worth, credit and financial responsibility is, considering the
responsibilities involved, reasonably satisfactory to Landlord;

               (c) The nature and character of the proposed subtenant or
assignee. its business or activities and intended use of the demised premises
is, in Landlord's reasonable judgment. in keeping with the standards of the
Building and the floor or floors on which the demised premises are located;

               (d) The proposed subtenant or assignee is not then an occupant of
any part of the Building or a party who dealt with Landlord or Landlord's agent
(directly or through a broker) with respect to space in the Building during the
six (6) months immediately preceding Tenant's request for Landlord's consent if
comparable space is then available in the Building for a comparable term;

               (e) All costs incurred with respect to providing reasonably
appropriate means of ingress and egress from the sublet space or to separate the
sublet space from the remainder of the demised premises shall, subject to the
provisions of Article 6 with respect to alterations, installations, additions or
improvements be borne by Tenant or subtenant;

                                      −36−
               (f) Each sublease shall specifically state that (i) it is subject
to all of the terms, covenants, agreements, provisions, and conditions of this
lease, (ii) the subtenant will not have the right to a further assignment
thereof or sublease or assignment thereunder, or to allow the demised premises
to be used by others, without the consent of Landlord in each instance, (iii) a
consent by Landlord thereto shall not be deemed or construed to modify, amend or
affect the terms and provisions of this Lease, or Tenant's obligations
hereunder, which shall continue to apply to the premises involved, and the
occupants thereof, as if the sublease or assignment had not been made;

               (g) Tenant shall pay Landlord any reasonable out−of. pocket costs
incurred by `Landlord to review the requested consent including any attorneys
fees incurred by Landlord;

               (h) The proposed subtenant or assignee is not (i) a bank trust
company,. safe deposit business, savings and loan association or loan company;
(ii) employment or recruitment agency; (iii) school, college, university or
educational institution whether or not for profit; (iv) a government or any
subdivision or agency thereof;

               (i) In the case of a subletting of a portion of the demised
premises, the portion so sublet shall be regular in shape and suitable for
normal renting purposes and such subletting will not result in more than two
occupants (including Tenant, but excluding affiliates and Relationship Entities
permitted to occupy the demised premises as herein provided) occupying each
floor of the demised premises;

               (j) The proposed assignment shall be for a consideration or the
proposed subletting shall be at a rental rate determined in an arm' s length
transaction, and in no event shall Tenant advertise or list with brokers at a
lower rental rate then the rental rates then being charged under leases being
entered into by Landlord for comparable space in the Building.

         11.07 If Tenant shall assign this Lease or sublease all or any part of
the demised premises, Tenant shall pay to Landlord, as additional rent:

               (i) in the case of an assignment, an amount equal to fifty (50%)
percent of all sums and other considerations paid to Tenant by the assignee for
or by reason of such assignment or otherwise (including, but not limited to,
sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment,
furniture, furnishings or other personal property, less, in the case of a sale
thereof,

                                      −37−
the then fair market value thereof), less reasonable advertising costs and expenses, customary
brokerage commissions, reasonable legal fees and other commercially reasonable concessions
actually incurred in connection with such assignment and amortized over the remaining term of
this lease; and

               (ii) in the case of a sublease, fifty (50%) percent of any rents,
additional charge or other consideration payable under the sublease or otherwise
to Tenant by the subtenant which is in excess of the fixed annual rent and
additional rent accruing during the term of the sublease in respect of the
subleased space (at the rate per square foot payable by Tenant hereunder)
pursuant to the terms hereof (including, but not limited to, sums paid for the
sale or rental of Tenant's fixtures, leasehold improvements, equipment,
furniture or other personal property, less, in the case of the sale thereof, the
then net unamortized or undepreciated cost thereof determined on the basis of
Tenant's federal income tax returns), less reasonable advertising costs and
expenses, customary brokerage commissions, reasonable legal fees and other
commercially reasonable concessions actually incurred in connection with such
subletting and amortized over the term of the sublease.

The sums payable under this Section 11.07 shall be paid to Landlord as and when
paid by the subtenant or assignee, as the case may be, to Tenant.

         11.08 If Tenant defaults in the payment of any rent after notice and
the expiration of applicable cure periods, Landlord is authorized to collect any
rents due or accruing from any assignee, subtenant or other occupant of the
demised premises and to apply the net amounts collected to the fixed annual rent
and additional rent reserved herein. The receipt by Landlord of any amounts from
an assignee or subtenant, or other occupant of any part of the demised premises
shall not be deemed or construed as releasing Tenant from Tenant's obligations
hereunder or the acceptance of that party as a direct tenant.


11.09 Notwithstanding anything to the contrary contained herein, Tenant shall not be required
to obtain Landlord's consent to the use of up to 2,000 rentable square feet in the aggregate as
desk space in the demised premises by one or more entities (each of which is hereinafter
individually called a "Relationship Entity") each of which is a regular client or provider of
service to Tenant. Permission to such Relationship Entity{ies) to use the demised premises
shall not create a tenancy or any other interest in the demised premises except a license
revocable by Tenant at will which shall cease and expire in any event automatically without
notice upon the expiration or termination of the letting under this lease and all acts,
omissions and operations of such Relationship Entities shall be deemed

                                      −38−
acts, omissions and operations of the Tenant. Use of the demised premises pursuant thereto
shall not be deemed to entitle such Relationship Entities to rights or privileges which Landlord
has or may hereafter accord to lessees of space in the Building.

         11.10 Subject to Landlord's consent, which Landlord agrees not to
unreasonably withhold or delay (and which Landlord agrees to grant or withhold
within thirty (30) days following Tenant's request therefore), Tenant may assign
this Lease or sublet the entire premises for substantially the balance of the
term of this Lease to any corporation or other entity into or with which Tenant
may be merged or consolidated or to any entity which shall be an affiliate,
subsidiary, parent or successor of Tenant, provided and on condition that (i)
such transaction is for a bona fide business purpose and not, either directly or
indirectly, principally for the purpose of transferring the leasehold created
hereby; (ii) the successor to the Tenant or the transferee has a net worth
immediately following such transfer of not less than the greater of (x) the net
worth of Tenant as of the Commencement Date, or (y) the net worth of Tenant
immediately preceding such transfer, and proof thereof, reasonably satisfactory
to Landlord, shall have been delivered to Landlord at least ten (10) days prior
to the effective date of such transfer; provided that Landlord shall not have
the rights described in Sections 11.05 and 11.07 herein with respect to the
transactions described in this Section 11.10.

         For the purpose of this Section 11.10, a "subsidiary" or "affiliate" or
"successor" of Tenant shall mean the following:

                  (i) An "affiliate" shall mean any corporation which, directly
         or indirectly, controls or is controlled by or is under common control
         with Tenant. For this purpose, "control" shall mean the possession,
         directly or indirectly, of the power to direct or cause the direction
         of the management and policies of such corporation, whether through the
         ownership of voting securities or by contract or otherwise.

                  (ii) A "subsidiary" shall mean any corporation not less than
         fifty percent (50%) of whose outstanding stock shall, at the time, be
         owned directly or indirectly by Tenant. Any cessation of the affiliate
         or subsidiary relationship between Tenant and the entity in question
         shall constitute an assignment or subletting, as the case may be, which
         shall be subject to all of the terms, provisions and conditions of this
         Article.

                                      −39−
                  (iii) A "successor" of Tenant shall mean (x) a corporation in
         which or with which Tenant, its corporate successors or assigns, is
         merged or consolidated, in accordance with applicable statutory
         provisions for merger or consolidation of corporations, provided that
         by operation of law or by effective provisions contained in the
         instruments of merger or consolidation, the liabilities of the
         corporations participating in such merger or consolidation are assumed
         by the corporation surviving such merger or created by such
         consolidation, or (y) a transfer of not less than eighty percent (80%)
         of the issued and outstanding stock of Tenant.


11.11 In connection with any proposed assignment or sublease, Tenant shall grant to Landlord's
then managing agent the exclusive right to sublease or to assign this lease, as the case may be,
for a period of ninety (90) days after Tenant's notice of such proposed assignment or sublease;
provided, however, that the provisions of this Section 11 .11 shall not apply to the initial
subleasing of up to one (1) full floor comprising the demised premises in a transaction which
is consummated prior to the first (1st) anniversary of the Rent Commencement Date.

                                   ARTICLE 12

                            CERTIFICATE OF OCCUPANCY

         12.01 Tenant will not at any time use or occupy the demised premises in
violation of the Certificate of Occupancy issued for the Building.

                                   ARTICLE 13

                         ADJACENT EXCAVATION −− SHORING

         13.01 If an excavation or other substructure work shall be made upon
land adjacent to the demised premises, or shall be authorized to be made, Tenant
shall afford to the person causing or authorized to cause such excavation,
license to enter upon the demised premises for the purpose of doing such work as
shall be necessary to preserve the wall of or the Building of which the demised
premises form a part from injury or damage and to support the same by proper
foundations without any claim for damages or indemnity against Landlord, or
diminution or abatement of rent.

                                      −40−
                                   ARTICLE 14

                                  CONDEMNATION

         14.01 In the event that the whole of the demised premises shall be
lawfully condemned or taken in any manner for any public or quasi−public use,
this Lease and the term and estate hereby granted shall forthwith cease and
terminate as of the date of vesting of title. In the event that only a part of
the demised premises shall be so condemned or taken, then, effective as of the
date of vesting of title, the fixed annual rent under Article 1 hereunder and
additional rents under Article 3 hereunder shall be abated in an amount thereof
apportioned according to the area of the demised premises so condemned or taken.
In the event that only a part of the Building shall be so condemned or taken,
then (a) Landlord (whether or not the demised premises be affected) may, at
Landlord's option, terminate this Lease and the term and estate hereby granted
as of the date of such vesting of title by notifying Tenant in writing of such
termination within sixty (60) days following the date on which Landlord shall
have received notice of vesting of title, or (b) if such condemnation or taking
shall be of a substantial part of the demised premises or of a substantial part
of the means of access thereto, Tenant may, at Tenant's option, by delivery of
notice in writing to Landlord within thirty (30) days following the date on
which Tenant shall have received notice of vesting of title, terminate this
Lease and the term and estate hereby granted as of the date of vesting of title,
or (c) if neither Landlord nor Tenant elects to terminate this Lease, as
aforesaid, this Lease shall be and remain unaffected by such condemnation or
taking, except that the fixed annual rent payable under Article 1 and additional
rents payable under Article 3 shall be abated to the extent hereinbefore
provided in this Article 14. In the event that only a part of the demised
premises shall be so condemned or taken and this Lease and the term and estate
hereby granted with respect to the remaining portion of the demised premises are
not terminated as hereinbefore provided, Landlord will, with reasonable
diligence and at its expense, restore the remaining portion of the demised
premises as nearly as practicable to the same condition as it was in prior to
such condemnation or taking. Landlord agrees that it shall not exercise its
rights to terminate this Lease pursuant to this Section 14.01 in a manner which
is inconsistent with the exercise of its termination rights with respect to
other tenants of the Building which are similarly affected as Tenant.

         14.02 In the event of its termination in any of the cases hereinbefore
provided, this Lease and the term and estate hereby granted shall

                                      −41−
expire as of the date of such termination with the same effect as if that were the Expiration
Date, and the fixed annual rent and additional rents payable hereunder shall be apportioned as
of such date.

         14.03 In the event of any condemnation or taking hereinbefore mentioned
of all or a part of the Building, Landlord shall be entitled to receive the
entire award in the condemnation proceeding, including any award made for the
value of the estate vested by this Lease in Tenant, and Tenant hereby expressly
assigns to Landlord any and all right, title and interest of Tenant now or
hereafter arising in or to any such award or any part thereof, and Tenant shall
be entitled to receive no part of such award. Tenant shall be permitted to make
a separate claim with the condemning authority for its moving and relocation
expenses and the cost of its fixtures and leasehold improvements.


14.04 It is expressly understood and agreed that the provisions of this Article 14 shall not be
applicable to any condemnation or taking for governmental occupancy for a limited period.

         14.05 In the event of any taking of less than the whole of the Building
which does not result in a termination of this Lease, or in the event of a
taking for a temporary use or occupancy of all or any part of the demised
premises which does not result in a termination of this Lease, Landlord, at its
expense, and whether or not any award or awards shall be sufficient for the
purpose, shall proceed with reasonable diligence to repair, alter and restore
the remaining parts of the Building and the demised premises to substantially
their former condition to the extent that the same may be feasible and so as to
constitute a complete and tenantable Building and demised premises.

         14.06 In the event any part of the demised premises be taken to effect
compliance with any law or requirement of public authority other than in the
manner hereinabove provided in this Article 14, then, (i) if such compliance is
the obligation of Tenant under this lease, Tenant shall not be entitled to any
diminution or abatement of rent or other compensation from Landlord therefor,
but (ii) if such compliance is the obligation of Landlord under this lease, the
fixed annual rent hereunder shall be reduced and additional rents under Article
3 shall be adjusted in the same manner as is provided in Section 14.01 according
to the reduction in rentable area of the demised premises resulting from such
taking.

                                      −42−
                                   ARTICLE 15

                       ACCESS TO DEMISED PREMISES; CHANGES


15.01 Tenant shall permit Landlord to erect, use and maintain pipes, ducts and conduits in and
through the demised premises, provided the same are installed adjacent to or concealed behind
existing walls and ceilings of the demised premises. Landlord shall to the extent practicable
install such pipes, ducts and conduits by such methods and at such locations as will not
unreasonably interfere with or impair Tenant's layout or use of the demised premises. Landlord
or its agents or designees shall have the right to enter the demised premises, at reasonable
times during Business Hours (as defined herein), upon prior notice (which may be oral) for the
making of such repairs or alterations as Landlord may deem necessary for the Building or which
Landlord shall be required to or shall have the right to make by the provisions of this lease
or any other lease in the Building and, subject to the foregoing, shall also have the right to
enter the demised premises for the purpose of inspecting them or exhibiting them to prospective
purchasers or lessees of the entire Building or to prospective mortgagees of the fee or of
Landlord's interest in the property of which the demised premises are a part or to prospective
assignees of any such mortgages or to the holder of any mortgage on the Landlord's interest in
the property, its agents or designees. Landlord shall be allowed to take all material into and
upon the demised premises that may be required for the repairs or alterations above mentioned
within the demised premises as the same is required for such purpose, without the same
constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no wise
abate while said repairs or alterations are being made by reason of loss or interruption of the
business of Tenant because of the prosecution of any such work. Landlord shall exercise
reasonable diligence so as to minimize the disturbance to Tenant but nothing contained herein
shall be deemed to require Landlord to perform the same on an overtime or premium pay basis.

         15.02 Landlord reserves the right, without the same constituting an
eviction and without incurring liability to Tenant therefor, to renovate and/or
change the arrangement and/or location of public entrances, lobbies passageways,
doors, doorways, corridors, elevators, stairways, toilets and other public parts
of the Building; provided, however, that access to the Building shall not be cut
off and that there shall be no unreasonable obstruction of access to the demised
premises or unreasonable interference with the use or enjoyment thereof.

                                      −43−
         15.03 Landlord reserves the right to light from time to time all or any
portion of the demised premises at night for display purposes without paying
Tenant therefor.


15.04 Landlord may, during the twelve (12) months prior to expiration of the term of this
lease, exhibit the demised premises to prospective tenants upon prior reasonable notice (which
may be oral).

         15.05 If Tenant shall not be personally present to open and permit an
entry into the demised premises at any time when for any reason an entry therein
shall be urgently necessary by reason of fire or other emergency, Landlord or
Landlord's agents may forcibly enter the same without rendering Landlord or such
agents liable therefor (if during such entry Landlord or Landlord's agents shall
accord reasonable care to Tenant's property) and without in any manner affecting
the obligations and covenants of this Lease.

                                   ARTICLE 16

                            CONDITIONS OF LIMITATION

         16.01 This lease and the term and estate hereby granted are subject to
the limitation that whenever Tenant shall make an assignment of the property of
Tenant for the benefit of creditors, or shall file a voluntary petition under
any bankruptcy or insolvency law or any involuntary petition alleging an act of
bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or
insolvency law, or whenever a petition shall be filed by or against Tenant under
the reorganization provisions of the United States Bankruptcy Act or under the
provisions of any law of like import, or whenever a petition shall be filed by
Tenant under the arrangement provisions of the United States Bankruptcy Act or
under the provisions of any law of like import, or whenever a permanent receiver
of Tenant or of or for the property of Tenant shall be appointed, then, Landlord
may, (a) at any time after receipt of notice of the occurrence of any such
event, or (b) if such event occurs without the acquiescence of Tenant, at any
time after the event continues for sixty (60) days, give Tenant a notice of
intention to end the term of this lease at the expiration of five (5) days from
the date of service of such notice of intention, and upon the expiration of said
five (5) day period, this lease and the term and estate hereby granted, whether
or not the term shall theretofore have commenced, shall terminate with the same
effect as if that day were the Expiration Date, but Tenant shall remain liable
for damages as provided in Article 18.

                                      −44−
         16.02 This Lease and the term and estate hereby granted are subject to
further limitation as follows:

               (a) whenever Tenant shall default in the payment of any
installment of fixed annual rent, or in the payment of any additional rent or
any other charge payable by Tenant to Landlord, on any day upon which the same
ought to be paid, and such default shall continue for five (5) days after
Landlord shall have given Tenant a notice specifying such default, or

               (b) whenever Tenant shall do or permit anything to be done,
whether by action or inaction, contrary to any of Tenant's obligations
hereunder, and if such situation shall continue and shall not be remedied by
Tenant within thirty (30) days after Landlord shall have given to Tenant a
notice specifying the same, or, in the case of a happening or default which
cannot with due diligence be cured within a period of thirty (30) days and the
continuation of which for the period required for cure will not subject Landlord
to the risk of criminal liability (as more particularly described in Article 8
hereof) or termination of any superior lease or foreclosure of any superior
mortgage, if Tenant shall not, (i) within said thirty (30) day period advise
Landlord of Tenant's intention to duly institute all steps necessary to remedy
such situation, (ii) duly institute within said thirty (30) day period, and
thereafter diligently and continuously prosecute to completion all steps
necessary to remedy the same and (iii) complete such remedy within such time
after the date of the giving of said notice to Landlord as shall reasonably be
necessary, or

               (c) whenever any event shall occur or any contingency shall arise
whereby this Lease or the estate hereby granted or the unexpired balance of the
term hereof would, by operation of law or otherwise, devolve upon or pass to any
person, firm or corporation other than Tenant, except as expressly permitted by
Article 11, or

               (d) whenever Tenant shall abandon (i.e., vacate the demised
premises and not provide security therein or make efforts to sublet the demised
premises) the demised premises (unless as a result of a casualty), or

               (e) whenever in case any other lease held by Tenant from Landlord
shall expire and terminate (whether or not the term thereof shall then have
commenced) as a result of the default of Tenant thereunder or of the occurrence
of an event as therein provided (other than by expiration of the fixed term
thereof or pursuant to a cancellation or termination option therein contained),
or

                                      −45−
               (f) whenever Tenant shall default in the due keeping, observing
or performance of any covenant, agreement, provision or condition of Article 5
hereof on the part of Tenant to be kept, observed or performed and if such
default shall continue and shall not be remedied by Tenant within three (3) days
after Landlord shall have given to Tenant a notice specifying the same,

               (g) if during any consecutive eighteen (18) month period during
the term of this lease (i) Tenant shall have on three (3) or more occasions paid
any installment of fixed annual rent or any additional rent more than ten (10)
days after the same was due hereunder and (ii) Landlord shall have given Tenant
notice of such default pursuant to subsection (a) hereof before such default was
cured,


then in any of said cases set forth in the foregoing subsections (a), (b), (c), (d), (e), (f)
and (g) Landlord may give to Tenant a notice of intention to end the term of this Lease at the
expiration of three (3) days from the date of the service of such notice of intention, and upon
the expiration of said three (3) days this Lease and the term and estate hereby granted, whether
or not the term shall theretofore have commenced. shall terminate with the same effect as if
that day were the Expiration Date. but Tenant shall remain liable for damages as provided in
Article 18.

                                   ARTICLE 17

                        RE−ENTRY BY LANDLORD, INJUNCTION

         17.01 If Tenant shall default in the payment of any installment of
fixed annual rent, or of any additional rent, on any date upon which the same
ought to be paid, and if such default shall continue for five (5) days after
Landlord shall have given to Tenant a notice specifying such default, or if this
lease shall expire as in Article 16 provided, Landlord or Landlord's agents and
employees may immediately or at any time thereafter re−enter the demised
premises, or any part thereof, either by summary dispossess proceedings or by
any suitable action or proceeding at law, or by force (to the extent permitted
by law) or otherwise, without being liable to indictment, prosecution or damages
therefrom, to the end that Landlord may have, hold and enjoy the demised
premises again as and of its first estate and interest therein. The word
re−enter, as herein used, is not restricted to its technical legal meaning. In
the event of any termination of this lease under the provisions of Article 16 or
if Landlord shall re−enter the demised premises under the provisions of this
Article 17 or in the event of the termination of this lease, or of re−entry, by
or under any summary dispossess or other proceedings or action or

                                      −46−
any provision of law by reason of default hereunder on the part of Tenant, Tenant shall
thereupon pay to Landlord the fixed annual rent and additional rent payable by Tenant to
Landlord up to the time of such termination of this lease, or of such recovery of possession of
the demised premises by Landlord, as the case may be, and shall also pay to Landlord damages as
provided in Article 18.

         17.02 In the event of a breach or threatened breach by Tenant of any of
its obligations under this Lease, Landlord shall also have the right of
injunction. The special remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies or means
of redress to which Landlord may lawfully be entitled at any time and Landlord
may invoke any remedy allowed at law or in equity as if specific remedies were
not provided for herein.


17.03 If this Lease shall terminate under the provisions of Article 16, or if Landlord shall
re−enter the demised premises under the provisions of this Article 17, or in the event of the
termination of this lease, or of re−entry, by or under any summary dispossess or other
proceeding or action or any provision of law by reason of default hereunder on the part of
Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord,
whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord
against any fixed annual rent or additional rent due from Tenant at the time of such
termination or re−entry or, at Landlord's option against any damages payable by Tenant under
Articles 16 and 18 or pursuant to law.

         17.04 Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord obtaining
possession of the demised premises, by reason of the violation by Tenant of any
of the covenants and conditions of this lease or otherwise.

                                   ARTICLE 18

                                     DAMAGES


18.01 If this Lease is terminated under the provisions of Article 16, or if Landlord shall
re−enter the demised premises under the provisions of Article 17, or in the event of the
termination of this Lease, or of re−entry, by or under any summary dispossess or other
proceeding or action or any provision

                                      −47−
of law by reason of default hereunder on the part of Tenant, Tenant shall pay to
Landlord as damages, at the election of Landlord, either

               (a) a sum which at the time of such termination of this Lease or
at the time of any such re−entry by Landlord, as the case may be, represents the
then present value of the excess (discounted using the same rate as U.S.
Treasury Bills with a term equivalent to the period of time between the date of
termination of the Lease and the date the Lease would have expired absent such
termination), if any, of

               (1) the aggregate of the fixed annual rent and the additional
               rent payable hereunder which would have been payable by Tenant
               (conclusively presuming the additional rent to be the same as was
               payable for the year immediately preceding such termination
               except that additional rent on account of increases in Taxes and
               the Wage Rate shall be presumed to increase at the average of the
               rates of increase thereof previously experienced by Landlord
               during the period (not to exceed 3 years) prior to such
               termination) for the period commencing with such earlier
               termination of this lease or the date of any such re−entry, as
               the case may be, and ending with the Expiration Date, had this
               lease not so terminated or had Landlord not so re−entered the
               demised premises, over

               (2) the aggregate fair rental value of the demised premises for
               the same period, or

               (b) sums equal to the fixed annual rent and the additional rent
(as above presumed) payable hereunder which would have been payable by Tenant
had this lease not so terminated, or had Landlord not so re−entered the demised
premises, payable upon the due dates therefor specified herein following such
termination or such re−entry and until the Expiration Date, provided, however,
that if Landlord shall re−let the demised premises during said period, Landlord
shall credit Tenant with the net rents received by Landlord from such
re−letting, such net rents to be determined by first deducting from the gross
rents as and when received by Landlord from such re−letting, the expenses
incurred or paid by Landlord in terminating this lease or in re−entering the
demised premises and in securing possession thereof, as well as the expenses of
re−letting, including altering and preparing the demised premises in a Building
Standard manner for new tenants, brokers' commissions, and all other expenses
properly chargeable against the

                                      −48−
demised premises and the rental thereof; it being understood that any such re−letting may be for
a period shorter or longer than the remaining term of this Lease; but in no event shall Tenant
be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord
hereunder, or shall Tenant be entitled in any suit for the collection of damages pursuant to
this subsection to a credit in respect of any net rents from a re−letting, except to the extent
that such net rents are actually received by Landlord. If the demised premises or any part
thereof should be re−let in combination with other space, then proper apportionment on a square
foot basis shall be made of the rent received from such re−letting and of the expenses of
re−letting.

If the demised premises or any part thereof be re−let by Landlord for the
unexpired portion of the term of this lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal, the
amount of rent reserved upon such re−letting shall, prima facie, be the fair and
reasonable rental value for the demised premises, or part thereof, so re−let
during the term of the re−letting.

         18.02 Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have expired if
it had not been so terminated under the provisions of Article 16, or under any
provision of law, or had Landlord not re−entered the demised premises. Nothing
herein contained shall be construed to limit or preclude recovery by Landlord
against Tenant of any sums or damages to which, in addition to the damages
particularly provided above, Landlord may lawfully be entitled by reason of any
default hereunder on the part of Tenant. Nothing herein contained shall be
construed to limit or prejudice the right of Landlord to prove for and obtain as
liquidated damages by reason of the termination of this Lease or re−entry of the
demised premises for the default of Tenant under this Lease, an amount equal to
the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved whether or
not such amount be greater, equal to, or less than any of the sums referred to
in Section 18.01.

                                   ARTICLE 19

                LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS

         19.01 If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by

                                      −49−
virtue of any of the terms or provisions in any Article of this Lease, (a) Landlord may remedy
such default for the account of Tenant, immediately and without notice in case of emergency (but
Landlord shall send notice to Tenant reasonably promptly thereafter), or in any other case only
provided that Tenant shall fail to remedy such default with all reasonable dispatch after
Landlord shall have notified Tenant in writing of such default and the applicable grace period
for curing such default shall have expired; and (b) if Landlord makes any expenditures or
incurs any obligations for the payment of money in connection with such default including, but
not limited to, reasonable attorneys' fees in instituting, prosecuting or defending any action
or proceeding, such sums paid or obligations incurred, with interest at the Interest Rate,
shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord within
twenty (20) days after rendition of a bill to Tenant therefore.

                                   ARTICLE 20

                                 QUIET ENJOYMENT


20.01 Landlord covenants and agrees that subject to the terms and provisions of this Lease, if,
and so long as this Lease is in effect, Tenant's rights under this Lease shall not be cut off
or ended before the expiration of the term of this Lease, subject however, to: (i) the
obligations of this Lease, and (ii) the provisions of Article 25 hereof with respect to ground
and underlying leases and mortgages which affect this Lease.

                                   ARTICLE 21

                             SERVICES AND EQUIPMENT

         21.01 So long as Tenant is not in default under any of the covenants of
this Lease, Landlord shall, at its cost and expense:

               (a) Provide necessary elevator facilities during Business Hours
of Business Days and shall have at least one elevator subject to call at all
other times. At Landlord's option, the elevators shall be operated by automatic
control or by manual control, or by a combination of both of such methods.

               (b) Furnish heat to the demised premises during Business Hours of
Business Days. Landlord shall have no responsibility or liability for the

                                      −50−
ventilating conditions and/or temperature of the demised premises during the hours or days
Landlord is not required to furnish heat pursuant to this paragraph.

               (c) Furnish cold water for lavatory, pantry, drinking and office
cleaning purposes. Tenant, at Tenant's sole cost and expense, shall have the
right to install a hot water heater to provide hot water to the demised
premises. If Tenant requires, uses or consumes water for any other purposes,
Tenant agrees to Landlord installing a meter or meters or other means to measure
Tenant's water consumption, and Tenant further agrees to reimburse Landlord for
the cost of the meter or meters and the installation thereof, and to pay for the
maintenance of said meter equipment and/or to pay Landlord's cost of other means
of measuring such water consumption by Tenant. Tenant shall reimburse Landlord
within twenty (20) days of demand for the cost of all water consumed, as
measured by said meter or meters or as otherwise measured, including sewer
rents.

               (d) Provide Tenant with ten (10) listings in the Building's
directory.

               (e) Upon reasonable prior notice from Tenant, provide heating,
plumbing and other systems during non−Business Hours at Tenant's sole cost and
expense which shall equal commercially reasonable rates imposed by Landlord
therefor.


21.02 Landlord reserves the right without any liability whatsoever, or abatement of fixed
annual rent, or additional rent, to stop the heating, air−conditioning, elevator, plumbing,
electric and other systems when necessary by reason of accident or emergency or for repairs,
alterations, replacements or improvements, provided that except in case of emergency, Landlord
will notify Tenant in advance, if possible, of any such stoppage and, if ascertainable, its
estimated duration, and will proceed diligently with the work necessary to resume such service
as promptly as possible and in a manner so as to minimize interference with Tenant's use and
enjoyment of the demised premises. Notwithstanding the foregoing or anything contained in
Article 34 to the contrary, if and to the extent Tenant ceases operating its business in the
demised premises based solely and directly upon Landlord's performance of work therein or
Landlord's failure to provide services required to be provided under this Lease, Tenant shall
be entitled to a day−for−day abatement in rent.

         21.03 Tenant shall clean and maintain the demised premises and shall
contract directly with the cleaner and a carting company for rubbish removal

                                      −51−
reasonably designated by Landlord from time to time to render such services to
tenants of the Building.

         21.04 It is expressly agreed that only Landlord or anyone or more
persons, firms or corporations reasonably authorized in writing by Landlord will
be permitted to furnish laundry, linen, towels, drinking water, ice, and other
similar supplies and services to tenants and licensees in the Building. Landlord
may fix, in its reasonable discretion, at any time and from time to time, the
hours during which and the regulations under which such supplies and services
are to be furnished and under which, foods and beverages may be brought into
Building by persons other than regular employees of Tenant.

         21.05 As part of Tenant's Work, Tenant shall install an air cooled
packaged air conditioning unit (hereinafter called the "Unit") to provide air
conditioning to the demised premises. Tenant shall, at its sole cost and
expense, operate and maintain the Unit. Such maintenance obligations shall be
performed throughout the term of this Lease, on Tenant's behalf and at Tenant's
expense, by a reputable air conditioning maintenance company, first reasonably
approved by Landlord. Tenant's obligation to maintain the Unit shall include,
but not be limited to, the periodic cleaning and/or replacement of filters,
replacements of fuses and belts, the calibration of thermostats and all startup
and shut down of the Unit. Tenant shall, at its sole cost and expense, perform
any and all necessary repairs, and cause any and all replacements of, the Unit.
The Unit and any replacements thereof shall be and remain at all times the
property of Landlord, and Tenant shall surrender the Unit and all such
replacements to Landlord on the Expiration Date. Landlord will not be required
to furnish any other services, except as otherwise provided in this Lease.

         21.06 Subject to the terms of this Lease and to force majeure and other
matters beyond Landlord's control, Tenant shall have access to the Building
twenty−four (24) hours a day, seven (7) days per week.


21.07 Tenant shall make all arrangements for, and pay all expenses incurred in connection with,
use of the freight elevators servicing the demised premises. Landlord agrees that during the
Business Hours on Business Days there shall be no charge for Tenant's normal use of the freight
elevators servicing the demised premises. However, Tenant acknowledges that (x) Tenant's use of
such freight elevator is non−exclusive and subject to scheduling by Landlord, (y) if Tenant's
use of such freight elevator for transporting materials, supplies, equipment, machinery,
furniture or furnishings will, in Landlord's reasonable opinion, disrupt the operation of the
Building (including the normal use of the

                                      −52−
freight elevators), then Tenant will only be permitted to use such freight elevator during
non−Business Hours, in which event Tenant shall be obligated to pay for such usage at
Landlord's actual cost therefor and (z) there is a four (4) hour minimum usage of the freight
elevator on non−Business Days.

                                   ARTICLE 22

                                   DEFINITIONS

         22.01 The term "Landlord" as used in this lease means only the owner,
or the mortgagee in possession, for the time being of the Land and Building (or
the owner of a lease of the Building or of the Land and Building), so that in
the event of any transfer of title to said land and Building or said lease, or
in the event of a lease of the Building and the assumption by the transferee, in
writing or by law, of all of the obligations of Landlord hereunder, or of the
Land and Building, upon notification to Tenant of such transfer or lease the
said transferor Landlord shall be and hereby is entirely freed and relieved of
any and all covenants, obligations and liabilities of Landlord hereunder, and it
shall be deemed and construed as a covenant running with the land without
further agreement between the parties or their successors in interest, or
between the parties and the transferee of title to said Land and Building or
said lease, or the said lessee of the Building, or of the Land and Building,
that the transferee or the lessee has assumed and agreed to carry out any and
all such covenants, obligations and liabilities of Landlord hereunder.

         22.02 The term "Business Days" as used in this Lease shall exclude
Saturdays, Sundays and all days observed by the Federal, State or local
government as legal holidays as well as all other days recognized as holidays
under applicable union contracts. The term "Business Hours" as used in this
Lease shall mean the hours between 8:00 a.m. and 6:00 p.m.

         22.03 "Interest Rate" shall mean a rate per annum equal to the lesser
of (a) three percent (3%) above the commercial lending rate announced from time
to time by Citibank, N.A., as its prime rate for 90−day unsecured loans, or (b)
the maximum applicable legal rate, if any.


22.04 "Legal Requirements" shall mean laws, statutes and ordinances (including building codes
and zoning regulations and ordinances) and the orders, rules, regulations, directives and
requirements of all federal, state, county, city and borough departments, bureaus, boards,
agencies, offices,

                                      −53−
commissions and other subdivisions thereof, or of any official thereof, or of any other
governmental public or quasi−public authority, whether now or hereafter in force, which may be
applicable to the Land or Building or the demised premises or any part thereof, or the
sidewalks, curbs or areas adjacent thereto and all requirements, obligations and conditions of
all instruments of record on the date of this Lease.

                                   ARTICLE 23

                           INVALIDITY OF ANY PROVISION

         23.01 If any term, covenant, condition or provision of this Lease or
the application thereof to any circumstance or to any person, firm or
corporation shall be invalid or unenforceable to any extent, the remaining
terms, covenants, conditions and provisions of this Lease or the application
thereof to any circumstances or to any person, firm or corporation other than
those as to which any term, covenant, condition or provision is held invalid or
unenforceable, shall not be affected thereby and each remaining term, covenant,
condition and provision of this Lease shall be valid and shall be enforceable to
the fullest extent permitted by law.

                                   ARTICLE 24

                                    BROKERAGE


24.01 Landlord and Tenant each covenant, represent and warrant to the other that it has had no
dealings or communications with any broker, or agent other than Newmark & Company Real Estate,
Inc. (which is representing Landlord) and Grubb & Ellis New York, Inc. in connection with the
consummation of this lease. Landlord and Tenant each covenant and agree to pay, hold harmless
and indemnify the other from and against any and all cost, expense (including reasonable
attorneys' fees) or liability for any compensation, commissions or charges claimed by any
broker or agent alleging to have dealt with Landlord or Tenant, respectively, other than the
brokers set forth in this Section 24.01, with respect to this Lease or the negotiation thereof.
Landlord shall pay the brokerage fees due to Newmark & Company Real Estate, Inc. and Grubb &
Ellis New York, Inc. pursuant to separate agreements. This Article 24 shall survive the
expiration or sooner termination of this Lease.

                                      −54−
                                   ARTICLE 25

                                  SUBORDINATION

          25.01 This Lease is and shall be subject and subordinate to all ground
or underlying leases which may now or hereafter affect the real property of
which the demised premises form a part and to all mortgages which may now or
hereafter affect such leases or such real property, and to all renewals,
modifications, replacements and extensions thereof. The provisions of this
Section 25.01 shall be self−operative and no further instrument of subordination
shall be required. In confirmation of such subordination, Tenant shall promptly
execute and deliver at its own cost and expense any instrument, in recordable
form if required, that Landlord, the lessor of the ground or underlying lease or
the holder of any such mortgage or any of their respective successors in
interest may reasonably request to evidence such subordination, and Tenant
hereby constitutes and appoints Landlord or its successors in interest to be
Tenant's attorney−in−fact, irrevocably and coupled with an interest, to execute
and deliver any such instrument for and on behalf of Tenant. Landlord represents
that as of the date hereof there are currently no mortgages encumbering the
Building.

         25.02 In the event of a termination of any ground or underlying lease,
or if the interests of Landlord under this lease are transferred by reason of,
or assigned in lieu of, foreclosure or other proceedings for enforcement of any
mortgage, or if the holder of any mortgage acquires a lease in substitution
therefor, then Tenant under this lease will, at the option to be exercised in
writing by the lessor under such ground or underlying lease or such mortgagee or
purchaser, assignee or lessee, as the case may be, either (i) attorn to it and
will perform for its benefit all the terms, covenants and conditions of this
Lease on Tenant's part to be performed with the same force and effect as if said
lessor, such mortgagee or purchaser, assignee or lessee, were the landlord
originally named in this Lease, or (ii) enter into a new lease with said lessor
or such mortgagee or purchaser, assignee or lessee, as landlord, for the
remaining term of this Lease and otherwise on the same terms and conditions and
with the same options, if any, then remaining. The foregoing provisions of
clause (i) of this Section 25.02 shall enure to the benefit of such lessor,
mortgagee, purchaser, assignee or lessee, shall be self−operative upon the
exercise of such option, and no further instrument shall be required to give
effect to said provisions. Tenant, however, upon demand of any such lessor,
mortgagee, purchaser, assignee or lessee agrees to execute, from time to time,
instruments in confirmation of the foregoing provisions of this Section 25.02,
satisfactory to any such lessor, mortgagee, purchaser, assignee or lessee,
acknowledging such attornment and setting forth the terms and conditions

                                      −55−
of its tenancy. Tenant hereby constitutes and appoints Landlord or its successors in interest
to be the Tenant's attorney−in−fact, irrevocably and coupled with an interest, to execute and
deliver such instrument of attornment, or such new lease, if the Tenant refuses or fails to do
so promptly upon request.

         25.03 Anything herein contained to the contrary notwithstanding, under
no circumstances shall the aforedescribed lessor under the ground lease or
mortgagee or purchaser, assignee or lessee, as the case may be, whether or not
it shall have succeeded to the interests of the Landlord under this Lease, be

               (a) liable for any act, omission or default of any prior
landlord; or

               (b) subject to any offsets, claims or defenses which the Tenant
might have against any prior landlord; or

               (c) bound by any fixed annual rent or additional rent which
Tenant might have paid to any prior landlord for more than one month in advance
or for more than three months in advance where such rent payments are payable at
intervals of more than one month; or

               (d) bound by any modification, amendment or abridgment of the
Lease, or any cancellation or surrender of the same, made without its prior
written approval, provided the same do not increase Tenant's obligations or
reduce Tenant's rights beyond a de minimis extent.


25.04 If, in connection with the   financing of the Building, the holder of any mortgage shall
request reasonable modifications   in this Lease as a condition of approval thereof, Tenant will
not unreasonably withhold, delay   or defer making such modifications; provided the same do not
increase Tenant's obligations or   reduce Tenant's rights beyond a de minimis extent.

         25.05 Tenant agrees that, except for the first month's rent and the
security required hereunder, it will pay no rent under this Lease more than
thirty (30) days in advance of its due date, if so restricted by any existing or
future ground lease or mortgage to which this Lease is subordinated or by an
assignment of this Lease to the ground lessor or the holder of such mortgage,
and, in the event of any act or omission by Landlord, Tenant will not exercise
any right to terminate this Lease or to remedy the default and deduct the cost
thereof from rent due hereunder until Tenant shall have given written notice of
such act or omission to the ground lessor and to the holder of any mortgage on
the fee or the ground lease

                                        −56−
who shall have furnished such lessor's or holder's last address to Tenant, and until a
reasonable period for remedying such act or omission shall have elapsed following the giving of
such notices, during which time such lessor or holder shall have the right, but shall not be
obligated, to remedy or cause to be remedied such act or omission. Tenant shall not exercise any
right pursuant to this Section 26.02 if the holder of any mortgage or such aforesaid lessor
commences to cure such aforesaid act or omission within a reasonable time and diligently
prosecutes such cure thereafter.

                                   ARTICLE 26

                              CERTIFICATE OF TENANT

         26.01 Landlord and Tenant agree, at any time and from time to time, as
requested by the other, upon not jess than ten (10) days prior notice, to
execute and deliver to the other a statement certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications
that the same is in full force as modified and stating the modifications),
certifying the dates to which the annual fixed rent and additional rent have
been paid, and stating whether or not, to the best of its knowledge, the other
party is in default in performance of any of its obligations under this Lease,
and, if so, specifying each such default of which it has knowledge, it being
intended that any such statement delivered pursuant hereto may be relied upon by
others with whom the requesting party may be dealing.

                                   ARTICLE 27

                     LEGAL PROCEEDINGS WAIVER OF JURY TRIAL

         27.01 Landlord and Tenant do hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other on any matters whatsoever arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the
demised premises, and/or any other claims (except claims for bodily injury or
damage to physical property), and any emergency statutory or any other statutory
remedy. It is further mutually agreed that in the event Landlord commences any
summary proceeding for non−payment of rent, Tenant will not interpose and does
hereby waive the right to interpose any counterclaim of whatever nature or

                                      −57−
description in any such proceeding, except with respect to compulsory
counterclaims.

                                   ARTICLE 28

                              SURRENDER OF PREMISES

         28.01 Upon the expiration or other termination of the term of this
Lease, Tenant shall quit and surrender to Landlord the demised premises, broom
clean, in good order and condition, ordinary wear and tear and damage by fire,
the elements or other casualty excepted, and Tenant shall remove all of its
property as herein provided. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of the term of this
Lease.


28.02 In the event Tenant remains in possession of the demised premises after the Expiration
Date or the date of sooner termination of this Lease, Tenant, at the option of Landlord, shall
be deemed to be occupying the demised premises as a holdover tenant from month−to−month, at a
monthly rent equal to two (2) times the higher of (x) the sum of (i) the monthly−installment of
fixed rent payable during the last month of the term of this Lease, and (ii) one−twelfth
(1/12th) of the additional rent payable during the last year of the term of this Lease or (y)
the fair market value of the demised premises, calculated on a monthly basis, subject to all of
the other terms and obligations of this Lease insofar as the same are applicable to a
month−to−month tenancy.

                                   ARTICLE 29

                              RULES AND REGULATIONS


29.01 Tenant and Tenant's servants, employees and agents shall observe faithfully and comply
strictly with the Rules and Regulations set forth in Exhibit C attached hereto and made part
hereof entitled "Rules and Regulations" and such other and further reasonable Rules and
Regulations as Landlord or Landlord's agents may from time to time adopt provided, however, that
in case of any conflict or inconsistency between the provisions of this lease and of any of the
Rules and Regulations as originally or as hereafter adopted, the provisions of this lease shall
control. Reasonable written notice of any additional Rules and Regulations shall be given to
Tenant. Tenant shall not be subject to any Rules and

                                      −58−
Regulations which are more onerous than those imposed on any other tenant in the
Building.


Nothing in this lease contained shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any
other lease, against any other tenant of the Building, and Landlord shall not be liable to
Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors
or licensees.

                                   ARTICLE 30

                             CONSENTS AND APPROVALS


30.01 Wherever in this Lease Landlord's consent or approval is required, if Landlord shall
delay or refuse such consent or approval, Tenant in no event shall be entitled to make, nor
shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall
Tenant claim any money damages by way of set−off, counterclaim or defense) based upon any claim
or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent
or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such
provision, for specific performance, injunction or declaratory judgment, unless it is finally
determined that Landlord acted arbitrarily or capriciously. Notwithstanding the foregoing,
Landlord and Tenant hereby agree that any disputes relating to alterations to the demised
premises or Tenant's rights to assign this lease or sublet the demised premises shall be
resolved by expedited arbitration in accordance with Article 38 hereof.

                                   ARTICLE 31

                                     NOTICES


31.01 Any notice or demand, consent, approval or disapproval, or statement required to be given
by the terms and provisions of this Lease, or by any law or governmental regulation, either by
Landlord to Tenant or by Tenant to Landlord, shall be in writing. Landlord's and Tenant's
respective attorneys shall have the right to send any such notice on behalf of their clients.
Unless otherwise required by such law or regulation, such notice or demand shall be given, and
shall be deemed to have been served and given three (3) Business Days after such notice or
demand is mailed by registered or certified mail, return receipt requested,

                                      −59−
deposited enclosed in a securely closed post−paid wrapper, in a United States Government general
or branch post office, or official depository within the exclusive care and custody thereof,
addressed to either party, at its address set forth on page 1 of this Lease. After Tenant shall
occupy the demised premises for the conduct of its business, the address of Tenant for notices,
demands, consents, approvals or disapprovals shall be the Building, Attention: CFO. Either
party may, by notice as aforesaid, designate a different address or addresses for notices,
demands, consents, approvals or disapprovals. Copies of notices sent by Tenant to Landlord
shall be sent to Arent Fox Kintner Plotkin & Kahn PLLC, 1675 Broadway, New York, New York
10019, Attention: Jeffrey Walker, Esq. Copies of notices sent by Landlord to Tenant shall be
sent to Richards & O'Neil, LLP, 885 Third Avenue, New York, New York 10022, Attention: Kenneth
L. Sankin, Esq.

         31.02 In addition to the foregoing, either Landlord or Tenant may, from
time to time, request in writing that the other party serve a copy of any notice
or demand, consent, approval or disapproval, or statement, on one other person
or entity designated in such request, such service to be effected as provided in
Section 31.01 hereof.

                                   ARTICLE 32

                                    NO WAIVER

         32.01 No agreement to accept a surrender of this Lease shall be valid
unless in writing signed by Landlord. No employee of Landlord or of Landlord's
agents shall have any power to accept the keys of the demised premises prior to
the termination of this Lease. The delivery of keys to any employee of Landlord
or of Landlord's agent shall not operate as a termination of this Lease or a
surrender of the demised premises. In the event of Tenant at any time desiring
to have Landlord sublet the premises for Tenant's account, Landlord or
Landlord's agents are authorized to receive said keys for such purpose without
releasing Tenant from any of the obligations under this Lease. The failure of
Landlord or Tenant to seek redress for violation of, or to insist upon the
strict performance of, any covenant or condition of this lease or any of the
Rules and Regulations set forth herein, or hereafter adopted by Landlord, shall
not prevent a subsequent act, which would have originally constituted a
violation, from having all the force and effect of an original violation. The
receipt by Landlord of rent with or without knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach. The failure
of Landlord to enforce any of the Rules and

                                      −60−
Regulations set forth herein, or hereafter adopted, against Tenant and/or any other tenant in
the Building shall not be deemed a waiver of any such Rules and Regulations. No provision of
this lease shall be deemed to have been waived by Landlord or Tenant, unless such waiver be in
writing signed by such party. No payment by Tenant or receipt by Landlord of a lesser amount
than the monthly rent herein stipulated shall be deemed to be other than on the account of the
earliest stipulated rent, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment of rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover the balance of
such rent or pursue any other remedy in this Lease provided.

         32.02 This Lease contains the entire agreement between the parties, and
any executory agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of it in whole or in part unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.

                                   ARTICLE 33

                                    CAPTIONS

         33.01 The captions are inserted only as a matter of convenience and for
reference, and in no way define, limit or describe the scope of this Lease nor
the intent of any provision thereof.

                                   ARTICLE 34

                              INABILITY TO PERFORM


34.01 If, by reason of (1) strike, (2) labor troubles, (3) governmental pre−emption in
connection with a national emergency, (4) any rule, order or regulation of any governmental
agency, (5) conditions of supply or demand which are affected by war or other national, state
or municipal emergency, or any other cause or (6) any cause beyond Landlord's reasonable
control, Landlord shall be unable to fulfill its obligations under this Lease or shall be
unable to supply any service which Landlord is obligated to supply, Landlord shall have no
liability therefor and this Lease and Tenant's obligation to pay rent hereunder shall in no wise
be affected, impaired or excused.

                                      −61−
                                   ARTICLE 35

                         NO REPRESENTATIONS BY LANDLORD


35.01 Landlord or Landlord's agents have made no representations or promises with respect to the
Building or demised premises except as herein expressly set forth.

                                   ARTICLE 36

                                NAME OF BUILDING

         36.01 Landlord shall have the full right at any time to name and change
the name of the Building and to change the designated address of the Building.
The Building may be named after any person, firm, or otherwise, whether or not
such name is, or resembles, the name of a tenant of the Building.

                                   ARTICLE 37

                              RESTRICTIONS UPON USE

         37.01 It is expressly understood that no portion of the demised
premises shall be used as, by or for (i) any retail bank, trust company, savings
bank, industrial bank, savings and loan association or personal loan bank open
to the public (or any branch office or public accommodation office of any of the
foregoing), or (ii) a public stenographer or typist, barber shop, beauty shop,
beauty parlor or shop, telephone or telegraph agency, telephone or secretarial
service (except in connection with Tenant's business), messenger service (except
in connection with Tenant's business), travel or tourist agency, public
restaurant or bar, commercial document reproduction or offset printing service
(except in connection with Tenant's business), public vending machines, retail,
wholesale or discount shop for sale of merchandise, retail service shop, labor
union, school or classroom, governmental or quasi−governmental bureau,
department or agency, including an autonomous governmental corporation, or a
company engaged in the business of renting office or desk space.

                                      −62−
                                   ARTICLE 38

                                   ARBITRATION

         38.01 In each case specified in this Lease in which resort to
arbitration shall be required, such arbitration (unless otherwise specifically
provided in other Sections of this Lease) shall be in New York City in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and the provisions of this Lease. The decision and award of the
arbitrators shall be in writing, shall be final and conclusive on the parties,
and counterpart copies thereof shall be delivered to each of the parties. In
rendering such decision and awards, the arbitrators shall not add to, subtract
from or otherwise modify the provisions of this Lease. Judgment may be had on
the decision and award of the arbitrators so rendered in any court of competent
jurisdiction. Each party shall pay its own legal fees and other expenses.

                                   ARTICLE 39

                                    INDEMNITY


39.01 Tenant shall indemnify, defend and save Landlord its agents and employees and any
mortgagee of Landlord's interest in the Land and/or the Building and any lessor under any
superior lease harmless from and against any liability or expense arising from the use or
occupation of the demised premises by Tenant or anyone in the demised premises with Tenant's
permission, or from any breach of this Lease by Tenant, unless and to the extent occasioned by
the negligence or willful misconduct of Landlord or its agents or employees. Landlord shall
promptly notify Tenant of any such claim. Tenant shall have the right to defend same with
counsel selected by Tenant. Landlord shall cooperate with any such defense, and Landlord shall
not settle any claim without Tenant's consent. Landlord and Tenant each hereby waives any right
to receive consequential damages.

                                   ARTICLE 40

                               MEMORANDUM OF LEASE

         40.01 Tenant shall, at the request of Landlord execute and deliver a
statutory form of memorandum of this Lease for the purpose of recording, but
said

                                      −63−
memorandum of this Lease shall not in any circumstances be deemed to modify or to change any of
the provisions of this Lease. In no event shall Tenant record this Lease or a memorandum
thereof.

                                   ARTICLE 41

                                  MISCELLANEOUS


41.01 Irrespective of the place of execution or performance, this Lease shall be governed and
construed in accordance with the laws of the State of New York.

         41.02 This Lease shall be construed without regard to any presumption
or other rule requiring construction against the party causing this Lease to be
drafted.


41.03 Except as otherwise expressly provided in this Lease, each covenant, agreement,
obligation or other provision of this Lease on Tenant's part to be performed shall be deemed and
construed as a separate and independent covenant of Tenant, not dependent on any other provision
of this Lease.

         41.04 All terms and words used in this Lease, regardless of the number
or gender in which they are used, shall be deemed to include any other number
and any other gender as the context may require.

         41.05 Time shall be of the essence with respect to the exercise of any
option granted under this Lease.

         41.06 Except as otherwise provided herein whenever payment of interest
is required by the terms hereof it shall be at the Interest Rate.

         41.07 If the demised premises or any additional space to be included
within the demised premises shall not be available for occupancy by Tenant on
the specific date hereinbefore designated for the commencement of the term of
this Lease or for the inclusion of such space for any reason whatsoever, then
this Lease shall not be affected thereby but, in such case, said specific date
shall be deemed to be postponed until the date when the demised premises or such
additional space shall be available for occupancy by Tenant, and Tenant shall
not be entitled to possession of the demised premises or such additional space
until the same are available for occupancy by Tenant, provided, however, that
Tenant shall

                                      −64−
have no claim against Landlord, and Landlord shall have no liability to Tenant by reason of any
such postponement of said specific date, and the parties hereto further agree that any failure
to have the demised premises or such additional space available for occupancy by Tenant on said
specific date or on the Commencement Date shall in no wise affect the obligations of Tenant
hereunder nor shall the same be construed in any wise to extend the term of this Lease unless
specifically provided to the contrary in the preamble to this Lease and furthermore, this
Section 41.07 shall be deemed to be an express provision to the contrary of Section 223−a of the
Real Property Law of the State of New York and any other law of like import now or hereafter in
force.

          41.08 In the event that Tenant is in arrears in payment of fixed annual
rent or additional rent hereunder, Tenant waives Tenant's right, if any, to
designate the items against which any payments made by Tenant are to be
credited, and Tenant agrees that Landlord may apply any payments made by Tenant
to any items it sees fit, irrespective of and notwithstanding any designation or
request by Tenant as to the items against which any such payments shall be
credited.

         41.09 This lease shall not be binding upon Landlord until the same is
executed by Landlord and Tenant and an executed copy thereof has been delivered
to Tenant.

                                   ARTICLE 42

                                SECURITY DEPOSIT


42.01 Tenant shall simultaneously upon execution of this Lease deliver to Landlord and, shall,
except as otherwise provided herein, maintain in effect at all times during the term hereof, an
irrevocable letter of credit, in the form annexed hereto as Exhibit F and in the amount of Two
Million and 00/100 Dollars ($2,000,000.00) as security for the faithful performance and
observance by Tenant of the terms, provisions, covenants and conditions of this Lease. Such
letter of credit shall be issued by a banking corporation reasonably satisfactory to Landlord
and having its principal place of business or its duly licensed branch or agency in the State
of New York. Such letter of credit shall have an expiration date no earlier than the first
anniversary of the date of issuance thereof and shall be automatically renewed from year to year
unless terminated by the issuer thereof by notice to Landlord given not less than forty−five
(45) days prior to the expiration thereof.

                                      −65−
Except as otherwise provided herein, Tenant shall, throughout the term of this Lease, deliver
to Landlord, in the event of the termination of any such letter of credit, replacement letters
of credit in lieu thereof (each such letter of credit and such extensions or replacements
thereof, as the case may be, is hereinafter referred to as a "Security Letter") no later than
forty−five (45) days prior to the expiration date of the preceding Security Letter. The term of
each such Security Letter shall be not less than one (1) year and shall be automatically
renewable from year to year as aforesaid. If Tenant shall fail to obtain any replacement of a
Security Letter within the time limits set forth in this Section 42.01, Landlord may draw down
the full amount of the existing Security Letter and retain the same as security hereunder.
Landlord shall return any cash so drawn upon Tenant furnishing an acceptable replacement letter
of credit.

         42.02 In the event Tenant defaults in respect to any of the terms,
provisions, covenants and conditions of this Lease after receipt of any required
notice and the expiration of any applicable cure period, including, but not
limited to, the payment of rent and additional rent, Landlord may use, apply or
retain the whole or any part of the security so deposited to the extent required
for the payment of any rent and additional rent or any other sum as to which
Tenant is in default or for any sum which Landlord may expend or may be required
to expend by reason of Tenant's default in respect of any of the terms,
provisions, covenants, and conditions of this Lease, including but not limited
to, any damages or deficiency accrued before or after summary proceedings or
other re−entry by Landlord. To insure that Landlord may utilize the security
represented by the Security Letter in the manner, for the purpose, and to the
extent provided in this Article, each Security letter shall provide that the
full amount thereof may be drawn down by Landlord upon the presentation to the
issuing bank of Landlord's draft drawn on the issuing bank without accompanying
memoranda on statement of beneficiary, except for a certification from Landlord
that Tenant is in default beyond any applicable notice and cure periods.

         42.03 In the event that Tenant defaults in respect of any of the terms,
provisions, covenants and conditions of the lease after receipt of any required
notice and the expiration of any applicable cure period and Landlord utilizes
all or any part of the security represented by the Security letter but does not
terminate this Lease, Landlord may, in addition to exercising its rights as
provided in Section 42.02, retain the unapplied and unused balance of the
principal amount of the Security letter as security for the faithful performance
and observance by Tenant thereafter of the terms, provisions, and conditions of
this Lease, and may use, apply, or retain the whole or any part of said balance
to the extent required for payment of rent, additional rent, or any other sum as
to which

                                      −66−
Tenant is in default or for any sum which Landlord may expend or be required to expend by
reason of Tenant's default in respect of any of the terms, covenants, and conditions of this
Lease. In the event Landlord applies or retains any portion or all of the security delivered
hereunder, Tenant shall forthwith restore the amount so applied or retained so that at all
times the amount deposited shall be not less than the security required by Section 42.01 hereof.

          42.04 In the event that Tenant shall fully and faithfully comply with
all of the terms, provisions, covenants and conditions of this Lease and shall
never have been in default in the payment of fixed annual rent or additional
rent due hereunder, the security shall be reduced after the seventh anniversary
of the Rent Commencement Date to One Million Three Hundred Fifty−Four Thousand
Seven Hundred Forty−Three and 00/100 Dollars ($1,354,743.00); provided (i)
Tenant has not been in default more than two (2) times per annum in any given
year or more than five (5) times, in the aggregate, during the initial term of
this Lease and (ii) the "tangible net worth" (as that term is hereinafter
defined) of Tenant shall equal or exceed Sixty Five Million Dollars
($65,000,000) (the "Minimum Net Worth"). For purposes of this Section 42.04,
"tangible net worth" shall mean a net worth determined under GAAP and excluding
all assets which would be treated as intangible under sound accounting
principles, including but not limited to, such items as goodwill, trademarks,
copyrights and patents. Tenant agrees that if at any time after the reduction of
security pursuant to this Section 42.04 (if any) Tenant shall default under this
Lease, or the tangible net worth of Tenant shall be less than the Minimum Net
Worth, Tenant shall restore the security to Two Million and 00/100 Dollars
($2,000,000.00). Tenant agrees that on each anniversary of the date hereof,
Tenant shall deliver to Landlord an unconditional audited financial statement of
Tenant for the prior year evidencing Tenant's tangible net worth, prepared in
accordance with GAAP, consistently applied from period to period, by an
independent certified public accounting firm acceptable to Landlord (an"
Acceptable Firm"). Landlord hereby agrees that PricewaterhouseCoopers, LLP or
another so−called "Big 5" accounting firm shall be deemed acceptable to
Landlord.

         42.05 Except to the extent that Tenant shall not have paid all fixed
rent and additional rent hereunder and timely deliver the demised premises to
Landlord in the manner required hereunder and provided Tenant is not then in
default of any obligation or provision hereunder, the security shall be returned
to Tenant within thirty (30) days after the date fixed as the end of the Lease
and after delivery of entire possession of the demised premises to Landlord. In
the event of a sale of the Land and Building or leasing of the Building,
Landlord shall have the right to transfer any interest it may have in the
Security Letter to the vendee or

                                      −67−
lessee and Landlord shall thereupon be released by Tenant from all liability for the return of
such Security Letter, provided such vendee or lessee assumes any responsibilities of Landlord
with respect to such Security Letter, and Tenant agrees to look solely to the new landlord for
the return of said Security Letter; and it is agreed that the provisions hereof shall apply to
every transfer or assignment made of the Security Letter to a new Landlord. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber the monies
deposited herein as security and that neither Landlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In the
event of a sale of the Building Landlord shall have the right to require Tenant to deliver a
replacement Security Letter naming the new landlord as beneficiary and, if Tenant shall fail to
timely deliver the same, to draw down the existing Security Letter and retain the proceeds as
security hereunder until a replacement Security Letter is delivered.

                                   ARTICLE 43

                                   PARTNERSHIP

         43.01 If Tenant is a partnership, the liability of each of the general
partners comprising the partnership Tenant shall be joint and several. The
technical dissolution of Tenant by reason of the death, retirement, resignation,
bankruptcy or adjudication of incompetency of one or more partners, shall not
affect this Lease or the liability thereunder of the general partners, and
Tenant agrees that the partnership shall nevertheless continue as Tenant with
respect to the remaining partners. Similarly, a merger or consolidation with
another firm shall not be deemed a sublease or assignment or a violation of the
provisions of this Lease.

         43.02 Upon execution of this Lease by Landlord and Tenant shall
promptly deliver to Landlord a list of the names and residence addresses of all
existing partners comprising the partnership Tenant. In the event Tenant admits
any new partners, Tenant agrees, within thirty (30) days thereafter, to give
notice to Landlord of that fact and of the name and residence address of each
new partner, together with such reasonable proof as Landlord shall require that
all of such new general partners have in writing assumed performance of Tenant's
obligations under this Lease.


43.03 In the event of a merger or consolidation, Tenant agrees, within thirty (30) days
thereafter, to give notice to Landlord of that fact and all of the names and residence addresses
of the partners of the merged or consolidated

                                      −68−
firm, together with such reasonable proof as Landlord shall require that all of such general
partners have in writing assumed performance of Tenant's obligations under this Lease.

                                   ARTICLE 44

                                    SUBLEASE


44.01 Notwithstanding anything to the contrary contained herein, Tenant acknowledges that this
Lease is a sublease of the demised premises and is subject and subordinate to all of the terms,
covenants, conditions, agreements and provisions in the lease dated May 1, 1957 between
Prudential Insurance Company of America, as landlord and Landlord's predecessor−in−interest, as
tenant, and in the sublease dated June 27, 1958 between 500−512 Seventh Avenue Associates, as
sublessor and Landlord's predecessor−in−interest (such lease and sublease as the same has been
amended and assigned are hereinafter severally and collectively called the "Superior
Documents"). Landlord warrants and represents that nothing in the Superior Documents prohibits
the making of this Lease or the terms thereof and that the Superior Documents are in full force
and effect. Landlord represents that it has received no notice of any existing default under the
Superior Documents.

         44.02 Anything in this Lease to the contrary notwithstanding, if there
exists a breach by Landlord of any of its obligations under this Lease caused
solely by a corresponding breach by the lessor under any Superior Document of
its obligations thereunder, then and in such event, Tenant's sole remedy against
Landlord in the event of any such breach of obligations under this Lease, shall
be the right to pursue a claim at Tenant's sole cost and expense in the name of
Landlord against such lessor. Landlord agrees that it will, at Tenant's expense,
cooperate with Tenant in the pursuit of such claim.


44.03 Landlord and Tenant agree that the leasehold estate created by this Lease shall not merge
with any other estate held by Landlord or an affiliate of Landlord in the property of which the
demised premises form a part or any other interest of Landlord in the demised premises and the
Building, unless Landlord shall expressly elect to have such estates merge.

                                      −69−
                                   ARTICLE 45

                              INTENTIONALLY OMITTED


                                   ARTICLE 46

                              INTENTIONALLY OMITTED


                                   ARTICLE 47

                              FIRST OFFERING SPACE


47.01 (a) For purposes of this Lease, the term "First Offering Space" shall mean either (i) the
entire twentieth (20th) floor or (ii) the entire twenty−fourth (24th) floor of the Building
shown on the floor plans annexed hereto as Exhibit E, as designated by Landlord.

               (b) Provided (i) Tenant is not in default beyond any applicable
notice and cure periods under the terms and conditions of this Lease either as
of the date of the giving of "Tenant's First Notice" or the "First Offering
Space Inclusion Date" (as such terms are hereinafter defined), and (ii) as of
either the date of the giving of Tenant's First Notice or the First Offering
Space Inclusion Date, Tenant is in actual occupancy of not less than one hundred
percent (100%) of the demised premises, if at any time during the term of this
Lease (including the Extension Term, if exercised pursuant to Article 48 of this
Lease) the First Offering Space shall become available for leasing to anyone
other than the current tenant or any subsidiary or affiliate thereof
(hereinafter called the "Current Tenant") then Landlord, before offering such
First Offering Space to anyone other than the Current Tenant, shall offer to
Tenant, subject to the provisions of this Article 47, the right to include the
entire First Offering Space within the demised premises upon all the terms and
conditions of this Lease (including the provisions of Article 3 with the base
year periods specified therein but excluding Article 50 hereof), except that:

                  (i) the fixed annual rent with respect to the First Offering
         Space shall be at the higher of (x) the fair market rent for the First
         Offering Space, which shall be determined by Landlord as of the date
         (hereinafter called the "First Offering Space Determination Date")
         occurring thirty (30) days prior to the First Offering Space Inclusion
         Date (as such term

                                      −70−
         is hereinafter defined) taking into account all then relevant factors
         and shall be set forth in a written notice to Tenant, or (y) the
         product obtained by multiplying (A) the monthly amount of fixed annual
         rent (determined on a rentable square foot basis) for the last full
         calendar month prior to the First Offering Space Inclusion Date (as
         hereinafter defined) computed on an annualized basis without giving
         effect to any abatement, credit or offset in effect, by (8) 12, and by
         (C) the amount of rentable square feet included within the First
         Offering Space (hereinafter called the "First Offering Space Escalated
         Rent");

                  (ii) Effective as of the First Offering Space Inclusion Date
         for purposes of calculating the additional rent payable pursuant to
         Article 3 allocable to the First Offering Space, Tenant's Proportionate
         Share shall be increased by a fraction, expressed as a percentage, the
         numerator of which shall be the number of rentable square feet
         (calculated on the same basis as the rentable square footage of the
         initially demised premises) included within the First Offering Space,
         and the denominator of which shall be 511,304; and

                  (iii) The term "Wage Rate Multiple" shall be increased by the
         number of rentable square feet of the First Offering Space.

                  (iv) The security required to be maintained pursuant to
         Article 42 hereof shall be increased by an amount equal to the fixed
         annual rent for the First Offering Space.


For the purposes of this Section 47.01 (b), the term "Tenant" shall mean either the Tenant on
the date hereof or such other entity becoming an occupant hereunder pursuant to either Section
11.02 or 11.10 above.

               (c) Such offer shall be made by Landlord to Tenant in a written
notice (hereinafter called the "First Offer Notice") which offer shall specify
the fixed annual rent payable with respect to the First Offering Space,
determined in accordance with the provisions of subsection (b) hereof.

               (d) Tenant may accept the offer set forth in the First Offer
Notice by delivering to Landlord an unconditional acceptance (hereinafter called
"Tenant's First Notice") of such offer within fifteen (15) days after delivery
by Landlord of the First Offer Notice to Tenant. Such First Offering Space shall
be added to and included in the demised premises on the later to occur (herein
called the "First Offering Space Inclusion Date") of (i) the day that Tenant
exercises its

                                      −71−
option as aforesaid, or (ii) the date such First Offering Space shall become available for
Tenant's possession. Time shall be of the essence with respect to the giving of Tenant's First
Notice.

               (e) If Tenant does not accept (or fails to timely accept) an
offer made by Landlord pursuant to the provisions of this Article 47 with
respect to the First Offering Space, Landlord shall be under no further
obligation to Tenant with respect to the First Offering Space.

               (f) In the event that Tenant disputes the amount of the fair
market rent specified in the First Offer Notice, then at any time on or before
the date occurring twenty (20) days after Tenant, has received the First Offer
Notice, and provided that Tenant shall have given Tenant's First Notice, Tenant
may initiate the arbitration process provided for herein by giving notice try
that effect to Landlord, and, if Tenant so initiates the arbitration process,
such notice shall specify the name and address of the person designated to act
as an arbitrator on its behalf. Within thirty (30) days after the Landlord's
receipt of notice of the designation of Tenant's arbitrator, Landlord shall give
notice to Tenant specifying the name and address of the person designated to act
as an arbitrator on its behalf. If Landlord fails to notify Tenant of the
appointment of its arbitrator within the time above specified, then Tenant shall
provide an additional notice to Landlord requiring Landlord's appointment of an
arbitrator within twenty (20) days after Landlord's receipt thereof. If Landlord
fails to notify Tenant of the appointment of its arbitrator within the time
specified by the second notice, the appointment of the second arbitrator shall
be made in the same manner as hereinafter provided for the appointment of a
third arbitrator in a case where the two arbitrators appointed hereunder and the
parties are unable to agree upon such appointment. The two arbitrators so chosen
shall meet within ten (10) days after the second arbitrator is appointed, and
if, within sixty (60) days after the second arbitrator is appointed, the two
arbitrators shall not agree upon a determination of the fair market rent for the
First Offering Space, they shall together appoint a third arbitrator. In the
event of their, being, unable to agree upon such appointment within eighty (80)
days after the appointment of the second arbitrator, the third arbitrator shall
be selected by the parties themselves if they can agree thereon within a further
period of fifteen (15) days. If the parties do not so agree, then either party,
on behalf of both and on notice to the other, may request such appointment by
the American Arbitration Association (or any organization successor thereto) in
accordance with its rules then prevailing or if the American Arbitration
Association or such successor organization) shall fail to appoint said third
arbitrator within fifteen (15) days after such request is made, then either
party may apply, on notice to the other, to the Supreme Court, New York County,
New York (or any other court having jurisdiction

                                      −72−
and exercising functions similar to those now exercised by said Court) for the appointment of
such third arbitrator. The third arbitrator shall determine the fair market rent for the First
Offering Space and render a written certified report of its determination to both Landlord and
Tenant within sixty (60) days of the appointment of the first two arbitrators or sixty (60) days
from the appointment of the third arbitrator if such third arbitrator is appointed pursuant to
this subparagraph (f), and the determination of Landlord's or Tenant's arbitrator which is
closest to the determination of the third arbitrator, shall be applied to determine as above
provided, however, in no event shall the fixed annual rent with respect to the First Offering
Space be less than the First Offering Space Escalated Rent.

               Each party shall pay the fees and expenses of the one of the two
original arbitrators appointed by or for such party, and the fees and expenses
of the third arbitrator and all other expenses (not including the attorneys'
fees, witness fees and similar expenses of the parties which shall be borne
separately by each of the parties) of the arbitration shall be borne by the
parties equally.

               Each of the arbitrators selected as herein provided shall have at
least ten (10) years' experience in the leasing and renting of office space on
behalf of Landlords in Midtown Manhattan.

               (g) If Tenant fails to initiate the arbitration process within
the aforesaid twenty (20) day period, time being of the essence, then Landlord's
determination of the fixed annual rent set forth in the First Offer Notice shall
be conclusive. In the event Landlord notifies Tenant that the fixed annual rent
for the First Offering Space shall be the First Offering Space Escalated Rent,
then the provisions of subparagraph (f) hereof shall be inapplicable.

               (h) In the event the Tenant initiates the aforesaid arbitration
process and, as of the First Offering Space Inclusion Date, the amount of the
fair market rent has not been determined, Tenant shall pay the amount determined
by Landlord to be the fair market rent for the First Offering Space and when the
determination has actually been made, an appropriate retroactive adjustment
shall be made as of the First Offering Space Inclusion Date.

               (i) The provisions of this Article 47 shall be effective only if,
on the date on which Tenant accepts possession of the First Offering Space, the
Tenant named herein and only such Tenant is in actual occupancy of one hundred
percent (100%) of the demised premises. For the purposes of this Section 47.01
(i), the term "Tenant" shall mean either the Tenant on the date hereof

                                      −73−
or such other entity becoming an occupant herewith pursuant to either Section
11.02 or 11.10 above.

               (j) Tenant agrees to accept the First Offering Space in its
condition and state of repair existing as of the First Offering Space Inclusion
Date and understands and agrees that Landlord shall not be required to perform
any work, supply any materials or incur any expense to prepare such space for
Tenant's occupancy.

               (k) The fixed annual rent for the First Offering Space as
determined pursuant to this Article 47 shall be subject to periodic increases
for any period during the term of this Lease for which such fixed annual rent
would otherwise be less (on a per rentable square foot basis) than the fixed
annual rent payable pursuant to Section 1.01 hereof (on a per rentable square
foot basis) for such period, so that the fixed annual rent payable during such
periods with respect to the First Offering Space shall be equal (on a per
rentable square foot basis) to the fixed annual rent payable pursuant to Section
1.01 hereof during such periods.

                                   ARTICLE 48

                            EXTENSION OF TERM OPTION


48.01 (a) Subject to the provisions of subsection (k) hereof, Tenant shall have the right to
extend the term of this Lease for one (1) additional term of five (5) years commencing on the
day following the Expiration Date (hereinafter referred to as the "Commencement Date of the
Extension Term" and ending on the last day of the calendar month in which occurs the day
preceding the fifth (5th) anniversary of the Commencement Date of the Extension Term (such
additional term is hereinafter called the "Extension Term") provided that:

                  (i) Tenant shall give Landlord notice (hereinafter called the
         "Extension Notice") of its election to extend the term of this Lease at
         least twelve (12) months prior to the Expiration Date, and

                  (ii) Tenant is not, and has not been in default more than two
         (2) times per annum or more than six (6) times during the initial term
         of this Lease (after notice and the expiration of any applicable cure
         periods) as of the time of the giving of the Extension Notice and as of
         the Commencement Date of the Extension Term, and

                                      −74−
                  (iii) as of the time of the giving of the Extension Notice and
         as of the Commencement Date of the Extension Term, Tenant is in actual
         occupancy of not less than one hundred percent (100%) of the demised
         premises (including any additional space in the Building hereafter
         leased by Tenant). For the purposes of this Section 48.01(a)(iii), the
         term "Tenant" shall mean either the Tenant on the date hereof or such
         other entity becoming an occupant hereunder pursuant to either Section
         11.02 or 11.10 above.

               (b) The fixed annual rent payable by Tenant to Landlord during
the Extension Term shall be the higher of:

                  (i) the fair market rent for the demised premises determined
         as of the date occurring six (6) months prior to the Commencement Date
         of the Extension Term (such date is hereinafter called the
         "Determination Date") taking into account all then relevant factors and
         which determination shall be made within a reasonable period of time
         after the occurrence of the Determination Date pursuant to the
         provisions of subsection (d) hereof, or

                  (ii) the product obtained by multiplying the rentable square
         foot area of the demised premises by the fixed annual rent and
         additional rent payable by Tenant to Landlord pursuant to Articles 1
         and 3, respectively, hereof for the last month of the initial term of
         this Lease on an annualized basis (including the most recent rate of
         additional rent calculated on a monthly basis payable pursuant to
         Article 3 hereof) with respect to the demised premises (without giving
         effect to any abatements, set offs or concessions then in effect)
         determined on a per rentable square foot basis.

               (c) Effective as of the Commencement Date of the Extension Term:

                  (i) the "Base Tax" set forth in Section 3.01 (a) hereof shall
         be deemed to be the product of (x) the amount for which the land and
         the Building are assessed for the purpose of establishing the real
         estate taxes to be paid by Landlord for the Tax Year ending on the June
         30 immediately preceding the Determination Date, multiplied by (y) the
         real estate tax rate for such Tax Year, and

                                      −75−
                  (ii) the "Base Wage Rate" set forth in Section 3.01(i) hereof
         shall be deemed to mean the Wage Rate in effect on January 1st of the
         calendar year immediately preceding the calendar year in which occurs
         the Determination Date.

               (d) Landlord and Tenant shall endeavor to agree as to the amount
of the fair market rent for the demised premises pursuant to the provisions of
clause (i) of subsection (a) hereof, during the thirty (30) day period following
the Determination Date. In the event that Landlord and Tenant cannot agree as to
the amount of the fair market rent within such thirty (30) day period following
the Determination Date, then Landlord or Tenant may initiate the arbitration
process provided for herein by giving notice to that effect to the other, and
the party so initiating the appraisal process (such party hereinafter referred
to as the "Initiating Party") shall specify in such notice the name and address
of the person designated to act as an arbitrator on its behalf. Within thirty
(30) days after the designation of such arbitrator, the other party (hereinafter
referred to as the "Other Party") shall give notice to the Initiating Party
specifying the name and address of the person designated to act as an arbitrator
on its behalf. If the Other Party fails to notify the Initiating Party of the
appointment of its arbitrator within the time above specified, then the
appointment of the second arbitrator shall be made in the same manner as
hereinafter provided for the appointment of a third arbitrator in a case where
the two arbitrators appointed hereunder and the parties are unable to agree upon
such appointment. The two arbitrators so chosen shall meet within ten (10) days
after the second arbitrator is appointed and if, within sixty (60) days after
the second arbitrator is appointed, the two arbitrators shall not agree, they
shall together appoint a third arbitrator. In the event of their being unable to
agree upon such appointment within eighty (80) days after the appointment of the
second arbitrator, the third arbitrator shall be selected by the parties
themselves if they can agree thereon within a further period of fifteen (15)
days. If the parties do not so agree, then either party, on behalf of both and
on notice to the other, may request such appointment by the American Arbitration
Association (or organization successor thereto) in accordance with its rules
then prevailing or if the American Arbitration Association (or such successor
organization) shall fail to appoint said third arbitrator within fifteen (15)
days after such request is made, then either party may apply on notice to the
other, to the Supreme Court, New York County, New York (or any other court
having jurisdiction and exercising functions similar to those now exercised by
said Court) for the appointment of such third arbitrator.

               (e) Each party shall pay the fees and expenses of the one of the
two original arbitrators appointed by or for such party, and the fees and
expenses of the third arbitrator and all other expenses (not including the
attorneys'

                                      −76−
fees, witness fees and similar expenses of the parties which shall be borne separately by each
of the parties) of the arbitration shall be borne by the parties equally.

               (f) The third arbitrator shall determine the fair market rent of
the demised premises and render a written certified report of its determination
to both Landlord and Tenant within sixty (60) days of the appointment of the
first two arbitrators or sixty (60) days from the appointment of the third
arbitrator if such third arbitrator is appointed pursuant to this subsection
(d), and the determination of Landlord's or Tenant's arbitrator which is closest
to the determination of the third arbitrator, shall be applied to determine as
above provided, whether the fixed annual rent shall be increased pursuant to
clause (i) of subsection (b) hereof for the Extension Term.

               (g) Each of the arbitrators selected as herein provided shall
have at least ten (10) years' experience in the leasing and renting of office
space in first class office buildings in Midtown Manhattan, New York County.

               (h) If Landlord notifies Tenant that the fixed annual rent for
the Extension Term shall be equal to the amount set forth in clause (ii) of
subsection (b) hereof, then the provisions of subsection (d) hereof shall be
inapplicable and have no force or effect.

               (i) In the event Landlord or Tenant initiates the appraisal
process pursuant to subsection (d) hereof and as of the Commencement Date of the
Extension Term the amount of the fair market rent has not been determined,
Tenant shall pay the amount determined by Landlord to be the fair market rent
for the demised premises and when such determination has been made, an
appropriate retroactive adjustment shall be made as of the Commencement Date of
the Extension Term.

               (j) Except as provided in subsections (b) and (c) hereof,
Tenant's occupancy of the demised premises during the Extension Term shall be on
the same terms and conditions as are in effect immediately prior to the
expiration of the initial term of this Lease, provided, however, Tenant shall
have no further right to extend the term of this Lease pursuant to this Article.

               (k) If Tenant does not send the Extension Notice pursuant to
provisions of subsection (a) hereof, this Article shall have no force or effect
and shall be deemed deleted from this Lease.

                                      −77−
               (l) If this Lease is renewed for the Extension Term, then
Landlord or Tenant can request the other party hereto to execute an instrument
in form for recording setting forth the exercise of Tenant's right to extend the
term of this Lease and the last day of the Extension Term.

               (m) If Tenant exercises its right to extend the term of this
Lease for the Extension Term pursuant to this Article, the phrases "the term of
this Lease" or "the term hereof" as used in this Lease, shall be construed to
include, when practicable, the Extension Term.

                                   ARTICLE 49

                              INTENTIONALLY OMITTED


                                   ARTICLE 50

                      LAYOUT AND FINISH; TENANT WORK CREDIT


50.01 Tenant hereby covenants and agrees that Tenant will, at Tenant's own cost and expense, and
in a good and workmanlike manner, make and complete the work and installations in and to the
demised premises set forth below in such manner so that the demised premises will be tasteful
and dignified executive and general offices.

         50.02 Tenant, at Tenant's expense, shall prepare a final plan or final
set of plans and specifications (which said plan or set of plans, as the case
may be, and specifications are hereinafter called the "final plan") which shall
contain complete information and dimensions necessary for the construction and
finishing of the demised premises. The final plan shall be submitted to Landlord
for Landlord's written approval which approval shall not be unreasonably
withheld or delayed with respect to work which is interior, non−structural and
does not affect Building Systems, the exterior of the Building or any area of
the Building outside the demised premises. Landlord shall not be deemed
unreasonable in withholding its consent to the extent that the final plan
prepared by Tenant pursuant hereto involves the performance of work or the
installation in the demised premises of materials or equipment which do not
equal or exceed the standard of quality of Building Standard installations.
Landlord agrees that it shall respond to Tenant's request for approval of the
final plan within fifteen (15) Business Days after Tenant's submission thereof.

                                      −78−
50.03 In accordance with the final plan, Tenant, at Tenant's expense, will make and complete in
and to the demised premises the work and installations (hereinafter called "Tenant's Work")
specified in the final plan. Tenant agrees that Tenant's Work will be performed with the least
possible disturbance to the occupants of other parts of the Building and to the structural and
mechanical parts of the Building and Tenant will, at its own cost and expense, leave all
structural and mechanical parts of the Building which shall or may be affected by Tenant's Work
in good and workmanlike operating condition. Tenant, in performing Tenant's Work will, at its
own cost and expense, promptly comply with all laws, rules and regulations of all public
authorities having jurisdiction in the Building with reference to Tenant's Work. If any act or
omission of Tenant or its general contractor, subcontractors or agents render the Building of
which the demised premises are a part liable to any mechanic's lien or other lien and if any
such lien or liens be filed against the Building of which the demised premises are a part, or
against Tenant's Work, or any part thereof, Tenant will, at Tenant's own cost and expense,
promptly remove the same of record within thirty (30) days after Tenant's receipt of notice of
the filing of such lien or liens; or in default thereof, Landlord may cause any such lien or
liens to be removed of record by payment of bond, as Landlord may elect, and Tenant shall
reimburse Landlord for all costs and expenses incidental to the removal of any such lien or
liens incurred by Landlord. Tenant shall indemnify and save harmless Landlord of and from all
claims, reasonable counsel fees, loss, damage and expenses whatsoever by reason of any liens,
charges or payments of any kind whatsoever that may be incurred or become chargeable against
Landlord or the Building of which the demised premises are a part, or Tenant's Work or any part
thereof, by reason of any work done or to be done or materials furnished or to be furnished to
or upon the demised premises in connection with Tenant's Work. Tenant hereby covenants and
agrees to indemnify and save harmless Landlord of and from all claims, reasonable counsel fees,
loss, damage and expenses whatsoever by reason of any injury or damage, howsoever caused, to any
person or property occurring prior to the completion of Tenant's Work or occurring after such
completion, as a result of anything done or omitted in connection therewith or arising out of
any fine, penalty or imposition or out of any other matter or thing connected with any work done
or to be done or materials furnished or to be furnished in connection with Tenant's Work. At any
and all times during the progress of Tenant's Work, Landlord shall be entitled to have a
representative or representatives on the site to inspect Tenant's Work and such representative
or representatives shall have free and unrestricted access to any and every part of the demised
premises upon reasonable notice and provided such access shall not unduly disrupt Tenant's
Work. Tenant shall advise Landlord in writing of Tenant's general contractor who are to do
Tenant's Work, and such general contractor shall be subject to Landlord's prior written approval
which

                                      −79−
approval shall not be unreasonably withheld; such contractor shall, to the extent permitted by
law, use subcontractors and employees for Tenant's Work who will work harmoniously with other
employees on the job. Notwithstanding the foregoing, Tenant shall use the life safety system
subcontractor designated by Landlord to perform any work to connect Tenant's installations to
the Building's life safety system. Annexed hereto as Exhibit D is a list of contractors and
subcontractors which have been approved by Landlord.

         50.04 Tenant shall, at Tenant's sole cost and expense, file all
necessary architectural plans and obtain all necessary approvals and permits in
connection with Tenant's Work being performed by it pursuant to this Article 50.
Tenant shall submit to Landlord Tenant's final plans for Landlord's review no
later than June 1, 2000, subject to force majeure.

         50.05 The following conditions shall also apply to Tenant's Work


(i) all Tenant's Work shall be of material, manufacture, design capacity and color at least
equal to the standard adopted by Landlord for the Building (hereinafter called "Building
Standard");

         (ii) Tenant, at Tenant's expense, shall (i) file all required
architectural, mechanical and electrical drawings and obtain all necessary
permits, and (ii) furnish and perform all engineering and engineering drawings
in connection with Tenant's Work. Tenant shall obtain Landlord's approval of the
drawings referred to in (i) and (ii) hereof, which approval shall be within
fifteen (15) Business Days and shall not be unreasonably withheld or delayed;

         (iii) Tenant shall use an engineer reasonably approved by Landlord with
respect to the preparation of Tenant's engineering drawings for Tenant's Work;

         (iv) All of the provisions of Articles 6 and 8 hereof shall apply to
Tenant's performance of Tenant's Work; and

         (v) Tenant's Work shall be completed no later than September 30, 2000
subject to delays beyond Tenant's control.


50.06 Tenant agrees to install the Unit (as defined in Section 21.05) as part of Tenant's Work
and to perform all work necessary to upgrade the restrooms on the entire twenty−first (21st),
twenty−second (22nd) and twenty−third (23rd) floors of the Building in compliance with the
Building standards, with Local

                                      −80−
Law 58 and with the Americans with Disabilities Act of 1990 (collectively "Credit Work").
Landlord shall allow Tenant a credit not to exceed the amount of Two Hundred Forty−Three
Thousand One Hundred Fifty−Nine Dollars ($243,159) (hereinafter called the "Work Credit"),
which credit shall be applied solely against the cost and expense incurred in connection with
the Credit Work. Notwithstanding anything contained in this lease to the contrary, up to ten
(10%) percent of the Work Credit may be used for architectural, engineering, space planning,
expediter and inspection fees, fees for all municipal and other permits, licenses and approvals
and fees, directly relating to Credit Work, (as opposed to being related to furniture,
furnishings or other non−"hard cost" items). In the event that the cost and expense of the
Credit Work shall exceed the amount of the Work Credit, Tenant shall be entirely responsible for
such excess. In the event that the cost and expense of Credit Work shall be less than the
amount of the Work Credit, then the amount of the Work Credit shall be reduced accordingly.

         50.07 Landlord shall allow Tenant a credit not to exceed the amount of
One Million Two Hundred Fifteen Thousand Seven Hundred Ninety−Five Dollars
($1,215,795.00) (hereinafter called the "Tenant's Work Credit"), which credit
shall be applied solely against the cost and expense incurred in performing
Tenant's Work other than the Credit Work. In the event that the cost and expense
of the Tenant's Work (exclusive of the Credit Work) shall exceed the amount of
Tenant's Work Credit, Tenant shall be entirely responsible for such excess. In
the event that the cost and expense of Tenant's Work (exclusive of the Base
Work) shall be less than the amount of Tenant's Work Credit, then the amount of
Tenant's Work Credit shall be reduced accordingly. Notwithstanding anything
contained in this lease to the contrary, up to ten (10%) percent of the Tenant's
Work Credit may be used for architectural, engineering, space planning,
expediter and inspection fees, fees for all municipal and other permits,
licenses and approvals and fees, directly relating to Tenant's Work, (as opposed
to being related to furniture, furnishings or other non−"hard cost" items).

         50.08 (a) Provided Tenant shall not be in default under the terms of
this Lease beyond applicable notice and cure periods, Landlord hereby agrees to
make periodic payments of up to ninety (90%) of the Tenant's Work Credit and/or
Work Credit to Tenant as Tenant's Work and Credit Work progresses, in accordance
with the terms and conditions hereinafter set forth (the "Work Payment
Conditions") in this subsection (a) Tenant shall submit to Landlord from time to
time, but not more often than once per month, requisitions (herein referred to
as "Tenant's Request") for such periodic payment with respect to the portion(s)
of Tenant's Work and Credit Work performed subsequent to the immediately
preceding Tenant's Request (if any), together with the following:

                                      −81−
               (i) copies of invoices from the contractors and subcontractors
who performed the portions of Tenant's Work and Credit Work referred to in such
Tenant's Request, and from the materialmen and suppliers who supplied the
materials and supplies referred to in such Tenant's Request (which may be
grossed up by Tenant as required to add back the retainage held by Tenant for
such work and not reflected in the corresponding invoices);

               (ii) a certificate from Tenant's architect or general contractor
or construction manager that (1) such portion of the Tenant's Work and Credit
Work has been substantially completed in accordance with the final plan and
revisions thereto theretofore approved by Landlord; and (2) there are no uncured
violations of record as a result of such portion of the Tenant's Work and Credit
Work; and

               (iii) lien waivers from Tenant's general contractor and
construction manager, and each major (for purposes hereof, a contract amount in
excess of $10,000.00) subcontractor, materialman and supplier to the extent of
the amount paid to such parties through the requisition preceding such Tenant's
Request.


Promptly following any Tenant's Request together with the aforesaid accompanying documentation,
Landlord shall have the right to enter the demised premises for the purpose of verifying that
such portion of Tenant's Work and Credit Work covered by Tenant's Request has been performed
substantially in accordance with the Tenant's Plans and revisions thereto theretofore approved
by Landlord. If the Work Payment Conditions have been satisfied, then within thirty (30) days
after Landlord's receipt of Tenant's Request, together with the accompanying documentation,
Landlord shall pay to Tenant the amount shown on the "Current Payment Due" on the Tenant's
Request. The balance of the Tenant's Work Credit and/or Work Credit, if any, after the
completion of Tenant's Work and Credit Work, shall be paid to Tenant in accordance with the
terms and conditions set forth in paragraph (b) below.

               (b) Subject to the provisions of this Section, Landlord hereby
agrees to pay the balance of the Tenant's Work Credit and/or Work Credit, in
accordance with the terms and conditions hereinafter in this subsection (b) (the
"Final Work Payment Conditions"). After the completion of the Tenant's Work and
Credit Work, Tenant shall submit to Landlord a requisition (herein referred to
as the "Final Request") for the balance of the Tenant's Work Credit and/or Work
Credit, together with the following:

                                      −82−
               (i) a certificate from Tenant's architect or general contractor
or construction manager that (1) all Tenant's Work and Credit Work has been
completed in substantial accordance with the final plans and revisions thereto
theretofore approved by Landlord; (2) there are no uncured violations of record,
as a result of any of the Tenant's Work; and all Tenant's Work and Credit Work
has been paid for in full;

               (ii) a general release and lien waivers from Tenant's general
contractor, and each major (for purposes hereof, a contract amount in excess of
$10,000.00) subcontractor, materialman and supplier and any other lien waiver
Tenant has received in connection with Tenant's Work and Credit Work;

               (iii) copies of all New York City Building Department and New
York City Fire Department sign−offs, inspection certificates and/or
self−certifications by Tenant's subcontrators and/or any permits required to be
issued by any governmental entity having jurisdiction thereover to the extent
required to permit the lawful occupancy of the demised premises by Tenant; and

               (iv) two (2) copies of CAD ``as built" plans of the demised
premises, or if Tenant has not had such CAD ``as builts" prepared, the final
plan as finally approved by Landlord and filed with the New York City Department
of Buildings, legibly marked with all field changes made during the performance
of Tenant's Work and Credit Work (other than de minimis changes) and certified
by Tenant's architect as containing all such field changes.

               (c) Promptly following the Final Request together with the
aforesaid accompanying documentation, Landlord shall have the right to enter the
demised premises for the purpose of verifying that all of the Tenant's Work and
Credit Work has been completed and performed substantially in accordance with
the final plan and revisions thereto theretofore approved by Landlord. If the
Final Work Payment Conditions have been satisfied, then within thirty (30) days
after Landlord's receipt of the Final Request together with the accompanying
documentation, Landlord shall pay to Tenant the balance of the Tenant's Work
Credit and/or Work Credit.


50.09 Tenant acknowledges that as of the date hereof there are separate Class E systems and
sprinkler risers for the Building and that certain building known and located at 500 Seventh
Avenue, New York, New York (the "500 Building"). Tenant further acknowledges that during the
term of this Lease, Landlord in its sole election, may combine the lobbies of the Building and
the 500 Building into a single lobby in a location to be selected by Landlord, in its sole

                                      −83−
discretion, and unify the Class E systems for the Building. In the event Landlord shall elect
to combine the lobbies of the Building and the 500 Building and unify the Class E systems, then
Tenant shall make all necessary modifications and install all necessary devices within the
demised premises to comply with applicable laws and regulations. Landlord shall reimburse
Tenant for any reasonable actual out−of pocket expenses to modify the Class E systems in the
demised premises incurred by Tenant as a result of Landlord's combining such lobbies and
unifying the Class E system of the Building and the 500 Building. In connection with the
performance of Tenant's Work, Landlord shall provide to Tenant a reasonable number of
connection points (at least one connection point on every third (3rd) floor of the Building) to
the Building's fire safety system to which it may connect its smoke detectors and other life
safety and security devices in the demised premises to comply with applicable laws, including,
without limitation, New York City local law; provided, however, Tenant shall solely be
responsible for the cost of making such connection.

                                      * * *

             The remainder of this page is left intentionally blank
                          the signature page follows.]

                                      −84−
         IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
lease as of the day and year first above written.

                          LANDLORD:


                        500−512 SEVENTH AVENUE LIMITED PARTNERSHIP

                                 500−512 ArCap LLC

                                 By:     Archon Capital, L.P. By:

                                         By:   WH MezzCo GP, L.L.C., its General
                                               Partner


                                         By:   /s/ Susan Sack
                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                               Name: Susan Sack
                                               Title: Vice President

                                 By:     GS MezzCo GP, L.L.C., its General Partner


                                         By:   /s/ signature illegible
                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                               Name:
                                               Title:


                        TENANT

                        WRC MEDIA, INC.

                                 /s/ Robert S. Lynch
                                 −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                 Name: Robert S. Lynch
                                 Title:


Tenant's Tax Identification Number is
                                        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
  EXHIBIT A

 FLOOR PLAN

 [Attached]




  EXHIBIT A

 (WRC MEDIA)

[FLOOR PLAN]
  EXHIBIT A

 (WRC MEDIA)

[FLOOR PLAN]



  EXHIBIT A

 (WRC MEDIA)

[FLOOR PLAN]
                                     EXHIBIT B

                               PROPERTY DESCRIPTION

                               (512 SEVENTH AVENUE)


All that certain plot, piece or parcel of land, situate, lying and being in the Borough of
Manhattan, County of New York, City and State of New York, known as 512 Seventh Avenue and
designated as follows:

Section:          3
Block:            787
Lot:              44



                                     EXHIBIT C

                               RULES AND REGULATIONS

           Tenant shall not:

         1. obstruct, encumber or use, or allow or permit any of its employees,
agents, licensees or invitees to congregate in or on, the sidewalks, driveways,
entrances, passages, courts, arcades, esplanade areas, plazas, elevators,
vestibules, stairways, corridors or halls of the Building, outside of the
demised premises, or use any of them for any purposes other than for ingress and
egress to and from the demised premises;

         2. attach awnings or other projections to the outside walls of the
Building or place bottles, parcels or other articles, or lettering visible from
the exterior, on the windows, windowsills or peripheral air conditioning
enclosures;

         3. attach to, hang on, or use in connection with, any exterior window
or entrance door of the demised premises, any blinds, shades or screens which
are not of a quality, type, design and color, or which are not attached in a
manner, approved by Landlord;

         4. place or leave any door mat or other floor covering in any area
outside of the demised premises;


5. exhibit, inscribe, paint or affix any sign, insignia, advertisement, object or other
lettering in or on any windows, doors, walls or part of the outside or inside of the Building
(exclusive of the inside of the demised premises), or in the demised premises if visible from
the outside, without Landlord's approval, except that the name(s) of Tenant and any permitted
sublessee may be displayed on the entrance doors of the premises occupied by each, subject to
Landlord's reasonable approval of the size, color and design of such display and, if Landlord
elects to perform such work, Tenant shall pay Landlord for the performance of such work;

         6. cover or obstruct the sashes, sash doors, skylights, windows and
doors that reflect or admit light and air into the halls, passageways or other
public areas of the Building;

         7. place in, sweep or permit to be swept, attach to, put in front of,
or affix to any part of the exterior of, the Building or any of its halls,
doors, windows,

                                       C−1
elevators, corridors or vestibules, outside of the demised premises, any lettering, signs,
decorations, showcases, displays, display windows, packages, boxes or other articles;

         8. except in the normal decoration of the interior of the demised
premises, mark, paint, drill into, or in any way deface, any part of the
Building or the demised premises or cut, bore or string wires therein;

          9. permit or allow bicycles, vehicles, animals, fish or birds of any
kind to be brought into or kept on or about the Building or the demised
premises;

          10. make, permit or allow to be made, any unseemly or disturbing
noises, whether by musical instruments, recordings, radio, talking machines,
television, whistling, singing or in any other way, which might disturb other
occupants in the Building or those having business with them or impair or
interfere with the use or enjoyment by others of neighboring buildings or
premises;

         11. bring into or keep on any part of the demised premises or the
Building any inflammable, combustible, radioactive or explosive fluid, chemical
or substance;

         12. place upon any of the doors (other than closet or vault doors) or
windows in the Building any locks or bolts which shall not be operable by the
Grand Master Key for the Building, or make any changes in locks or the
mechanisms thereof which shall make such locks inoperable by said Grand Master
Key unless such change is approved by Landlord in which event Tenant shall give
Landlord duplicate keys for such locks or bolts;

         13. remove,   or carry into or out of the demised premises or the
Building, any safes,   freight, furniture, packages, boxes, crates or any bulky or
heavy objects except   during such hours and in such elevators as Landlord may
reasonably determine   from time to time;

         14. use any lighting in perimeter areas of the Building, other than
that which is standard for the Building or approved by Landlord, so as to permit
uniformity of appearance to those viewing the Building from the outside;

         15. engage or pay any employees on the demised premises except those
actually working for the Tenant in the demised premises, or advertise for
laborers giving the demised premises as an address;

                                        C−2
16. obtain, permit or allow in the Building the purchase, or acceptance for use in the demised
premises, by means of a service cart, vending machine or otherwise, of any ice, drinking water,
food, tobacco in any form, beverage, towel, barbering, boot blackening, cleaning, floor
polishing or other similar items or services from any persons, except such persons, during such
hours, and at such places within the Building and under such requirements as may be determined
by Landlord with respect to the furnishing of such items and services, provided that the charges
for such items and services by such persons are not excessive;

         17. use, permit or allow any advertising or identifying sign which the
Landlord shall have notified Tenant tends, in Landlord's judgment, to impair the
reputation of the Building or its desirability as a building for offices;

         18. close and leave the demised premises at any time without closing
all operable windows and, if requested by Landlord, turning out all lights;

         19. permit entrance doors to the demised premises to be left open at
any time or unlocked when the demised premises are not in use;

         20. encourage canvassing, soliciting or peddling in any part of the
Building or permit or allow the same in the demised premises;

         21. use, or permit or allow any of its employees, contractors,
suppliers or invitees to use, any space or part of the Building, including the
passenger elevators or public halls thereof, in the moving, delivery or receipt
of safes, freight, furniture, packages, boxes, crates, paper, office material or
any other matter or thing, any hand trucks, wagons or similar items which are
not equipped with such rubber tires, side guards and other safeguards which
shall have been approved by Landlord or use any such hand trucks, wagons or
similar items in any of the passenger elevators;

         22. cause or permit any food odors or any other unusual or
objectionable odors to exist in or emanate from the demised premises or permit
any cooking or preparation of food except in areas approved by Landlord and in
compliance with local ordinances;

         23. create or permit a public or private nuisance, by reason of noise,
odors and/or vibrations or otherwise;

         24. throw or allow or permit to be thrown anything out of the doors
windows or skylights or down the passageways or stairways of the Building;

                                      C−3
         25. lay vinyl asbestos tile or other similar floor covering so that the
same shall come in direct contact with the floor or in a manner or by means of
such pastes or other adhesives which shall not have been approved by Landlord,
it being understood that if linoleum or other similar floor covering is desired
to be used, an interlining of builder's deadening felt shall be first affixed to
the floor, by a paste or other material which is soluble in water, the use of
cement or other similar adhesive material being expressly prohibited;

         26. use, allow or permit the passenger elevators to be used by Tenant's
working hands (persons in rough clothing handling packages, cartons and
shipments of material or mail) or persons carrying bulky packages or by persons
calling for or delivering mail or goods to or from the demised premises, and
Tenant shall cooperate with Landlord in enforcing this Rule on those making
deliveries to Tenant;


27. request any of Landlord's agents, employees or contractors to perform any work, or do
anything, outside of their regular duties, unless previously approved by the Building manager;

         28. invite to the demised premises or the Building, or permit the visit
of, persons in such numbers or under such conditions as unreasonably to
interfere with the use and enjoyment of any of the plazas, entrances, corridors,
arcades, escalators, elevators or other facilities of the Building by other
occupants thereof;

         29. use, permit or allow the use of any fire exits or stairways for any
purpose other than emergency use;

         30. employ any firm, person or persons to move safes, machines or other
heavy objects into or out of the Building, without prior approval of Landlord of
such persons and the manner in which such items will be moved, which approval
shall not be unreasonably withheld:

         31. install or use any machines or machinery of any kind whatsoever
which may disturb any persons outside of the demised premises;

         32. use the water and wash closets or other plumbing fixtures for any
purpose other than those for which they were constructed, and shall not allow or
permit sweepings, rubbish, rags, or other solid substances to be thrown therein;
or


33. install any carpeting or drapes, or paneling, grounds or other decorative wood products, in
the demised premises, other than those wood products

                                      C−4
considered furniture, which are not treated with fire−retardant materials and, in such event,
shall submit, to Landlord's reasonable satisfaction, proof or other reasonable certification of
the materials reasonably satisfactory fire retardant characteristics.

         34. smoke or carry cigars or cigarettes in the elevators of the
building.

II       Tenant shall:


1. pay Landlord for any damages, costs or expenses incurred by Landlord with respect to the
breach of any of the Rules and Regulations contained in or provided by this Lease by Tenant, or
any of its servants, agents, employees, licensees or invitees, or the misuse by Tenant, or any
of the aforesaid, of any fixture or part of the demised premises or the Building and shall
cause its servants, agents, employees, licensees and invitees to comply with the Rules and
Regulations contained in or provided for by this Lease;

         2. upon the termination of this Lease, turn over to Landlord all keys;
either furnished to, or otherwise procured by, Tenant with respect to any locks
used by Tenant in the demised premises or the Building and, in the event of the
loss of any such keys, pay to Landlord the cost of procuring same;

         3. subject to the provisions of Article 18 hereof, refrain from, and
immediately upon receipt of notice thereof, discontinue any violation or breach
of the Rules and Regulations contained in or provided for by this Lease;


4. request Landlord to furnish passes to persons whom Tenant desires to have access to the
demised premises during times other than Business Hours and be responsible and liable to
Landlord for all persons and acts of such persons for whom Tenant requests such passes;

         5. furnish artificial light and electrical energy (unless Landlord
shall furnish electrical energy as a service included in the rent) at Tenant's
expense for the employees of the Landlord or Landlord's contractors while doing
janitorial or other cleaning services or while making repairs or Alterations in
the demised premises.

         6. apply at the office of the Building's manager with respect to all
matters and requirements of Tenant which require the attention of Landlord, his
agents or any of his employees;

                                      C−5
7. pay Landlord reasonable charges for the installation and replacement of ceiling tiles removed
for Tenant by telephone installers or others in the demised premises and public corridors, if
any;

         8. purchase from Landlord or Landlord's designee, at Landlord's option,
all lighting tubes, lamps, bulbs and ballasts used in the demised premises and
shall pay Landlord, or Landlord's designee, as the case may be, reasonable
charges for the purchase and installation hereof; and


9. pay Landlord reasonable charges for the hiring or providing of security guards during times
when Tenant, or any subtenant of Tenant, is moving into or out of portions of the demised
premises or when significant quantities of furniture or other materials are being brought into
or removed from the demised premises.

III.     Landlord shall:

         1. have the right to inspect all freight objects or bulky matter
(except printed matter) brought into the Building and to exclude from the
Building all objects and matter which violate any of the Rules and Regulations
contained in or provided for by this Lease;

         2. have the right to require any person leaving the demised premises
with any package, or other object or matter, to submit a pass, listing such
package or object or matter, from Tenant;

         3. in no way be liable to Tenant or any other party for damages or loss
arising from the admission, exclusion or rejection of any person or any property
to or from the demised premises or the Building under the provisions of the
Rules and Regulations contained in or provided for by this Lease;

         4. have no liability or responsibility for the protection of any of
Tenant's property as a result of damage or the unauthorized removal of any such
property resulting wholly or in part from Landlord's failure to enforce, in any
particular instance, or generally, any of Landlord's rights.

         5. have the right to require all persons entering or leaving the
Building, during hours other than Business Hours, to sign a register and may
also exclude from the Building, during such hours, all persons who do not
present a pass to the Building signed by Landlord;

                                      C−6
         6. furnish passes to persons for whom Tenant requests same;

         7. have the right to control and operate the public portions of the
Building and the public facilities, as well as facilities furnished for the
common use of other occupants, of the Building; and

         8. have the right to remove any violation of Paragraph I items 2, 3, 4,
5, 6 or 7 of these Rules and Regulations without any right of Tenant to claim
any liability against Landlord, and have the right to impose a reasonable charge
against Tenant for removing any such violation or repairing any damages
resulting therefrom

                                      C−7
                                    EXHIBIT D

                 LIST OF APPROVED CONTRACTORS AND SUBCONTRACTORS

                                   [Attached]



HVAC−Eastern Aire & Tedair
Plumbing−Alger & API Plumbing
Electrical−Fitzgerald & Accuglow
Sprinkler−Ace & Alger
Drywall−Precision & San−Jon
Acoustical− Precision & San−Jon
Door & Hardware−Canaan Door
Flooring−Consolidated & Chelsea Floor
Glass−Checker & Port Richman
Arch. Metal−Port Richman & Aval
Ceramic−Bay Brent & Goal Tile
Paint−Encore & State
Millwork−S&G Millwork & Dimensional Concepts
Convector Covers−Rainbow
Misc., Steel−Kraman Iron Works
Window Treatment−International Blinds
(Preliminary List−WRC Media)



                  *ALL THOSE LISTED HEREIN MUST BE UNION LABOR
      EXHIBIT E

FIRST OFFERING SPACE

     [Attached]



      EXHIBIT E

     (WRC MEDIA)

    [FLOOR PLAN]
       EXHIBIT E

      (WRC MEDIA)

     [FLOOR PLAN]



       EXHIBIT F

FORM OF SECURITY LETTER

      [Attached]
FROM ____________________   _______________________________________________
                            _______________________________________________

                                                 ISSUE DATE:_________________
                                                    L/C NO.:___________________

        Advising Bank

************ DIRECT *****************           APPLICANT:_______________________
                                                          _______________________



         Beneficiary

500−512 SEVENTH AVENUE LIMITED                  AMOUNT: USD ______________
PARTNERSHIP, C/O NEWMARK & CO.,                 _____________________________
REAL ESTATE, INC..                              _____________________________
125 PARK AVE., NEW YORK, NY 10017               _____________________________

GENTLEMEN:

WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. ______ IN FAVOR
OF 500−512 SEVENTH AVENUE LIMITED PARTNERSHIP (THE "LANDLORD") FOR AN AGGREGATE
AMOUNT NOT TO EXCEED U.S. DOLLARS ___________________________________. THIS
LETTER OF CREDIT IS AVAILABLE WITH __________________________ NEW YORK AGAINST
PRESENTATION OF YOUR DRAFT AT SIGHT DRAWN ON _______________________. NEW YORK
WHEN ACCOMPANIED BY THE DOCUMENTS INDICATED HEREIN.

BENEFICIARY'S DATED STATEMENT PURPORTEDLY SIGNED BY ONE OF ITS OFFICIALS OR AN
OFFICIAL OF ITS AGENT READING AS FOLLOWS: "THE AMOUNT OF THIS DRAWING USD
___________ UNDER _________________________ LETTER OF CREDIT NUMBER
_______________ REPRESENTS FUNDS DUE US AS AN EVENT OF DEFAULT HAS OCCURRED
UNDER ONE OR MORE TERMS OF THAT CERTAIN LEASE AGREEMENT DATED ______ 2000 BY AND
BETWEEN 500−512 SEVENTH AVENUE LIMITED PARTNERSHIP, AS LANDLORD AND
__________________, AS TENANT."


PARTIAL AND MULTIPLE DRAWINGS ARE PERMITTED. WE FURTHER UNDERTAKE THAT ANY DRAFT(S) PRESENTED
UNDER THIS LETTER OF CREDIT SHALL BE PAID NOT WITHSTANDING ANY CLAIM BY ANY PERSON THAT THE SUM
DEMANDED IS NOT DUE OR FOR ANY OTHER REASON THAT SAID DRAFT(S) IS NOT TO BE HONORED.

THIS LETTER OF CREDIT EXPIRES AT OUR COUNTERS IN NEW YORK WITH OUR CLOSE OF
BUSINESS ON __________________.


IT IS A CONDITION OF THIS IRREVOCABLE LETTER OF CREDIT THAT IT SHALL BE AUTOMATICALLY EXTENDED
WITHOUT AMENDMENT FOR AN ADDITIONAL PERIOD OF ONE YEAR FROM THE PRESENT OR EACH FUTURE
EXPIRATION DATE, UNLESS AT LEAST 45 DAYS PRIOR TO SUCH DATE WE SEND YOU NOTICE IN WRITING BY
REGISTERED MAIL, OR HAND DELIVERY AT THE ABOVE ADDRESS, THAT WE ELECT NOT TO RENEW THIS LETTER
OF CREDIT FOR SUCH ADDITIONAL PERIOD. HOWEVER, IN NO EVENT SHALL THIS LETTER OF CREDIT BE
EXTENDED BEYOND THE FINAL EXPIRY DATE OF __________________. UPON SUCH NOTICE TO YOU, YOU MAY
DRAW DRAFTS ON US AT SIGHT FOR AN AMOUNT NOT TO EXCEED THE BALANCE REMAINING IN THIS LETTER OF
CREDIT WITHIN THE THEN APPLICABLE EXPIRY DATE, ACCOMPANIED BY YOUR DATED STATEMENT PURPORTEDLY
SIGNED BY ONE OF YOUR OFFICIALS READING: "THE AMOUNT OF THIS DRAWING USD ________ UNDER
_________________ LETTER OF CREDIT NUMBER ________ REPRESENTS FUNDS DUE US AS WE HAVE RECEIVED
NOTICE FROM _________________ OF THEIR DECISION NOT TO EXTEND LETTER OF CREDIT.

                                                   CONTINUED−−
                                                   ______________________________
                                                   ______________________________
                                                   ______________________________


________________________________
FROM ____________________   _______________________________________________
                            _______________________________________________

                                                 ISSUE DATE:_________________
                                                    L/C NO.:___________________

        Advising Bank

************ DIRECT *****************           APPLICANT:_______________________
                                                          _______________________



         Beneficiary

500−512 SEVENTH AVENUE LIMITED                  AMOUNT: USD ______________
PARTNERSHIP, C/O NEWMARK & CO.,                 _____________________________
REAL ESTATE, INC..                              _____________________________
125 PARK AVE., NEW YORK, NY 10017               _____________________________


NUMBER __________ FOR AN ADDITIONAL YEAR, AND THE LEASE IS STILL OUTSTANDING."


THIS LETTER OF CREDIT IS TRANSFERABLE IN ITS ENTIRETY (BUT NOT IN PART) TO A SUCCESSOR LANDLORD
AND ___________________________ ONLY IS AUTHORIZED, TO ACT AS THE TRANSFERRING BANK.

WE SHALL NOT RECOGNIZE ANY TRANSFER OF THIS LETTER OF CREDIT UNTIL THIS ORIGINAL
LETTER OF CREDIT TOGETHER WITH ANY AMENDMENTS AND A SIGNED AND COMPLETED
TRANSFER FORM AS PER EXHIBIT A ATTACHED HERETO IS RECEIVED BY US.

ALL TRANSFER FEES ARE FOR THE ACCOUNT OF THE APPLICANT.

THE CORRECTNESS OF THE SIGNATURE AND TITLE OF THE PERSON SIGNING THE TRANSFER
FORMS MUST BE VERIFIED BY YOUR BANK.

IN CASE OF ANY TRANSFER UNDER THIS LETTER OF CREDIT, THE DRAFT AND ANY REQUIRED
STATEMENT MUST BE EXECUTED BY THE TRANSFEREE.


THIS LETTER OF CREDIT MAY NOT BE TRANSFERRED TO ANY PERSON WITH WHICH U.S. PERSONS ARE
PROHIBITED FROM DOING BUSINESS UNDER U.S. FOREIGN ASSETS CONTROL REGULATIONS OR OTHER
APPLICABLE U.S. LAWS AND REGULATIONS.

ALL CORRESPONDENCE AND ANY DRAWINGS PRESENTED IN CONNECTION WITH THIS LETTER OF
CREDIT ARE TO BE DIRECTED TO OUR OFFICE AT _____________
____________________________________________________________________________
______________________________ CUSTOMER INQUIRY NUMBERS AND _________________
AND __________________ WE HEREBY ISSUE THIS STANDBY LETTER OF CREDIT IN YOUR
FAVOR. IT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS, 1993 REVISION, PUBLICATION NO. 500 AND ENGAGES US IN ACCORDANCE WITH
THE TERMS THEREOF. THE NUMBER AND THE DATE OF OUR CREDIT AND THE NAME OF OUR
BANK MUST BE QUOTED ON ALL DRAFTS REQUIRED.




                                                   ______________________________
                                                   ______________________________
                                                   ______________________________


________________________________
FROM _____________________                         ______________________________

                                   EXHIBIT "A"

                                                      NEW YORK, NEW YORK      19

________________________________
________________________________
________________
________________________
________________________________________________

                          RE:      LETTER OF CREDIT NO.
                          ISSUED BY_____________________________

GENTLEMEN:

         FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY
TRANSFERS TO;

         (NAME OF TRANSFEREE)
         (ADDRESS)

ALL RIGHTS OF THE UNDERSIGNED. BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF
CREDIT IN ITS ENTIRETY.


BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE
TRANSFERRED TO THE TRANSFEREE AND THE TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY
THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS WHETHER INCREASES OR EXTENSIONS OR
OTHER AMENDMENTS AND WHETHER NOW EXISTING OR HEREAFTER MADE ALL AMENDMENTS ARE TO BE ADVISED
DIRECT TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED
BENEFICIARY.

         THE ADVICE OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK
YOU TO ENDORSE THE TRANSFER ON THE REVERSE HEREOF, AND FORWARD IT DIRECT TO THE
TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.

                                                   YOURS VERY TRULY,

                                                   _____________________________
                                                   SIGNATURE OF BENEFICIARY

SIGNATURE GUARANTEED AND IS IN CONFORMITY TO THAT ON FILE WITH US AS TO SIGNER'S
AUTHORIZATION FOR THE EXECUTION OF THESE INSTRUMENTS.

                                                   BANK:

                                                   BY:____________________
                                                   TITLE:

THIS FORM MUST BE EXECUTED IN DUPLICATE.
                                    EXHIBIT G

                        ALTERATION RULES AND REGULATIONS

         1. All costs and expenses in connection with or arising out of the
performance of any Alteration shall be borne by Tenant and all payments thereof
shall be made by Tenant as they become due, and evidence of such payments shall
be furnished to Landlord (on standard AlA document and lien releases) within ten
(10) business days after Landlord's request.

         2. All materials as well as methods and processes used in the
performance of any Alteration shall conform to the Building standards.


3. All alterations requiring partition changes shall comply with compartmentation requirements
in that portion of the Building being altered, in accordance with Section C26−504.1 of the City
of New York Administrative Code, as amended December 1, 1972.

         4. Landlord may refer Tenant's mechanical plans to a consultant
selected by Landlord for review, and, in such event, Tenant agrees to pay the
reasonable cost of such within ten (10) business days after receipt of invoices
either from Landlord or from Landlord's consultant. Tenant agrees further to
comply with all reasonable changes and requirements that may be recommended by
Landlord's consultant.

         5. Tenant will perform any Alteration in a safe and lawful manner,
using contractors reasonably approved by Landlord in accordance with the Lease
and complying with applicable laws and all requirements and regulations of
municipal and other governmental or duly constituted bodies exercising
authority, and this compliance shall include the filing of plans and other
documents as required, and the procuring of any required licenses or permits,
prior to commencement of any Alteration. Tenant shall submit the following
certificates to the Landlord upon completion of any Alteration:

               a. Approvals issued by the Department of Buildings; and

               b. Electrical certificates issued by the Department of Water
Supply, Gas and Electricity and the Board of Fire Underwriters.


6. Tenant hereby indemnifies and agrees to defend and hold Landlord harmless from and against
any and all suits, claims, actions, loss, cost or expense (including claims for workmen's
compensation) based on personal injury or property

                                      G−1
damage caused in the performance of any Alteration by Tenant, Tenant's employees, agents,
servants or contractors engaged by Tenant, and Tenant will repair or replace, or at Landlord's
election, reimburse Landlord for the reasonable cost of repairs, or replacing any portion of the
Building or item of equipment, or any of Landlord's real or personal property so damaged, lost
or destroyed in the performance of any Alteration.

         7. Worker's Compensation, Comprehensive Liability, Bodily Injury and
Property Damage Insurance in the amount of $1,000,000.00, Combined Single Limit
(CSL) with companies and on forms reasonably satisfactory to Landlord, shall be
provided and at all times maintained by Tenant and Tenant's contractors engaged
in the performance of any Alteration and before proceeding with any Alteration,
certificates of such insurance shall be furnished to Landlord.


8. Landlord shall have no responsibility for or in connection with any Alteration and Tenant
will remedy at Tenant's expense and be responsible for any and all defects in any Alteration
that may appear during or after the completion thereof whether the same shall affect the Demised
Premises in particular or any part of the Building in general.

         9. The Landlord or its agents shall not be responsible for any
disturbances or deficiency created in the air−conditioning or other mechanical,
electrical or structural facilities within the Building as a result of any
Alteration. If such disturbances or deficiencies result, it shall be the
Tenant's entire responsibility to correct the resulting conditions and to
restore the services to the reasonable satisfaction of the Landlord, its
architects and engineers within ten (10) days.


10. If the performance of any Alteration shall require that additional services or facilities
(including, but without limiting the generality of the foregoing, extra elevator and cleaning
services) be provided, Tenant shall pay Landlord the charges therefor provided in the lease.

         11. Tenant's workmen and mechanics must work in harmony and not
interfere with any labor employed by the Landlord, Landlord's mechanics or
contractors or by any other tenant or its contractors.


12. Tenant's contractors shall comply with the rules of the Building and the terms of the Lease
as to the hours of availability of the Building elevators and the manner of handling materials,
equipment and debris to avoid conflict and interference with Building operation.

                                      G−2
         13. Tenant's contractors shall make available fire extinguishers based
on the following:

               a. Alterations up to 3,000 square feet − one (1) fire
extinguisher; and

               b. Alterations over 3,000 square feet − one (1) fire extinguisher
for every 3,000 square feet.

         Such fire extinguishers shall be kept and maintained on the Demised
Premises by Tenant's contractor for the duration of the Alteration.


14. Demolition and other work that produces excessive noise (including without limitation, all
core drilling) must be performed between 5:00 p.m. and 8:00 a.m. or on weekends. The delivery
of the materials and equipment and the removal of debris must be arranged to avoid any
inconvenience and annoyance to other tenants. Cleaning must be controlled to prevent dirt,
debris and dust from causing unsafe conditions infiltrating into adjacent tenant or mechanical
areas.

         15. Nothing herein contained shall be construed as (i) constituting
Tenant Landlord's agent (Tenant to do any Alteration as principal), or (ii) a
waiver by Landlord of any of the terms or provisions of the lease.


16. Tenant agrees to comply with such reasonable rules and regulations that might be
established from time to time by the Building Manager during construction.

                                      G−3



</TEXT>
</DOCUMENT>
                 ASSIGNMENT AND AMENDMENT OF LICENSE AGREEMENT,
                              AMENDMENT OF GUARANTY
                                   AND CONSENT

         THIS ASSIGNMENT AND AMENDMENT OF LICENSE AGREEMENT, AMENDMENT OF
GUARANTY AND CONSENT (this "Assignment and Amendment") is hereby made and
entered into by and among B.J. Vines, Inc. ("Licensor"), Blue Concept, LLC
("Assignor") and Innovo Azteca Apparel, Inc. ("Assignee").

         WHEREAS, Licensor and Assignor have entered into a Letter Agreement
executed on January 8, 2004, (the "License Agreement"), a copy of which is
attached hereto and incorporated herein as Exhibit A, pursuant to which Licensor
has granted to Assignor a license to exploit the "Betsey Johnson" trademark on
specified categories of apparel under the terms and conditions set forth in said
License Agreement; and


WHEREAS, as an inducement to enter into the License Agreement, Licensor and Paul Guez, as
Managing Member of Assignor, ("Paul Guez"), entered into a Guaranty Agreement with Licensor
executed on January __, 2004 ("Guaranty Agreement"), a copy of which is attached hereto and
incorporated herein as Exhibit B, whereby Paul Guez personally guaranteed the payment of
contractually obligated royalty payments to be paid to Licensor pursuant to the License
Agreement; and

         WHEREAS, Assignor wishes to assign all of its right, title and interest
in and to the License Agreement to Assignee and Assignee wishes to accept and
assume the same; and

         WHEREAS, Licensor and Paul Guez wish to amend paragraph 6 of the
Guaranty Agreement to clarify the continuity of the Paul Guez guaranty upon the
execution of this Assignment and Amendment; and


WHEREAS, the parties wish to amend paragraph 1 of the License Agreement to acknowledge the
potential creditworthiness of the Assignee in lieu of the Paul Guez guaranty upon the
expiration of the initial term of the License Agreement; and

         WHEREAS, Licensor has joined in this Assignment and Amendment as
evidence of its consent thereto and to the amendment of the Guaranty Agreement.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:


1. Assignor does hereby assign, transfer, and set over to Assignee, its successors, and assigns,
all of Assignor's right, title, and interest in and to the License Agreement. Assignor agrees
to cooperate with Assignee and to execute and deliver to Assignee all papers, instruments, and
assignments as may be necessary to vest all right, title, and interest in and to the aforesaid
License Agreement.

         2. Assignee hereby assumes and agrees to perform all of the covenants,
conditions and agreements of the License Agreement required to be made, kept and
performed by Assignor from and after the date of this Assignment and Amendment.

         3. Licensor   joins in this   Assignment and Amendment as evidence of its
consent to the same.

                                         1
         4. Licensor and Guez hereby delete Provision 6 of the Guaranty
Agreement in its entirety and replace it with the following new Provision 6 as
follows:

               "6. A permitted assignment of the License Agreement shall in no
way extinguish the obligations of Paul Guez as Guarantor of the contractually
obligated royalty payments set forth in the License Agreement."

         5. Licensor, Assignor and Assignee hereby amend Provision 1 of the
License Agreement to replace the second paragraph of Provision 1 with the
following paragraph:

               "Should both Licensor and Licensee be satisfied        with the
relationship, this agreement will be renewed for an additional three−year term
(the "Renewal Term"). The parties agree to negotiate in good faith the maximum
guaranteed royalties and minimum net sales for the Renewal Term beginning 120
days prior to the expiration of the Initial Term. In addition, should a Renewal
Term be entered into between the parties, the Guaranty Agreement will not
automatically renew and must be extinguished or renegotiated. Licensor agrees
that it will examine the creditworthiness of the Licensee, Assignee or any of
Assignee's corporate body affiliates in determining the necessity of an ongoing
guaranty."


6. This Assignment and Amendment shall be construed in accordance with and governed by the laws
of the State of New York. This Assignment and Amendment shall be binding upon and inure to the
benefit of the parties and their heirs, legal representatives, successors and permitted assigns.
This Assignment and Amendment may be executed in two or more counterparts, each of which shall
be deemed to be an original.

         IN WITNESS WHEREOF, this Assignment and Amendment has been executed to
be effective as of the 3rd day of February, 2004.



                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.
                           SIGNATURE PAGE TO FOLLOW.]



                                       2
Licensee/Assignor:                    Assignee:
−−−−−−−−−−−−−−−−−−                    −−−−−−−−−

BLUE CONCEPT, LLC                     INNOVO AZTECA APPAREL, INC.

/s/ Paul Guez                         /s/ Samuel J. Furrow, Jr.
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
By: Paul Guez                         By: Samuel J. Furrow, Jr.
Its: Managing Member                  Its: Chief Executive Officer




Licensor:                             Guarantor:
−−−−−−−−−                             −−−−−−−−−−

B.J. VINES, INC.                      PAUL GUEZ

/s/ Chantal Bacon                     /s/ Paul Guez
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−       −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
By: Chantal Bacon                     Paul Guez
Its: Vice President / Owner


                                  3

</TEXT>
</DOCUMENT>
[Betsy Johnson Letterhead]



                                 January 7, 2004



Mr. Paul Guez
Blue Concepts, LLC
5804 E. Slauson Ave.
Commerce, CA 90040

Dear Mr. Guez:


Based upon the previous discussions between you and Chantal Bacon, this letter details the
terms and conditions of the new license between B.J. Vines, Inc., a New York corporation with
its principal place of business located at 498 Seventh Avenue, 21st Floor New York, NY 10018
("Licensor") ad Blue Concepts, LLC a California limited liability company with its principal
place of business located at 5804 E. Slauson Avenue, Commerce, CA 90040 (Licensee").

1.          The term of the license will be four years, with the initial year
comprising eighteen months to allow for initial development and launch (the
"Initial Term"). Year one shall commence on January 7, 2004 and shall end on
June 30, 2005. Each subsequent year shall commence immediately upon the
expiration of the prior year. Years two through four will be twelve−month years.
The first shipping season will be for Fall 2004 merchandise.


Should both Licensor and Licensee be satisfied with the relationship, this agreement will be
renewed for an additional three−year term (the "Renewal Term"). The parties agree to negotiate
in good faith the minimum guarantied royalties and minimum net sales for the Renewal Term
beginning 120 days prior to the expiration of the Initial Term.

2.          The approved categories are women's jeans and coordination jeans
related separates, such as t−shirts and tops. The Licensee will have exclusive
distribution and selling rights for the approved categories during the Initial
Term and any Renewal Term of the agreement.

3.          The approved territory is the United States of America (U.S.), U.S.
territories such as Puerto Rico and the Virgin Islands, and Canada (the
"Territory"). Additional territories may be added to this agreement from time to
time, as specifically requested by Licensee and approved by Licensor.
4.          The approved account distribution is limited to those better
department and specialty stores that are consistent with the brand image of
Betsy Johnson. A specific account distribution list must be submitted by the
Licensee to the Licensor for approval and inclusion in this agreement, and shall
be attached as an addendum. Any additions to this list must be approved in
advance in writing by the Licensor. Any discounters to whom licensee wishes to
sell must also be designated on this list.

5.          Final approval of preliminary conception of collection, initial
design,   pre−production   samples,   production samples,    labels,   hangtags,
promotional materials, and all items bearing the Betsy Johnson trademark, logo,
or images rest exclusively with the Licensor.

         For each item that requires an approval, the Licensee will provide the
Licensor with two samples along with a written request for approval. Licensor
will respond within 7 business days of receipt of any such request. Approvals
will not be unreasonably withheld and denials or requests for changes will be
made in a good faith, cooperative manner.

6.          The Licensee is required to pay minimum guaranteed royalties ("MGR")
based upon the following schedule:

Upon signing of this agreement:                               $50,000
December 31, 2004                                             $50,000
March 31, 2005                                                $50,000
June 30, 2005                                                 $50,000

September 30, 2005                                            $70,000
December 31, 2005                                             $70,000
March 31, 2006                                                $70,000
June 30, 2006                                                 $70,000

September 30, 2006                                            $90,000
December 31, 2006                                             $90,000
March 31, 2007                                                $90,000
June 30, 2007                                                 $90,000

September 30, 2007                                            $110,000
December 31, 2007                                             $110,000
March 31, 2008                                                $110,000
June 30, 2008                                                 $110,000

         MGR's are based upon the payment of an eight percent (8%) royalty on
Net Sales. The term "Net Sales" shall mean gross sales less trade discounts
actually extended, merchandise returns actually credited, sales taxes or VAT
taxes, and shipping or freight charges invoiced by Licensee. The "Minimum Net
Sales" requirements are set forth below:
July   1,   2004−June   30,   2005                            $2,500,000
July   1,   2005−June   30,   2006                            $3,500,000
July   1,   2006−June   30,   2007                            $4,500,000
July   1,   2007−June   30,   2008                            $5,500,000

7.          The royalty rate for Net Sales that fall between $10,000,000 and
$15,000,000 in a twelve month contract period will be calculated at seven (7%).
The royalty rate for Net Sales in excess of $15,000,000 in a twelve month
contract period will be calculated at six (6%).

8.           Licensee is required to spend 2% annually of the Minimum Net Sales
on advertising and promotion. On an annual basis, Licensee must submit to
Licensor for Licensor's review an advertising and promotion budget.

9.           Licensee will be required to submit to the Licensor on a quarterly
basis reports that detail Net Sales (the "Quarterly Report"). These Quarterly
Reports must also include invoice number, sku number, product description, and
customer name.

10.          The Licensee will be required to submit and annual reconciliation
of all Net Sales based upon the information provided in the Quarterly Reports no
later than July 31st of each year of the agreement (the "Annual Report").

         Any royalties that are due as a result of sales exceeding the Minimum
Net Sales shall be paid according to the appropriate royalty rate concurrent
with submissions of the Annual Report.

11.          Sales to the discounters approved in accordance with Paragraph 4
above shall be capped at a maximum of 22% of total Net Sales on an annual basis.
A "discount" or "off−price sale" is defined as a sale priced greater than or
equal to 25% off the wholesale list price.

         Discounted sales shall be added to non−discounted sales to determine
total Net Sales. However, discounted sales that exceed the 22% maximum will be,
for the purpose of calculating the amount of royalties due to Licensor, "grossed
up" to full wholesale value.


12. Licensor is allowed to purchase licensed products from Licensee for distribution in its own
retail boutiques at a price of 40% off of published wholesale line price for such items. No
royalties will be due on purchase made directly by Licensor and the totals of such sales shall
not be added the Net Sales for the purpose of determining Minimum Net Sales.

13.          The Licensee is required to hire personnel of a sufficiently high
caliber in the design, merchandising, and sales area to execute the terms and
conditions of this agreement.
14. Licensee shall establish a separate showroom reflecting the status and brand image of the
Licensor for the promotion and sale of the licensed products. Licensor shall have final approval
of the design and conception of the showroom.

15.          As an inducement to enter into this agreement, Paul Guez shall
provide a personal guaranty for the contractually obligated royalty payment set
forth above.

         In   conclusion,  we look forward to working with you and your
organization to build what I am confident will be a strong partnership and a
mutually beneficial relationship. Towards that end, please indicate your
agreement with the terms and conditions as outlined above by signing in the
appropriate place.

Please do not hesitate to contact me or Chantal Bacon with any questions       of
comments. I may be reached at (212) 993−9252 or at dflohr@betseyjohnson.com.

                                            Sincerely,

                                            /s/ David Flohr

                                            David Flohr
                                            Chief Financial Officer



I have read the terms and conditions above and hereby agree to them:



For the Licensor:                                    For the Licensee:

/s/ Chantal Bacon                                    /s/ Paul Guez
−−−−−−−−−−−−−−−−−−                                   −−−−−−−−−−−−−−−−−−−−−
Chantal Bacon                                        Paul Guez
Vice President / Owner                               Manager and Member
B.J. Vines, Inc.                                     Blue Concept, LLC


January 8, 2004                                      January 8, 2004
−−−−−−−−−−−−−−−−                                     −−−−−−−−−−−−−−−−−−−−−
Date                                                 Date


</TEXT>
</DOCUMENT>
                          MASTER DISTRIBUTION AGREEMENT



This Master Distribution Agreement ("Agreement") is made effective as of January 1, 2004, by and
between JOE'S JEANS, INC., a Delaware corporation, with its principle place of business at 5804
East Slauson Avenue, Commerce, California 90040, USA, (hereinafter referred to as "JOE'S") and
BEYOND BLUE, INC., a California corporation, with its principle place of business at 815 Moraga
Drive, Second Floor, Los Angeles, California 90049, USA (hereinafter referred to as "BBI") and
collectively know as (the "Parties").

                               W I T N E S S E T H:
                               −−−−−−−−−−−−−−−−−−−−


WHEREAS, JOE'S is the owner of the Joe's Jeans trademark and other trademarks ("Trademarks") and
has been engaged in the manufacture and distribution of men's and women's clothing ("Products")
in the United States, and various other countries and desires to appoint a worldwide master
distributor, outside the United States of America (the "Territory");

WHEREAS, BBI is a reputable agent for and distributor of products similar to the
Products;


WHEREAS, JOE'S wishes to appoint BBI as, and BBI wishes to be appointed to and assume the
position of, the exclusive distributor of the Products in the Territory.

NOW, THEREFORE, the parties to this Agreement    (hereinafter   referred to as the
"Parties") hereby agree as follows:

1.       Grant of Distribution Rights.
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−

1.1      Distribution Rights
         −−−−−−−−−−−−−−−−−−−


Under the terms and conditions of this Agreement, JOE'S grants to BBI for the term of this
Agreement the right to purchase the Products from JOE'S, to import advertise, promote, market,
distribute and sell the Products and to use the Trademarks in the advertising, promotion,
marketing, distribution and sale of the Products in the Territory only as approved by JOE'S in
the manner set forth in this Agreement ("Distribution Rights").

Notwithstanding anything herein to the contrary, the right to sell or offer for
sale or authorize for sale any Product to the following or by the following
means in the Territory, is reserved exclusively to JOE'S (or its designee) and
its affiliated companies: (a) United States Government instrumentalities,
agencies, departments or activities, including, without limitation, Military
Post Exchanges, if any, in the Territory; (b) airport duty free shops, duty free
zones and any other areas similarly designated by local government and
authorities; and (c) the Internet or other electronic means now known or to be
developed (the "Internet").

Neither BBI nor any of its affiliated companies shall, directly or indirectly,
solicit customers for Products in the United States of America. Neither BBI nor
any of its affiliated companies shall, directly or indirectly, sell or offer to
sell Products outside the Territory or to anyone that it knows or, upon
reasonable inquiry, should know is likely to resell such Products outside of the
Territory. BBI shall promptly refer all inquires it receives concerning sales
outside the Territory to JOE'S.

                                       −1−
1.2      Special Conditions.
         −−−−−−−−−−−−−−−−−−−
The Parties acknowledge the following   existence of special   conditions to the
grant mentioned in Section 1.1 above.

(a)     Canada. The distribution rights of JOE's Products for the country of
        −−−−−−−
        Canada, which is included in the Territory of this Agreement, is
        subject to an existing and previously executed written distribution
        agreement    between   JOE'S   and    Sophistowear  Fashions,    Inc.
        ("Sophistowear")   and dated    January 7, 2003 (the    "Sophistowear
        Agreement"). The Sophistowear Agreement shall be assigned by JOE'S to
        BBI by no later than March 5, 2004, by an assignment agreement in
        substantial form as set forth on Exhibit A attached hereto. Upon
        execution of the assignment to BBI under this Section 1.2(a), JOE'S
        shall notify in writing      Sophistowear and BBI to evidence said
        assignment.

(b)     Japan. The country of Japan and the distribution rights for Japan are
        −−−−−−
        subject to a certain master distribution and licensing agreement
        executed between Joe's Jeans, Inc. and Itochu Corporation ("Itochu") on
        July 1, 2003 (the "Itochu Agreement"). Pursuant to Section 28.1 of the
        Itochu Agreement, the rights and obligations only for the distribution
        of JOE'S products (excluding any licensing rights) shall be assigned
        and transferred to BBI, by an assignment agreement in substantial form
        as set forth on Exhibit B attached hereto, and the performance thereof
        shall be subject to the terms and conditions of this Agreement save and
        except as follows:

        i.       The discount for purchases made for shipment to Japan shall be
                 at JOE'S then current wholesale line price less 25%, and not
                 as stated in Section 6.1 of this Agreement.

        ii.      The agreed remuneration arrangements between JOE'S and BBI as
                 stipulated in a certain agent agreement dated July 1, 2003
                 shall remain in full force and effect and shall not be
                 affected by this Agreement in any way.

        Upon execution of the assignment to BBI under this Section 1.2(b),
        JOE'S shall notify in writing Itochu and BBI to evidence said
        assignment.

1.3     Exclusivity and Competitive Products.
        −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                     −2−
(a)      During the effective term of this Agreement, JOE'S shall not grant to
         any other person, firm or corporation the Distribution Rights for the
         Products in the Territory, nor shall JOE'S distribute, lease, market,
         manufacture or otherwise make available, directly or indirectly, the
         Products in the Territory except through BBI.

(b)      BBI shall submit to JOE'S a list of the products other than JOE'S which
         are primarily jeans and potentially competitive products to JOE'S that
         it currently distributes or plans to distribute in the Territory
         ("Competitive Products"). When, during the term of this Agreement, BBI
         directly or indirectly,     through an Affiliate or otherwise,       is
         considering to act as an official distributor to the retail trade in
         the Territory for any product, which could be competitive with any of
         the Products, BBI will notify JOE'S and attempt to resolve any issues
         that could negatively impact BBI's distribution of the Products. The
         contents of this Section are not intended to be a restriction or
         impediment in any way to BBI's efforts to act as a licensing agent or
         consultant to entities manufacturing or selling products which may be
         considered competitive to the Products; the Parties agree that this
         Section 1.3 (b) refers to and is intended to be a consideration for
         official   distribution   activities controlled or prompted by any
         distribution agreements between BBI and a third party manufacturing or
         selling Competitive Products.

1.4      Term.
         −−−−


This Agreement shall come into force as of January 1, 2004 and shall remain in full force and
effect for a period of three (3) years through June 30, 2007. This Agreement shall cover the
following fourteen (14) collections (the "Term"):

         First Year    Spring 2004      Period January 1, 2004 to June 30, 2005
                       Summer 2004
                       Fall 2004
                       Holiday 2004
                       Spring 2005
                       Summer 2005

         Second Year   Fall 2005        Period July 1, 2005 to June 30, 2006
                       Holiday 2005
                       Spring 2006
                       Summer 2006

         Third Year    Fall 2006        Period July 1, 2006 to June 30, 2007
                       Holiday 2006
                       Spring 2007
                       Summer 2007


         Any renewal of the term of this Agreement shall be determined six (6)
months prior to the expiration of the Term by mutual agreement between the
parties.

2.       Sub−Distribution.
         −−−−−−−−−−−−−−−−−

         The parties hereby agree that within a reasonable time period after the
execution of this Agreement, but in no event later than April 1, 2004, a
standard sub−distribution    agreement (the "Sub−Distribution     Agreement" or
"Sub−Distribution Agreements") shall be

                                      −3−
finalized for execution by certain sub−distributors during the term of this
Agreement. BBI shall be responsible for entering into the Sub−Distribution
Agreements with various sub−distributors ("Sub−Distributors") in the Territory,
which shall act as local distributors and/or agents to distribute the Product
within certain areas of the Territory as more specifically defined in the
Sub−Distribution Agreements. BBI shall cooperate with JOE'S regarding approval
or disapproval of any Sub−Distributor, and shall seek final written approval for
Sub−Distributors   from JOE'S prior to execution of the         Sub−Distribution
Agreements. BBI shall be responsible for all aspects of the Sub−Distribution
Agreements,   including   enforcing   the   rights and    obligations   of each
Sub−Distributor under said Sub−Distribution Agreements. The Sub−Distribution
Agreements shall, at a minimum include the following:


           1.   Minimum   sample   charges    to be paid by   each   Sub−Distributor    for
samples;

         2. Minimum advertising  requirements,  including minimum monetary
obligations and approval by BBI and JOE'S of manner and use of advertising
expenditures;


3. An assignment provision whereby, in the event that this Agreement is terminated for any
reason whatsoever, each Sub−Distribution Agreement shall be assigned to JOE'S, and each
Sub−Distributor shall be bound to JOE'S as the assignee for its obligations under the
Sub−Distribution Agreements, and each Sub−Distribution Agreement shall remain in full force and
effect.

         Each Sub−Distribution Agreement shall be considered an Addendum to this
Agreement, and shall be incorporated upon each Sub−Distribution Agreement's
respective execution.


3.         Sales Promotion
           −−−−−−−−−−−−−−−

3.1        Best Efforts. BBI agrees to use its best efforts              to   promote   and
           −−−−−−−−−−−−−−
           stimulate the sale of the Products in the Territory.

3.2        Marketing.
           −−−−−−−−−−

JOE'S shall cooperate with BBI to allow BBI to use its best efforts to
advertise, promote, market and sell the Products in the Territory. Twice a year,
as specified herein, BBI shall furnish JOE'S with seasonal marketing plans for
the ensuing year which shall be due no later than the last day of November for
the   Spring/Summer   Collection   and by the last day of April         for the
Fall/Winter/Holiday collection. JOE'S shall notify BBI of its approval or
comment on needed changes to such marketing plans within one (1) month of
receipt of same from BBI. BBI shall secure JOE'S's approval prior to initiating
any changes in its existing or proposed sales and marketing plans.

All advertising, promotional and marketing materials prepared by BBI shall be
subject to the prior written approval of JOE'S. JOE'S shall have ten (10)
business days following receipt of such materials in which to review and approve
or disapprove the materials, which approval JOE'S may withhold in its sole
discretion. If JOE'S does not approve or disapprove any such materials in
writing within that time period,       such materials will be deemed to be
disapproved.


BBI agrees to attend at least two JOE'S line presentations during each year of the Agreement.
BBI will attend and show the Products at a minimum of two trade fairs during each year of the
Agreement.

                                             −4−
4.         Orders For Products, Defects and Deficiencies, Reports and Access.
           −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

4.1        Purchase Orders.
           −−−−−−−−−−−−−−−−


BBI shall submit purchase orders for the Products to JOE'S in writing prior to the order cut−off
date as communicated by JOE'S to BBI, which shall set forth at a minimum:

(a)   Identification of the Products ordered;
(b)   Quantities;
(c)   Sizes;
(d)   Requested delivery dates, and
(e)   Shipping instructions (including shipping address).

4.2        Acceptance of Orders.
           −−−−−−−−−−−−−−−−−−−−−


JOE'S shall accept orders placed by BBI in writing at its principal offices in Los Angeles,
U.S.A. After acceptance, an order may not be modified or changed except with the written request
by BBI and the approval of JOE'S.

4.3        Delivery, Risk and Title
           −−−−−−−−−−−−−−−−−−−−−−−−

(a)        Unless otherwise agreed in writing, all Products purchased by BBI from
           JOE'S shall be packed according to BBI's reasonable instructions and
           made available to BBI's designated forwarder. JOE'S shall advise BBI
           when the Products are available for shipment.

(b)        Unless otherwise agreed, the Products shall be delivered FOB, the JOE'S
           warehouse or the warehouse of JOE'S's supplier and delivery shall be
           deemed to have been completed once the Products have been picked up at
           JOE'S's warehouse by BBI's freight forwarder.

(c)        All title and risk of loss and damage shall pass to BBI when the
           Products have been effectively delivered to BBI's freight forwarder.

4.4        Modification of Orders.
           −−−−−−−−−−−−−−−−−−−−−−−


No accepted purchase order shall be modified or cancelled except upon the written agreement by
both parties. BBI's purchase orders or mutually agreed change orders shall be subject to all
provisions of this Agreement.

4.5        Import Documentation.
           −−−−−−−−−−−−−−−−−−−−−


BBI shall be the exporter of record with respect to all Products. BBI shall be responsible, at
its expense, for obtaining and maintaining all licenses and permits and for satisfying all
formalities as may be required to import Products into the Territory in accordance with the then
prevailing law or regulations, and all permits and other governmental approvals for the sale of
the Products in the Territory. BBI shall also bear all transportation costs associated with
shipping the Products from JOE'S to BBI.

4.6        Defects and Deficiencies.
           −−−−−−−−−−−−−−−−−−−−−−−−−

                                        −5−
(a)      In view of the administration and expense of shipping defective
         Products back to the United States to the Territory, provided that BBI
         is in compliance with the terms and conditions of this Agreement, at
         the end of each season, JOE'S will pay to BBI or otherwise credit BBI's
         account in the amount of the value of one−half of one percent (1/2%) of
         the net invoice price of all purchases of the Products to accommodate
         BBI for any damaged or defective Products which may have been received
         by BBI. BBI shall destroy and dispose of such defective products in the
         Territory, and shall promptly inform JOE'S of same.

(b)      In the case of Products that were delivered in quantities less than
         those set forth in JOE'S's invoices with respect thereto, BBI shall
         give JOE'S notice of such deficiency within thirty (30) days following
         delivery to BBI's warehouse in the Territory. If JOE'S, through its own
         sources, confirms that the deficiencies in such deliveries existed as
         of the time of delivery to the common carrier for shipment, then JOE'S
         shall allow a credit to BBI for such deficiencies, as set forth herein.
         JOE'S shall not in any event be responsible for any deficiency that
         arises following delivery to the common carrier for shipment. All
         claims for deficiencies shall first be made to BBI's common carrier,
         notwithstanding the required notice to JOE'S specified in this Section.
         If JOE'S is found to be ultimately responsible for the deficiency, the
         invoice price of the goods that were not shipped shall be deducted from
         the amount of the next letter of credit to be posted by BBI.


The refunds and credits set forth in this Section 5.8 may be offset by JOE'S against any amounts
due JOE'S at the time that the refunds or credits are to be given or applied.

4.7      Reports.
         −−−−−−−−

(a)      Retail Sales: For retail sales made by BBI, BBI shall provide to JOE'S
         every two (2) weeks with a sales report of the Products by door, by
         style and color, by sales price and by day.

(b)      Sales to Retail Stores. For its sales to the retail trade, BBI shall
         provide JOE'S with quarterly and annual reports as set forth below :

         o          Quarterly Reports. BBI shall, within thirty (30) business days
                    −−−−−−−−−−−−−−−−−−
                    after the end of each fiscal quarter of JOE'S, deliver to
                    JOE'S a report of gross sales and net sales (as defined
                    hereinbelow) by price, by style and color, and by retail
                    entity,   including   all   documentation   relevant   to the
                    calculation   of Net Sales as defined       herein,   for the
                    immediately preceding fiscal quarter and such other financial
                    reports and statements as JOE'S may reasonably request from
                    time to time. In addition, BBI shall provide to JOE'S a
                    seasonal qualitative and quantitative recap report by stock
                    keeping unit ("SKU"), pursuant to a template provided by
                    JOE'S. For purposes of this Agreement, Gross Sales shall mean
                    the full amount of all sales of the Products in the Territory.
                    Net sales shall be defined as the gross sales of all of the
                    Products sold in the Territory to the trade by BBI, less
                    refunds for returned Products and less value added, sales and
                    similar taxes, if any, incurred in connection with the sales
                    of the Products during the applicable period ("Net Sales").

                                        −6−
         o          Annual Reports. Within thirty (30) days following the end of
                    −−−−−−−−−−−−−−−−
                    the fiscal year of JOE'S, BBI shall deliver to JOE'S an annual
                    report   of gross    sales and Net     Sales   including    all
                    documentation relevant to the calculation of Net Sales as
                    defined herein for the immediately preceding calendar year.

4.8          Access.
             −−−−−−−

JOE'S independent auditors, shall, upon reasonable advance notice, have access
to BBI's records, at mutually agreeable times during the term of this Agreement
for the purpose of: (a) review BBI's inventory of Products; (b) reviewing and
auditing BBI's books and records relating to the reports to be given by BBI to
JOE'S,   including without limitation,     all books, records and supporting
documentation relative to BBI's Net Sales, advertising of the Products and
advertising and marketing expenditures; and/or (c) reviewing BBI's compliance
with this Agreement. In no case shall such a review take place more than once
every two (2) years, unless, however, JOE'S independent auditors shall require a
review more than once every two years for an unforeseen reason such as a
governmental inquiry, audit, investigation or other reason beyond JOE'S control
in the ordinary course of business.

5.       Guaranteed Purchases and Sales
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

5.1      Guaranteed Purchase Amount
         −−−−−−−−−−−−−−−−−−−−−−−−−−


BBI shall purchase all Products exclusively from JOE'S or from sources acceptable to JOE'S. BBI
shall purchase the minimum U.S. dollar amounts of Products from JOE'S on a seasonal basis, as
set forth below, at JOE'S's invoice price to BBI.

The annual guaranteed purchase amount shall include the amount of purchases
ordered by BBI but cancelled by JOE'S after acceptance by JOE'S.

5.2      Guaranteed Wholesale Sales:
         −−−−−−−−−−−−−−−−−−−−−−−−−−−

BBI shall achieve the Guaranteed Net Wholesale ("GNW") sales as set forth below:

         Year 1:             $6,500,000;
         Year 2:             8,500,000;
         Year 3:             To be mutually agreed upon by the parties within
                             30 days after the end of Year 1; provided, however,
                             that the parties hereby agree that GNW for Year 3
                             shall be no less than a 30% increase over Year 1 GNW
                             minimums, subject to Year 1 GNW minimums being met
                             pursuant to this agreement.


For purposes of this Agreement, GNW shall be defined as the minimum amount of purchases by BBI
from JOE'S at prices set forth pursuant to Section 6.1 of this Agreement.

6.       Prices and Payments.
         −−−−−−−−−−−−−−−−−−−−

6.1      Wholesale Prices.
         −−−−−−−−−−−−−−−−−


JOE'S shall invoice BBI for Products on a FOB warehouse basis at JOE'S's then current wholesale
line price less twenty−seven and five tenths percent (27.5%). All prices invoiced to BBI include
packing in accordance with BBI's reasonable packing requirements. If both

                                        −7−
parties agree to change the current pricing, the new pricing shall be negotiated
in good faith between the parties.

6.2      Payment Terms.
         −−−−−−−−−−−−−−

BBI shall make payment to JOE'S within 30 days of receipt       of each   invoice
delivered to BBI pursuant to Paragraph 6.1 hereinabove.

6.3      Retail Prices.
         −−−−−−−−−−−−−−

BBI and JOE'S may work together to determine appropriate suggested retail prices
in the Territory to be presented strictly in compliance with law; provided
however, that BBI reserves the right to sell Products at such prices as BBI, in
its discretion, shall determine. BBI shall provide JOE'S on a seasonal basis
with a list of its retail prices to be charged to its customers for the
Products.

7.       Trademarks.
         −−−−−−−−−−−

7.1      Use of Trademarks.
         −−−−−−−−−−−−−−−−−−


All Products shall be sold only under the Trademarks, which may be registered, at JOE'S absolute
discretion and control, in the Territory in JOE'S or its affiliate's name and at JOE'S expense.
BBI shall sell the Products only with their original packaging to the extent that it is legally
acceptable under law within the Territory, or with agreed changes to labels where necessary for
local regulatory purposes. BBI shall only use the Trademarks in a manner approved by JOE'S and
consistent with all applicable laws within the Territory.

The Trademarks are and shall remain at all times the property of JOE'S and/or
its affiliates. BBI recognizes that the Trademarks belong to JOE'S and/or its
affiliates. BBI is granted no rights with respect to the Trademarks except the
right to market, advertise, distribute and sell Products, which bear the
Trademarks. BBI warrants that it shall never do anything to jeopardize the
ownership of JOE'S or its affiliates' Trademarks, including but not limited to:
(a) claiming any right, title or interest in or to the Trademarks by
registration or otherwise, other than the right to use the same under all the
terms and conditions of this Agreement; (b) questioning the validity of the
Trademarks; (c) using its own name, trade names or trademarks or those of any
other person or entity in connection or association with the Trademarks or the
name of JOE'S or any of JOE'S's affiliates; or (d) applying the Trademarks to
any product, package or container without the express written approval of JOE'S.
BBI shall promptly assign to JOE'S any rights it might acquire in or to the
Trademarks through use or otherwise, except the right to use the Trademarks
under the terms and conditions hereof.


BBI shall not at any time use, in any combination or manner, the name of JOE'S, any Trademark
or any other trademark or trade name of JOE'S or its affiliates in any way in advertisements
except in either (a) advertisements which have been supplied by JOE'S to BBI and to which BBI
has made no change of substance; or (b) advertisements submitted by BBI to JOE'S and approved
by JOE'S.

BBI shall give prompt notice in writing to JOE'S of any infringement or possible
infringement of the Trademarks that may come to its attention. If requested by
JOE'S to do so, BBI shall, pursuant to JOE'S's direction and control, and at
JOE'S's expense, take such

                                      −8−
action as may be necessary or advisable to stop any infringement of the
Trademarks or other acts of unfair competition. If any sum is recovered in any
such suit, JOE'S shall be solely entitled thereto. JOE'S, at its own cost and
expense and in its absolute discretion and control, may (in its own name or in
the name of BBI or in both names) take such action as it deems necessary to
prevent infringement of the Trademarks or other acts of unfair competition or to
defend the BBI or its customers in suits, administrative or otherwise, brought
against them in connection with the use of the Trademarks.


BBI shall formally assign to JOE'S any cause of action it may have against an infringer of the
Trademarks upon the request of JOE'S, and shall execute all documents and do all acts deemed
necessary by JOE'S for JOE'S to control any infringement suit or proceeding which relates to the
Trademarks to the extent it is legally possible under the applicable law in the Territory.

JOE'S shall indemnify and hold BBI harmless from and against any claim of
alleged infringement of any right of a third party due to use of the Trademarks
in accordance with this Agreement.

7.2      Registration.
         −−−−−−−−−−−−−


JOE'S has registered or applied to register the Trademarks for the Products in the Territory.
In addition, in the event JOE'S believes that it is advisable to effect any filing or obtain any
governmental approval or sanction for the use by BBI of any of the Trademarks pursuant to this
Agreement, the parties shall fully cooperate in order to do so. All expenses relating to the
registration of the Trademarks in the Territory for the Products, as well as the making of any
filing or obtaining any governmental approvals for the use the Trademarks by BBI shall be borne
by JOE'S.

8.       Representations and Warranties.
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

8.1      JOE'S represents and warrants to BBI that:

(a)      JOE'S has full authority to enter into this Agreement;
(b)      JOE'S has (i) registered; (ii) applied to register; or (iii) shall use
         its best efforts to register the Trademarks for the Products in the
         Territory;
(c)      Execution, delivery and performance of this Agreement, including the
         grant of Distribution Rights set forth in this Agreement, will not
         violate the terms or any agreement, order or other arrangement binding
         upon JOE'S or the Trademarks; and

8.2      BBI represents and warrants to JOE'S that:

(a)      BBI has full authority to enter into this Agreement; and
(b)      Execution, delivery and performance of this Agreement will not violate
         the terms or any agreement, order or other arrangement binding upon
         BBI; and
(c)      BBI will market and sell the Products only in a first class manner and
         in full compliance with the terms of this Agreement.


9.       Termination.
         −−−−−−−−−−−−

9.1      Termination.
         −−−−−−−−−−−−

                                      −9−
Notwithstanding the provisions of Section 1.4 above,       this   Agreement   may be
terminated in accordance with the following provisions:

Either party may terminate   this   Agreement at any time by giving written notice
to the other party if:

(a)      Other than as specified herein, any breach of this Agreement which, if
         capable of being cured, is not cured within thirty (30) days after
         written notice thereof, except that any failure of BBI to make timely
         payments hereunder must be cured within ten (10) days after notice
         thereof;

(b)      on fifteen (15) days notice for any breach of this Agreement of
         Sections relating to Confidentiality, Representations and Warranties,
         Sales Outside the Territory, Trademarks;

(c)      failure of either party to satisfy any final judgment against it.


9.2      Rights and Obligations on Termination.
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

(a)      Upon termination or expiration of this Agreement, all Distribution
         Rights, rights to use the Trademarks, and other rights granted to BBI
         under this Agreement shall immediately terminate. BBI shall immediately
         cease using the Trademarks in any way, and BBI shall deliver to JOE'S
         or, upon JOE'S request,      shall destroy all advertising,      sales,
         promotional and other materials and literature bearing the Trademarks
         or containing trade secrets of JOE'S.


(b)      Notwithstanding the provisions in Section 9.2 (a) above, BBI may
         liquidate and sell its then existing inventory of Products on a
         non−exclusive basis for a period of ninety (90) days after the later of
         (A) the termination or expiration date, or (B) the date of final
         delivery of all Products which are on order on the termination or
         expiration date. If BBI has not disposed of all Products by the end of
         the (90) day inventory liquidation period hereunder, BBI may (i) sell
         to JOE'S such remaining Products at the price paid by BBI pursuant to
         Section 6.1 hereinabove less 50%.


(c)      Termination of this Agreement shall not release either party from the
         obligation to make payment of all amounts then or thereafter due and
         payable and accrued prior to the termination of this Agreement;

10.      Indemnity.
         −−−−−−−−−−

10.1     BBI's Indemnity.
         −−−−−−−−−−−−−−−−

Except to the extent that the same can be shown to have been caused
substantially by JOE'S, BBI agrees to indemnify, defend and hold harmless JOE'S,
its officers, directors, shareholders, agents, and employees from and against
any and all obligations, liabilities, claims, demands, suits, actions, causes of
action, damages and expenses (including but not limited to reasonable attorneys'
fees and costs) caused by or arising from (a) advertising, promotion, marketing,
distribution or sale of the Products by BBI or any other activity undertaken by
BBI or its affiliated companies pursuant to this Agreement; (b) unauthorized

                                        −10−
use by BBI of the Trademarks or JOE'S trade secrets or other confidential information; (c) its
performance under this Agreement; and (d) compliance with law as set forth in this Agreement.

10.2     JOE'S Indemnity.
         −−−−−−−−−−−−−−−−

(a)      JOE'S agrees to indemnify, defend and hold harmless BBI, its officers,
         directors, shareholders, agents and employees from and against any and
         all obligations, liabilities, claims, demands, suits, actions, causes
         of action, damages and expenses (including reasonable attorneys' fees
         and costs) caused by or arising from (i) BBI's authorized use of the
         Trademarks in accordance with this Agreement; (ii) JOE'S conduct as a
         wholesaler of the Products; (iii) compliance with Product Regulations
         as set forth in Paragraph 11.2 hereof; or (iv) compliance with
         applicable labor laws by JOE'S or any of its manufacturers or
         contractors.

(b)      JOE'S shall also defend and hold BBI harmless from any claim or
         liabilities arising from any alleged defect in the Products, including,
         but not limited to, product liability and tort claims arising out of
         the Products or use of the Products.

11.      Compliance with Product Regulations and Law.
         −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

11.1     Definition.
         −−−−−−−−−−−


As used in this Section, "Product Regulations" shall mean all governmental and
quasi−governmental statutes, regulations and rules applicable to the Products, including without
limitation all safety and health oriented statutes, regulations and rules applicable to the
Products in the Territory.

11.2     Products.
         −−−−−−−−−


Notwithstanding the provisions in Paragraph 12 of this Agreement, JOE'S will be responsible for
causing the Products to be manufactured in accordance with all Product Regulations in the
Territory known to JOE'S. If BBI gives notice to JOE'S that any Product does not comply with any
Product Regulation in the Territory, JOE'S will promptly take such actions as may be reasonably
necessary or advisable to cure such noncompliance. If JOE'S, upon conferring with BBI,
determines that cure of the noncompliance for any given Product will be so difficult or costly
as to make such cure commercially unreasonable, JOE'S may terminate the Distribution Rights with
respect to specifically such Product, giving BBI as much advance notice as is legally and
practically possible.

11.3     Compliance with Law.
         −−−−−−−−−−−−−−−−−−−−

BBI shall take the necessary steps to encourage sub−distributors to comply with
all applicable laws, regulations, ordinances, decisions, and other issuances
having the effect of law in the Territory regarding the relationships and
transactions contemplated by this Agreement, including but not limited to the
importation, storage, warehousing, advertising, marketing, packaging, and other
aspects of selling and distributing the Products. Further, BBI will, as soon as
possible   following its notice thereof,      advise JOE'S of any change in
manufacturing, sale, packaging, labeling or other legal requirements with
respect to the sale and distribution of the Products in the Territory.

                                      −11−
14.      Miscellaneous.
         −−−−−−−−−−−−−−

14.1     Force Majeure.
         −−−−−−−−−−−−−−

Neither party shall be held responsible for damages caused by any delay or
default due to any contingency beyond its control preventing performance
hereunder,   including without limitation, war, terrorist acts, government
regulations, embargoes, export, shipping or remittance restrictions, strikes,
lockouts, accidents, fires, delays or defaults caused by carriers, floods or
governmental seizure, control or rationing. The party claiming Force Majeure
shall immediately notify the other party of the nature of the event of Force
Majeure, and its cause and possible consequences, and shall take all reasonably
possible steps necessary to minimize such delay; provided, however, that if any
party fails to perform as required under this Agreement for a period of
forty−five (45) days for any of the reasons set forth herein, the other party
may elect to terminate this Agreement with no further obligations hereunder.


14.2     Relationship.
         −−−−−−−−−−−−−

This Agreement does not make either party an employee, agent, partner, or legal
representative of the other party for any purpose whatsoever. Neither party is
granted any right or authority to assume or to create any obligation or
responsibility, express or implied, on behalf of or in the name of the other
party or to do anything for which the other party or any of its affiliated
companies may become directly or contingently liable. In fulfilling its
obligations pursuant to this Agreement, each party shall be acting as an
independent contractor.

14.3     Confidentiality
         −−−−−−−−−−−−−−−

Each party agrees that it shall not disclose, unless otherwise permitted herein
or required by law, to any third party and shall use for the sole purpose of
this Agreement any proprietary technical, economic, financial or marketing
information which it may receive from the other party pursuant to this
Agreement. The foregoing sentence does not apply to any information which (1) is
already known to the receiving party prior to the execution of this Agreement;
(2) becomes hereafter lawfully available to it from a third party without breach
of this Agreement; (3) is in or comes into the public domain without act or
fault of the receiving party; or (4) is acquired by the receiving party
independently of disclosure of the confidential information by the disclosing
party. In addition, neither party shall use any of the trade secrets or
confidential information of the other party for any purpose not specifically
authorized by this Agreement.

14.4     Assignment.
         −−−−−−−−−−−

BBI shall not assign or otherwise transfer any of its rights or obligations
under this Agreement except with the prior written consent of JOE'S.

14.5     Notices and Approvals.
         −−−−−−−−−−−−−−−−−−−−−−


All notices and approvals provided for herein shall be given in writing at the addresses set
forth below (or such other address as the party may have specified to the other party in writing
in accordance with this Paragraph 14.5, by personal delivery, facsimile with confirmation of
receipt or via courier:

                                      −12−
         If to JOE'S:               JOE'S JEANS, INC.
                                    5804 East Slauson Avenue
                                    Commerce, California 90040
                                    U.S.A.
                                    Attn: Samuel J. Furrow, Jr.
                                    And by Facsimile to: 323.201−3846

         And to:                    INNOVO GROUP INC.
                                    5804 E. Slauson Avenue
                                    Commerce, California 90040
                                    Attention : Samuel J. Furrow, Jr.
                                    And by Facsimile : 323.201−3846



         If to BBI:                 BEYOND BLUE, INC.
                                    815 Moraga Drive, Second Floor
                                    Los Angeles, California 90049
                                    Attn : Harry Haralambus
                                    And by Facsimile : 310.472−1327


Any notice given in accordance with this Section 14.5 shall be deemed to have been given on the
date of the addressee's receipt in the case of personal delivery or three (3) days aftersending
notice via courier or upon confirmed facsimile transmission.

14.6     Entire Agreement.
         −−−−−−−−−−−−−−−−−


This Agreement, constitute the entire agreement of the parties with respect to the subject
matter hereof, and supersedes all previous agreements by and between JOE'S and BBI as well as
all prior proposals, oral or written, and all prior negotiations, conversations or discussions
between the parties related to this Agreement. Each of JOE'S and BBI acknowledges that it has
not been induced to enter into this Agreement by any representations or statements, oral or
written, not expressly contained herein, and that no other agreement, statement or promise not
contained in this Agreement shall be valid or binding.

14.7     Amendment.
         −−−−−−−−−−


This Agreement shall not be deemed or construed to be modified, amended, rescinded, cancelled
or waived, in whole or in part, except by written amendment signed by the parties.

14.8     Publicity.
         −−−−−−−−−−


This Agreement is confidential and no party shall issue press releases or engage in other types
of publicity of any nature dealing with the commercial and legal details of this Agreement
without the other party's prior written approval, which approval shall not be unreasonably
withheld. However, approval of such disclosure shall be deemed to be given to the extent such
disclosure is required to comply with governmental rules, regulations or other governmental
requirements. In such event, the publishing party shall furnish a copy of such disclosure to the
other party prior to the disclosure and give the other party as much notice as reasonably
possible and the opportunity to comment on the contents thereof and take such

                                      −13−
other action as may be legally     permissible   to   prevent   the   disclosure   or
otherwise protect its interests.

14.9     Severability.
         −−−−−−−−−−−−−


If any term, provision, covenant or condition of this Agreement is held by a court of competent
jurisdiction or other competent authority to be invalid, void or unenforceable, the remainder
of the provisions shall remain in full force and effect and shall in no way be affected,
impaired or invalidated by the such term, provision, covenant or condition.

14.10    Counterparts.
         −−−−−−−−−−−−−


This Agreement shall be executed in two or more counterparts in the English language, and each
such counterpart shall be deemed an original hereof. In case of any conflict between the English
version and any translated version of this Agreement, the English version shall govern.

14.11    Waiver.
         −−−−−−−

Failure of either party to enforce at any time any of the provision of this
Agreement or any right with respect hereto or failure to exercise any
provisions, rights or elections provided for herein shall in no way be
considered to be a waiver of such provisions, rights or elections or in no way
affect the validity of this Agreement. The failure of either party to exercise
any of the said provision, rights or election shall not preclude or prejudice
such party from later enforcing or exercising the same or any other provisions,
rights or elections which it may have under this Agreement.

14.12    Arbitration.
         −−−−−−−−−−−−

(a)      All disputes,    claims and controversies concerning the validity,
         interpretation, performance or breach of this Agreement shall, if not
         amicably solved by the parties hereto, be referred to arbitration in
         Los Angeles, California under the then current Commercial Arbitration
         Rules for International     Commercial  Arbitration of the American
         Arbitration Association (the "Rules"). In the event of any conflict
         between the Rules and this paragraph, the provisions of this paragraph
         shall govern.

(b)      Each party shall appoint one arbitrator within thirty (30) days after
         receipt by the respondent of the demand for arbitration, and the two
         arbitrators appointed by the parties shall, within thirty (30) days
         after their appointment, appoint a third presiding arbitrator. If
         either party fails to nominate an arbitrator, or if the two arbitrators
         appointed by the parties are unable to appoint a presiding arbitrator
         within the stated periods, the second or presiding arbitrator, as the
         case may be, shall be appointed according to the procedures of Rule 13
         of the Rules. All arbitrators shall be fluent in English and all
         hearings shall be conducted in the English language.

(c)      The arbitrators shall, by majority vote, tender a written decision
         stating reasons therefor. Any cash award shall be payable in United
         States dollars, net of fees, taxes and other charges. The prevailing
         party shall be entitled to recover its share of the costs and
         reasonable attorneys' fees, as determined by the arbitrators.

                                      −14−
(d)      The award shall include interest from the date of any damages incurred
         for breach or other violation of the Agreement, and from the date of
         the award until paid in full, at a rate to be fixed by the
         arbitrator(s), but in no event less than the London Interbank Offering
         Rate (LIBOR) per annum quoted for the corresponding period by The Wall
         Street Journal in U.S. Dollars for immediately available funds.


(e)      The arbitration award shall be final and binding upon the parties
         hereto, any third party beneficiaries hereof and their respective
         successors, assigns, heirs and legal representatives. Judgment upon the
         arbitration award may be entered and execution had in any court of
         competent jurisdiction or application may be made to such court for a
         judicial acceptance of the award and an order of enforcement.

(f)      The parties expressly waive their rights to submit matters in dispute
         to the courts in California and furthermore, hereby expressly waive any
         recourse against the decisions of the arbitration panel, including the
         final award, except as may be needed to enforce the decisions or awards
         of the arbitration panel as set forth below.

(g)      Notwithstanding the parties' agreement to arbitrate herein, the parties
         hereby agree and acknowledge that money damages may not be an adequate
         remedy for any breach of the provisions of this Agreement and any party
         hereto in its sole discretion may apply to the Federal District Court
         sitting in Los Angeles County, California or any other court of law or
         equity of competent jurisdiction for specific performance and/or
         injunctive relief (without posting a bond or other security) in order
         to enforce or prevent any violation of the provisions of this
         Agreement.

14.13    Cost and Expense.
         −−−−−−−−−−−−−−−−−


In the event of any dispute arising out of or relating to this Agreement, whether suit or other
proceeding is commenced or not, and whether in mediation, arbitration, at trial, on appeal, in
administrative proceedings or in bankruptcy (including without limitation any adversary
proceeding or contested matter in any bankruptcy case), each party shall pay its own costs and
expenses incurred, including attorneys' fees.

14.14    Governing Law.
         −−−−−−−−−−−−−−

This Agreement shall be governed by, and interpreted and construed in accordance
with, the laws of the State of California.

                                      −15−
IN WITNESS WHEREOF,    the parties have executed this   Agreement,   as of the date
first written above.



                                         JOE'S JEANS, INC.




                                         By:/s/ Joe Dahan
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                         Name
                                         Printed: Joe Dahan
                                                 −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                         Title: President
                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−




                                         BEYOND BLUE, INC.


                                         By:/s/ Harry Haralambus
                                            −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                         Name
                                         Printed: Harry Haralambus
                                                 −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                         Title:
                                               −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−


                                       −16−

</TEXT>
</DOCUMENT>
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                INNOVO GROUP INC.



                       CODE OF BUSINESS CONDUCT AND ETHICS


−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−




                                Table of Contents


Foreword....................................................................iii

Introduction..................................................................1

Compliance with Laws..........................................................2
         Antitrust Laws.......................................................3
         Anticorruption Laws..................................................3
         Securities Laws and Insider Trading..................................4
         Import−Export Laws and Antiboycott Laws..............................5

Conflicts of Interest.........................................................5
         Doing Business with Family Members...................................6
         Ownership in Other Businesses........................................7
         Outside Employment...................................................7
         Service on Boards....................................................8
         Business Opportunities...............................................8
         Loans................................................................8

Gifts and Entertainment.......................................................8
         Accepting Gifts and Entertainment....................................9
         Giving Gifts and Entertaining........................................9

Fair Dealing..................................................................9

Responding to Inquiries from the Press and Others............................10

Political Activity...........................................................10

Safeguarding Corporate Assets................................................10

Equal Employment Opportunity and Anti−Harassment.............................11

Health, Safety and the Environment...........................................12

Accuracy of Company Records..................................................12

Record Retention.............................................................13

Administration of the Code...................................................13
         Distribution........................................................13
         Role of Supervisors and Officers....................................14
         Reporting Violations................................................14
         Investigations/Corrective Action....................................14
         No Retaliation......................................................14
         Approvals...........................................................14
         Waivers.............................................................14
         Certifications......................................................15
         Asking for Help and Reporting Concerns..............................15

Asking for Help and Reporting Concerns.......................................15

                                       i
Note: This code and related policies are current as of May 31, 2003. In adopting and publishing
these guidelines, you should note that (1) in some respects our policies may exceed minimum
legal requirements or industry practice, and (2) nothing contained in this code should be
construed as a binding definition or interpretation of a legal requirement or industry practice.

To obtain additional copies of this code, you may contact the director of human
resources or access it from the web at http://www.innovogroup.com.


                                       ii
                                    Foreword

To all employees:

         Our company is founded on our commitment to the highest ethical
principles and standards. We value honesty and integrity above all else.
Upholding these commitments is essential to our success.


The law and the ethical principles and standards that comprise this code of conduct must guide
our actions. The code is, of course, broadly stated. Its guidelines are not intended to be a
complete listing of detailed instructions for every conceivable situation. Instead, it is
intended to help you develop a working knowledge of the laws and regulations that affect your
job.

         Adhering to this code is essential. I have personally taken the time to
study it carefully and I encourage you to do the same. I have also signed a
statement confirming that I have read this code carefully, and I expect you to
do the same by signing the confirmation form that appears on the final page.


Ultimately, our most valuable asset is our reputation. Complying with the principles and
standards contained in this code is the starting point for protecting and enhancing that
reputation. Thank you for your commitment.


                                        Samuel J. (Jay) Furrow, Jr.
                                        Chief Executive Officer



                                      iii
Introduction

         All of our employees, officers and directors must read and use this
code of conduct to ensure that each business decision follows our commitment to
the highest ethical standards and the law. Adherence to this code and to our
other official policies is essential to maintaining and furthering our
reputation for fair and ethical practices among our customers, shareholders,
employees and communities.

         It is the responsibility of every one of us to comply with all
applicable laws and regulations and all provisions of this code and the related
policies and procedures. Each of us must report any violations of the law or
this code. Failure to report such violations and failure to follow the
provisions of this code may have serious legal consequences and will result in
discipline up to and including termination of your employment.


This code summarizes certain laws and the ethical policies that apply to all of our employees,
officers and directors. Several provisions in this code refer to more detailed policies that
either (1) concern more complex company policies or legal provisions or (2) apply to select
groups of individuals within our company. If these detailed policies are applicable to you, it
is important that you read, understand, and be able to comply with them. If you have questions
as to whether any detailed policies apply to you, contact your immediate supervisor or our
compliance officer.1

         Situations that involve ethics, values and violations of certain laws
are often very complex. No single code of conduct can cover every business
situation that you will encounter. Consequently, we have implemented the
compliance procedures outlined in the sections of this code entitled
"Administration of the Code" and "Asking for Help and Reporting Concerns." The
thrust of our procedures is when in doubt, ask. If you do not understand a
provision of this code, are confused as to what actions you should take in a
given situation, or wish to report a violation of the law or this code, you
should follow those compliance procedures. Those procedures will generally
direct you to talk to either your immediate supervisor or our compliance
officer. There are few situations that cannot be resolved if you discuss them
with your immediate supervisor or our compliance officer in an open and honest
manner.

         After reading this code, you should:

         o        have a thorough knowledge of the code's terms and provisions;

         o        be able to recognize situations that present legal or ethical
                  dilemmas; and

         o        be able to deal effectively with questionable situations in
                  conformity with this code.

         In order to be able to accomplish these goals, we recommend that you
take the following steps:

         o        read the entire code of conduct thoroughly;

−−−−−−−−−−
1 Our initial compliance officer shall be Shane Whalen, Chief Operating Officer.
         o        if there are references to more detailed policies that are not
                  contained in this code, obtain and read those policies if they
                  apply to you;

         o        think about how the provisions of this code apply to your job,
                  and consider how you might handle situations to avoid illegal,
                  improper, or unethical actions; and

         o        if you have questions, ask your immediate supervisor or our
                  compliance officer.

         When you are faced with a situation and you are not clear as to what
action you should take, ask yourself the following questions:

         o        Is the action legal?

         o        Does the action comply with this code?

         o        How will your decision affect others, including our customers,
                  shareholders, employees and the community?

         o        How will your decision look to others? If your action is legal
                  but can result in the appearance of wrongdoing, consider
                  taking alternative steps.

         o        How would you feel if your decision were made public? Could
                  the decision be honestly explained and defended?

         o        Have you contacted your immediate supervisor or our compliance
                  officer regarding the action?

To reiterate, when in doubt, ask.

         Please note that this code is not an employment contract and does not
modify the employment relationship between us and you. We do not create any
contractual or legal rights or guarantees by issuing these policies, and we
reserve the right to amend, alter and terminate policies at any time and for any
reason.



Compliance with Laws
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         First and foremost, our policy is to behave in an ethical manner and
comply with all laws, rules and government regulations that apply to our
business. Although we address several important legal topics in this code, we
cannot anticipate every possible situation or cover every topic in detail. It is
your responsibility to know and follow the law and conduct yourself in an
ethical manner. It is also your responsibility to report any violations or
suspected violations of the law or this code by following the compliance
procedures contained in the section of the code entitled "Asking for Help and
Reporting Concerns."

                                         2
Antitrust Laws

         Antitrust laws are designed to ensure a fair and competitive
marketplace by prohibiting various types of anticompetitive behavior. Some of
the most serious antitrust offenses occur between competitors, such as
agreements to fix prices or to divide customers, territories or markets.
Accordingly, it is important to avoid discussions with our competitors regarding
pricing, terms and conditions, costs, marketing plans, customers and any other
proprietary or confidential information. Foreign countries often have their own
body of antitrust laws, so if our operations expand outside the United States
these operations may also be subject to the antitrust laws of other foreign
countries.


Unlawful agreements need not be written. They can be based on informal discussions or the mere
exchange of information with a competitor. If you believe that a conversation with a competitor
enters an inappropriate area, end the conversation at once. Membership in trade associations is
permissible only if approved in advance by our Compliance Officer.

         Whenever any question arises as to application of antitrust laws, you
should consult with legal counsel, and any agreements with possible antitrust
implications should be made only with the prior approval of legal counsel.

Anticorruption Laws


Conducting business with governments is not the same as conducting business with private
parties. What may be considered an acceptable practice in the private business sector may be
improper or illegal when dealing with government officials. Improper or illegal payments to
government officials are prohibited. "Government officials" includes employees of any
government anywhere in the world, even low−ranking employees or employees of
government−controlled entities, as well as political parties and candidates for political
office. If you deal with such persons or entities, you should consult with our Compliance
Officer to be sure that you understand these laws before providing anything of value to a
government official.

         If you become involved in transactions with foreign government
officials, you must comply not only with the laws of the country with which you
are involved but also with the U.S. Foreign Corrupt Practices Act. This act
makes it illegal to pay, or promise to pay money or anything of value to any
non−U.S. government official for the purpose of directly or indirectly obtaining
or retaining business. This ban on illegal payments and bribes also applies to
agents or intermediaries who use funds for purposes prohibited by the statute.


In some countries it is permissible to pay government employees for performing certain required
duties. These facilitating payments, as they are known, are small sums paid to facilitate or
expedite routine, non−discretionary government actions, such as obtaining phone service or an
ordinary license. In contrast, a bribe, which is never permissible, is giving or offering to
give anything of value to a government official to influence a discretionary decision.
Understanding the difference between a bribe and a facilitating payment is very important. If
you are ever involved in a foreign transaction, you must have approval from our Compliance
Officer before making any payment or gift to a foreign government official.

                                       3
Securities Laws and Insider Trading

         Because we are a public company, we are subject to a number of laws
concerning the purchase and sale of our stock and other publicly traded
securities. Regardless of your position with us, if you are aware of what is
known as "material non−public information" regarding our company, business,
affairs or prospects, you may not disclose that information to anyone outside
our company, and you are not allowed to buy or sell our stock or other
publicly−traded securities until the material non−public information is known
not only by individuals within our company, but also by the general public. The
improper use of material non−public information is known as insider trading.
Insider trading is a criminal offense and is strictly prohibited.


"Material non−public information" is any information concerning us that is not available to the
general public and which an investor would likely consider to be important in making a decision
whether to buy, sell or hold our stock or other securities. A good rule of thumb to determine
whether information about us is material non−public information is whether or not the release
of that information to the public would have an effect on the price of our stock. Examples of
material non−public information include information concerning earnings estimates, changes in
previously released earnings estimates, a pending stock split, dividend changes, significant
merger, acquisition or disposition proposals, major litigation, the loss or acquisition of a
major contract and major changes in our management. Material non−public information is no
longer deemed "non−public" information once it is publicly disclosed and the market has had
sufficient time to absorb the information. Examples of effective public disclosure are the
filing of such non−public information with the Securities and Exchange Commission, or the
printing of such information in The Wall Street Journal or other publications of general
circulation, in each case giving the investing public a fair amount of time to absorb and
understand our disclosures.

         In addition to being prohibited from buying or selling our stock or
other publicly−traded securities when you are in possession of material
non−public information, you are also prohibited from disclosing such information
to anyone else (including friends and family members) in order to enable them to
trade on the information. In addition, if you acquire material non−public
information about another company due to your relationship with us, you may not
buy or sell that other company's stock or other securities until such
information is publicly disclosed and sufficiently disseminated into the
marketplace.

         The following are general guidelines to help you comply with our
insider trading policy:

         o        Do not share material non−public information with people
                  within our company whose jobs do not require them to have the
                  information.

         o        Do not disclose any non−public information, material or
                  otherwise, concerning our company to anyone outside our
                  company unless required as part of your duties and the person
                  receiving the information has a reason to know the information
                  for company business purposes.

         o        If you have material non−public information regarding us, or
                  regarding any other publicly traded company that you obtained
                  from your employment or relationship with us, you must not buy
                  or sell, or advise anyone else to buy or sell, our securities
                  or that other

                                       4
                  company's securities, until such information is publicly
                  disclosed and sufficiently disseminated into the marketplace.


Penalties for trading on or communicating material non−public information are severe. If you are
found guilty of an insider trading violation, you can be subject to civil and even criminal
liability. In addition to being illegal, we believe that insider trading is unethical and will
be dealt with firmly, which may include terminating your employment with us and reporting
violations to appropriate authorities.

         For more information about our policies concerning the securities laws,
you should refer to our more detailed Insider Trading Policy and Procedures. Our
directors, executive officers and certain other designated employees are also
subject to a supplemental policy concerning insider trading. These policies are
available from our compliance officer. If you have any questions concerning the
securities laws or about our policies with regard to those laws, or regarding
the correct ethical and legal action to take in a situation involving material
non−public information, please contact your immediate supervisor or our
compliance officer.

Import−Export Laws and Antiboycott Laws


Our company is committed to complying fully with all applicable U.S. laws governing imports,
exports and the conduct of business with non−U.S. entities. These laws contain limitations on
the types of products that may be imported into the United States and the manner of
importation. They also prohibit exports to, and most other transactions with, certain countries
as well as cooperation with or participation in foreign boycotts of countries that are not
boycotted by the United States.

         This discussion is not comprehensive and you are expected to
familiarize yourself with all laws and regulations relevant to your position
with us, as well as all our related written policies on these laws and
regulations. To this end, our compliance officer is available to answer your
calls and questions. If you have any questions concerning any possible reporting
or compliance obligations, or with respect to your own duties under the law, you
should not hesitate to call and seek guidance from our compliance officer.



Conflicts of Interest
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         All of us must be able to perform our duties and exercise judgment on
behalf of our company without influence or impairment, or the appearance of
influence or impairment, due to any activity, interest or relationship that
arises outside of work. Put more simply, when our loyalty to our company is
affected by actual or potential benefit or influence from an outside source, a
conflict of interest exists. We should all be aware of any potential influences
that impact or appear to impact our loyalty to our company. In general, you
should avoid situations where your personal interests conflict, or appear to
conflict, with those of our company.

         Any time you believe a conflict of interest may exist, you must
disclose the potential conflict of interest to our compliance officer. Any
activity that is approved, despite the actual or

                                       5
apparent conflict, must be documented. A potential conflict of interest that involves an
executive officer must be approved by our Board of Directors or its designated committee. A
potential conflict of interest involving an officer with the title of Vice President and above,
other than executive officers, must be approved by our compliance officer.

It is not possible to describe every conflict of interest, but some situations
that could cause a conflict of interest include:

         o        doing business with family members,

         o        having a financial interest in another company with whom we do
                  business,

         o        taking a second job,

         o        managing your own business,

         o        serving as a director of another business,

         o        being a leader in some organizations, or

         o        diverting a business opportunity from our company to another
                  company.

Doing Business with Family Members

         A conflict of interest may arise if family members work for a supplier,
customer or other third party with whom we do business. It also may be a
conflict if a family member has a significant financial interest in a supplier,
customer or other third party with whom we do business. A "significant financial
interest" is defined below. Before doing business on our behalf with an
organization in which a family member works or has a significant financial
interest, an employee must disclose the situation to our compliance officer and
discuss it with him or her. Document the approval if it is granted. If the only
interest you have in a customer, supplier or other third party is because a
family member works there, then you do not need to disclose the relationship or
obtain prior approval unless you deal with the customer, supplier or other third
party.

"Family members" include your:

         o        spouse                  o     brothers or sisters

         o        parents                 o     in−laws

         o        children                o      life partner


Employing relatives or close friends who report directly to you may also be a conflict of
interest. Although our company encourages employees to refer candidates for job openings,
employees who may influence a hiring decision must avoid giving an unfair advantage to anyone
with whom they have a personal relationship. In particular, supervisors should not hire
relatives or attempt to influence any decisions about the employment or advancement of people
related to

                                         6
or otherwise close to them, unless they have disclosed the relationship to our
compliance officer who has approved the decision.

Ownership in Other Businesses


Our investments can cause a conflict of interest. In general, you should not own, directly or
indirectly, a significant financial interest in any company that does business with us or seeks
to do business with us. You also should not own a significant financial interest in any of our
competitors.

         Two tests determine if a "significant financial interest" exists:

         o        you or a family member owns more than 1% of the outstanding
                  stock of a business or you or a family member has or shares
                  discretionary authority with respect to the decisions made by
                  that business, or

         o        the investment represents more than 5% of your total assets or
                  of your family member's total assets.


If you or a family member has a significant financial interest in a company with whom we do
business or propose to do business, that interest must be approved by our compliance officer
prior to the transaction.

         Notwithstanding the foregoing, non−employee directors of our company
and their family members may have significant financial interests in or be
affiliates of suppliers, customers, competitors and third parties with whom we
do business or propose to do business. However, a director must:

         o        disclose any such relationship promptly after the director
                  becomes aware of it,

         o        remove himself or herself from any Board activity that
                  directly impacts the relationship between our company and any
                  such company with respect to which the director has a
                  significant financial interest or is an affiliate, and

         o        obtain prior approval of the Board of Directors or its
                  designated committee for any transaction of which the director
                  is aware between our company and any such company.

Outside Employment


Sometimes our employees desire to take additional part−time jobs or do other work after hours,
such as consulting or other fee−earning services. This kind of work does not in and of itself
violate our code. However, the second job must be strictly separated from your job with us, and
must not interfere with your ability to devote the time and effort needed to fulfill your
duties to us as our employee. You cannot engage in any outside activity that causes competition
with us or provides assistance to our competitors or other parties (such as suppliers) with whom
we regularly do business. You should avoid outside activities that embarrass or discredit us.
Outside work may never be done on company time and must not involve the use of our supplies

                                       7
or equipment. Additionally, you should not attempt to sell services or products
from your second job to us.

         Before engaging in a second line of work, you should disclose your
plans to your immediate supervisor or our compliance officer to confirm that the
proposed activity is not contrary to our best interests. You may also contact
our director of human resources for more information about our policies
concerning outside employment.

Service on Boards


Serving as a director of another corporation may create a conflict of interest. Being a director
or serving on a standing committee of some organizations, including government agencies, also
may create a conflict.

         Before accepting an appointment to the board or a committee of any
organization whose interests may conflict with our company's interests, you must
discuss it with our compliance officer and obtain his or her approval. This rule
does not apply to non−employee directors of our company.

Business Opportunities


Business opportunities relating to the kinds of products and services we usually sell or the
activities we typically pursue that arise during the course of your employment or through the
use of our property or information belong to us. Similarly, other business opportunities that
fit into our strategic plans or satisfy our commercial objectives that arise under similar
conditions also belong to us. You may not direct these kinds of business opportunities to our
competitors, to other third parties or to other businesses that you own or are affiliated with.

Loans

         Unlawful extensions of credit by our company in the form of personal
loans to our executive officers and directors are prohibited. All other loans by
our company to, or guarantees by our company of obligations of, officers with
the title of Vice President or above must be made in accordance with established
company policies approved by our board of directors or its designated committee.



Gifts and Entertainment
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−


We are dedicated to treating fairly and impartially all persons and firms with whom we do
business. Therefore, our employees must not give or receive gifts, entertainment or gratuities
that could influence or be perceived to influence business decisions. Misunderstandings can
usually be avoided by conduct that makes clear that our company conducts business on an ethical
basis and will not seek or grant special considerations.

                                       8
Accepting Gifts and Entertainment

         You should never solicit a gift or favor from those with whom we do
business. You may not accept gifts of cash or cash equivalents.


You may accept novelty or promotional items or modest gifts related to commonly recognized
occasions, such as a promotion, holiday, wedding or retirement, if:

         o        this happens only occasionally,

         o        the gift was not solicited,

         o        disclosure of the gift would not embarrass our company or the
                  people involved, and

         o        the value of the gift is under $250.

         You may accept an occasional invitation to a sporting activity,
entertainment or meal if:

         o        there is a valid business purpose involved,

         o        this happens only occasionally,

         o        the activity is of reasonable value and not lavish.

         A representative of the giver's company should be present at the event.

Giving Gifts and Entertaining


Gifts of nominal value (under $250) and reasonable entertainment for customers, potential
customers and other third parties with whom we do business are permitted. However, any gift or
entertainment must:

         o        support our company's legitimate business interests,

         o        be reasonable and customary, not lavish or extravagant, and

         o        not embarrass our company or the recipient if publicly
                  disclosed.


Under no circumstances can any bribe, kickback, or illegal payment or gift of cash or cash
equivalents be made. Also, special rules apply when dealing with government employees. These are
discussed in this code under "Compliance with Laws − Anticorruption Laws."

Fair Dealing
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We are committed to maintaining the highest levels of integrity and fairness within our company.
Any failure to negotiate, perform or market in good faith, may result in serious

                                       9
damage to our reputation and loss of the loyalty of our customers. You must conduct business
honestly and fairly and not take unfair advantage of anyone through any misrepresentation of
material facts, manipulation, concealment, abuse of privileged information, fraud or other
unfair business practice.

Responding to Inquiries from the Press and Others
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         Our company is subject to laws that govern the timing of our
disclosures of material information to the public and others. Only certain
designated employees may discuss our company with the news media, securities
analysts and investors. All inquiries from outsiders regarding financial or
other information about our company should be referred to the Chairman, Chief
Executive Officer, President, Chief Operating Officer, or Chief Financial
Officer.


Political Activity
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         Our funds may not be used for contributions of any kind to any
political party or committee or to any candidate or holder of any government
position (national, state or local).

         It is against our policy for you to lobby our other employees on behalf
of a political candidate during the work day. It is also against our policy to
reimburse an employee for any political contributions or expenditures. Outside
normal office hours, you are free to participate in political campaigns on
behalf of candidates or issues of your choosing, as well as make personal
political contributions.


Safeguarding Corporate Assets
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We have a responsibility to protect company assets entrusted to us from loss, theft, misuse and
waste. Company assets and funds may be used only for business purposes and may never be used for
illegal purposes. Incidental personal use of telephones, fax machines, copy machines, personal
computers, e−mail and similar equipment is generally allowed if it is occasional, there is no
significant added cost to us, it does not interfere with your work responsibilities and is not
related to an illegal activity or outside business. If you become aware of theft, waste or
misuse of our assets or funds or have any questions about your proper use of them, you should
speak immediately with your immediate supervisor or our compliance officer.

         It is also important that you protect the confidentiality of company
information. Confidential or proprietary information includes all information
that is not generally known to the public and is helpful to the company, or
would be helpful to competitors. Proprietary

                                       10
information should be marked accordingly, kept secure and access limited to
those who have a need to know in order to do their jobs.


Our business relations are built on trust, and third parties with whom we do business count on
that trust. If you learn information from them that is not otherwise public, you should keep
that information confidential also.

         We must all be sensitive to the impact of comments made over the
Internet through public forums such as chat rooms and bulletin boards. In such
forums, you may not post any information about the company including comments
about our products, stock performance, operational strategies, financial
results, customers or competitors, even in response to a false statement or
question. This applies whether you are at work or away from the office. Our
company owns all e−mail messages that are sent from or received through the
company's systems. We may monitor your messages and your messages may be
disclosed under certain circumstances such as in the event of litigation or
governmental inquiries.


Equal Employment Opportunity and Anti−Harassment
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−


We are committed to providing equal employment opportunities for all our employees and will not
tolerate any speech or conduct that is intended to, or has the effect of, discriminating against
or harassing any qualified applicant or employee because of his or her race, color, religion,
sex (including pregnancy, childbirth or related medical conditions), sexual orientation,
marital status, national origin, age, physical or mental disability, veteran status or any
characteristic protected by law. We will not tolerate discrimination or harassment by anyone −
managers, supervisors, co−workers, vendors or our customers. The phases of the employment
process, to which this policy extends include, but are not limited to, recruiting, hiring,
placement, promotion, compensation, benefits, layoffs, discipline, discharge, company−supported
training, educational tuition assistance and company−sponsored programs, as applicable.

          If you observe conduct that you believe is discriminatory or
harassing, or if you feel you have been the victim of discrimination or
harassment, you should notify the director of human resources, our compliance
officer or any executive officer immediately. For more information concerning
our anti−discrimination and anti−harassment policies and the procedure for
making a complaint under them, you should refer to the Employee Handbook or
contact the Human Resources Department.


We will not tolerate any retaliatory action against any employee for filing a complaint under
our anti−discrimination and anti−harassment policies or for assisting in any investigation
conducted pursuant to such policies. To the fullest extent possible, the Company will keep
complaints and the terms of their resolution confidential. If an investigation confirms that
harassment or discrimination has occurred, the Company will take corrective action against the
offending individual, including discipline up to and including immediate termination of
employment, as appropriate.

                                       11
The director of human resources has been assigned specific responsibilities for implementing and
monitoring our equal opportunity policies. One of the tenets of this code, however, is that all
employees are accountable for promoting equal opportunity practices within our company. We must
do this not just because it is the law, but because it is the right thing to do.

Health, Safety and the Environment
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         We are committed to providing safe and healthy working conditions by
following all occupational health and safety laws governing our activities.

         We believe that management and each and every employee have a shared
responsibility in the promotion of health and safety in the workplace. You
should follow all safety laws and regulations, as well as company safety
policies and procedures. You should immediately report any accident, injury or
unsafe equipment, practices or conditions.

         You also have an obligation to carry out company activities in ways
that preserve and promote a clean, safe, and healthy environment. You must
strictly comply with the letter and spirit of applicable environmental laws and
the public policies they represent.


The consequences of failing to adhere to environmental laws and policies can be serious. Our
company, as well as individuals, may be liable not only for the costs of cleaning up pollution,
but also for significant civil and criminal penalties. You should make every effort to prevent
violations from occurring and report any violations to your immediate supervisor or our
compliance officer.

Accuracy of Company Records
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         All information you record or report on our behalf, whether for our
purposes or for third parties, must be done accurately and honestly. All of our
records (including accounts and financial statements) must be maintained in
reasonable and appropriate detail, must be kept in a timely fashion, and must
appropriately reflect our transactions. Falsifying records or keeping unrecorded
funds and assets is a severe offense and may result in prosecution or loss of
employment. When a payment is made, it can only be used for the purpose spelled
out in the supporting document.


Information derived from our records is provided to our investors as well as government
agencies. Thus, our accounting records must conform not only to our internal control and
disclosure procedures but also to generally accepted accounting principles and other laws and
regulations, such as those of the Internal Revenue Service and the Securities and Exchange
Commission. Our public communications and the reports we file with the Securities and

                                       12
Exchange Commission and other government agencies should contain information that is full,
fair, accurate, timely and understandable in light of the circumstances surrounding disclosure.

         Our internal and external auditing functions help ensure that our
financial books, records and accounts are accurate. Therefore, you should
provide our accounting department, internal auditors, audit committee and
independent public accountants with all pertinent information that they may
request. We encourage open lines of communication with our audit committee,
accountants and auditors and require that all our personnel cooperate with them
to the maximum extent possible. It is unlawful for you to fraudulently
influence, induce, coerce, manipulate or mislead our independent public
accountants for the purpose of making our financial statements misleading.

         If you are unsure about the accounting treatment of a transaction or
believe that a transaction has been improperly recorded or you otherwise have a
concern or complaint regarding an accounting matter, our internal accounting
controls, or an audit matter, you should confer with our compliance officer, the
Vice President/Controller or our Chief Financial Officer, or you may submit your
concern, on an anonymous basis, to the audit committee of our board of
directors.


Record Retention
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−


Our records should be retained or discarded in accordance with our record retention policies and
all applicable laws and regulations. From time to time we are involved in legal proceedings that
may require us to make some of our records available to third parties. Our legal counsel will
assist us in releasing appropriate information to third parties and provide you (or your
immediate supervisor or our compliance officer) with specific instructions. It is a crime to
alter, destroy, modify or conceal documentation or other objects that are relevant to a
government investigation or otherwise obstruct, influence or impede an official proceeding. The
law applies equally to all of our records, including formal reports as well as informal data
such as e−mail, expense reports and internal memos. If the existence of a subpoena or a pending
government investigation is known or reported to you, you should immediately contact our
Compliance Officer and you must retain all records that may pertain to the investigation or be
responsive to the subpoena. For further information, you should refer to our Document Retention
Policy, which is available from our compliance officer.

Administration of the Code
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

Distribution

         All of our directors, officers and employees will receive a copy of
this code when they join our company. Updates of the code will be distributed to
all directors, officers and employees.

                                       13
Role of Supervisors and Officers


Supervisors and officers have important roles under this code and are expected to demonstrate
their personal commitment to this code by fostering a workplace environment that promotes
compliance with the code and by ensuring that employees under their supervision participate in
our company's compliance training programs.

Reporting Violations


All employees are obliged to report violations or suspected violations of this code or the law
and to cooperate in any investigations conducted under this code. We prefer that you give your
identity when reporting violations or suspected violations, to allow the company to contact you
in the event further information is needed to pursue an investigation, and your identity will
be maintained in confidence to the extent practicable under the circumstances and consistent
with enforcing this code and applicable law. However, you may anonymously report violations or
suspected violations. Please refer to the section on page 15 entitled "Asking for Help and
Reporting Concerns" and the individual sections in this code for information about where to
report violations or suspected violations.

Investigations/Corrective Actions


We will initiate a prompt investigation following any credible indication that a breach of law
or this code may have occurred. We will also initiate appropriate corrective action as we deem
necessary, which may include notifying appropriate authorities/or imposing disciplinary action,
up to and including discharge. If you are involved in a violation of this code, the fact that
you reported the violation, together with the degree of cooperation displayed by you and whether
the violation is intentional or unintentional, will be given consideration in our investigation
of the violation and any resulting disciplinary action. Violations of this code and applicable
law may also result in the imposition of civil and criminal penalties. For example, if you
commit a violation that results in monetary loss to the company, we may seek civil remedies from
you, and you may be required to reimburse us for that loss.

No Retaliation


We will not tolerate any retaliatory action against any employee who notifies us of a possible
violation of law or this code, including any act of discrimination, harassment or intimidation
against such employee. In addition, we adhere to all applicable "whistleblower" laws that are
designed to protect employees from retaliatory action for providing information to us,
governmental authorities or in connection with official proceedings under certain
circumstances, with respect to certain laws such as those governing workplace safety, the
environment, securities fraud and federal law relating to fraud against shareholders.

Approvals

          Approvals required under this code should be documented.


Waivers

                                        14
         Any request for a waiver of this code must be submitted in writing or
by e−mail to our compliance officer who has authority to decide whether to grant
a waiver. However, a waiver of any provision of this code for a director or an
executive officer must be approved by our Board of Directors or its designated
committee and will be promptly disclosed to the extent required by law or
regulation.

Certifications


All new employees must sign a certificate confirming that they have read and understand this
code. We will also require an annual certification of compliance with the code by all officers
with the title of Vice President or above. However, failure to read the code or sign a
confirmation certificate does not excuse you from complying with this code.

Asking for Help and Reporting Concerns
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

         We take this code very seriously and consider its enforcement to be
among our highest priorities, but we also acknowledge that it is sometimes
difficult to know right from wrong. That is why we encourage open communication.
When in doubt, ask. Whenever you have a question or concern, are unsure about
what the appropriate course of action is, or if you believe that a violation of
the law or this code has or may have occurred:

         o        You should talk with your immediate supervisor, assuming that
                  you are comfortable doing so under the circumstances. He or
                  she may have the information you need, or may be able to refer
                  the matter to an appropriate source, including legal counsel
                  as circumstances warrant.

         o        As an alternative or in addition to your immediate supervisor,
                  you may also contact our compliance officer with questions,
                  concerns, or information regarding violations or suspected
                  violations of this code.

         o        If you have concerns or complaints about accounting or audit
                  matters or our internal accounting controls, you may also
                  confer with our Chief Financial Officer, or if you feel more
                  comfortable, you may submit your concern or complaint, on an
                  anonymous basis, to the audit committee of our board of
                  directors by telephoning our employee hotline service at (866)
                  803−1540.

         o        For certain provisions within this code, the Human Resources
                  Director also a resource to whom questions, concerns, or
                  complaints may be directed.


To ensure appropriate handling of questions, concerns, or reports of violations or suspected
violations under this code, the above provides information about where to direct such matters.
However, consistent with the "when in doubt, ask" approach, if a situation arises under this
code that you believe must be discussed with someone other than the above

                                       15
sources, you should raise the issue with an executive officer of the company,
rather than to refrain from seeking or providing the information.



                                       16




                           o        Helpful Phone Numbers



Compliance Officer                     Shane Whalen               323−278−6764

Director of Human Resources            Jennifer Grant             323−725−5572

Chief Executive Officer                Jay Furrow                 323−725−5510

Chief Financial Officer                Marc Crossman              323−725−5530



                                       17
                            Confirmation Certificate

         I have been provided with a copy of the Code of Business Conduct and
Ethics of Innovo Group Inc. I acknowledge that I have read the code and
understand my responsibilities under it. I further acknowledge that I should
follow the compliance procedures described in the code if I have any questions
or concerns.


                                     −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

                                     Employee Name:
                                                   −−−−−−−−−−−−−−−−−−−−−−−−−−−−−
                                     Date:
                                          −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−

</TEXT>
</DOCUMENT>
                                                        Exhibit 21


List of Significant Subsidiaries of Innovo Group Inc.

Innovo Inc.
Innovo Azteca Apparel, Inc.
Joe's Jeans, Inc.


</TEXT>
</DOCUMENT>
                          CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statements on
Form S−3 No. 333−44330, No. 333−79505, No. 333−35981, and No. 333−108430,
Registration Statement on Form S−1 No. 333−52318 and Registration Statements on
Form S−8 No. 333−102580, No. 333−109151, No. 333−71127, No. 333−41591, No.
333−32761 and 333−01849 of Innovo Group Inc. and Subsidiaries and in the related
Prospectus of our report dated February 20, 2004, with respect to the
consolidated financial statements and the schedule of Innovo Group Inc. and
Subsidiaries included in this Annual Report on Form 10−K for the year ended
November 29, 2003.


                                            /s/Ernst & Young LLP

Los Angeles, California
February 23, 2004


</TEXT>
</DOCUMENT>
                                                                      Exhibit 31.1


                            Section 302 Certification


I, Samuel J. Furrow, Jr., certify that:

     1.   I have reviewed this annual report on Form 10−K of Innovo Group Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officer(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the
          registrant and have:

          a.   Designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b.   Evaluated the effectiveness of the registrant's      disclosure
               controls and    procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          c.   Disclosed in this report any change in the registrant's internal
               control over financial     reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect,   the   registrant's   internal control over financial
               reporting; and

     5.   The registrant's other certifying officer(s) and I have disclosed,
          based on our most recent evaluation of internal control over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

          a.   All significant deficiencies      and material weaknesses in the
               design or operation of internal   control over financial reporting
               which are reasonably likely to    adversely affect the registrant's
               ability to record, process,       summarize and report financial
               information; and

          b.   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.


 February 27, 2004


                                            /s/ Samuel J. Furrow, Jr.
                                            −−−−−−−−−−−−−−−−−−−−−−−−−
                                            Samuel J. Furrow, Jr.
                                            Chief Executive Officer
                                            (Principal Executive Officer)




</TEXT>
</DOCUMENT>
                                                                      Exhibit 31.2


                            Section 302 Certification


I, Marc B. Crossman, certify that:


     1.   I have reviewed this annual report on Form 10−K of Innovo Group Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officer(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the
          registrant and have:

          a.   Designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b.   Evaluated the effectiveness of the registrant's      disclosure
               controls and    procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          c.   Disclosed in this report any change in the registrant's internal
               control over financial     reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect,   the   registrant's   internal control over financial
               reporting; and

     5.   The registrant's other certifying officer(s) and I have disclosed,
          based on our most recent evaluation of internal control over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

          a.   All significant deficiencies      and material weaknesses in the
               design or operation of internal   control over financial reporting
               which are reasonably likely to    adversely affect the registrant's
               ability to record, process,       summarize and report financial
               information; and

          b.   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.


 February 27, 2004



                                            /s/ Marc B. Crossman
                                            −−−−−−−−−−−−−−−−−−−−
                                            Marc B. Crossman
                                            Chief Financial Officer
                                            (Principal Financial Office)



</TEXT>
</DOCUMENT>
                                                                       EXHIBIT 32

                            Section 906 Certification


                                  CERTIFICATION
                  BY SAMUEL J. FURROW, JR. AND MARC B. CROSSMAN
            AS CHIEF EXECUTIVE OFFICER (PRINCIPAL EXEUCTIVE OFFICER)
    AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER), RESPECTIVELY


In connection with this Annual Report on Form 10−K, which is being filed by Innovo Group Inc.,
we, Samuel J. Furrow, Jr., Chief Executive Officer (Principal Executive Officer) of Innovo
Group Inc., and Marc B. Crossman, Chief Financial Officer (Principal Financial Officer) of
Innovo Group Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes−Oxley Act of 2002, that, to the best of our knowledge:

     1.   the report fully complies with the requirements     of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   the information contained in the report fairly presents, in all
          material respects, the financial condition and results of operations
          of Innovo Group Inc.


A signed original of this written statement required by Section 906 has been provided to Innovo
Group Inc. and will be retained by it and furnished to the Securities and Exchange Commission
or its staff upon request.

February 27, 2004

                                            /s/ Samuel J. Furrow, Jr.
                                            −−−−−−−−−−−−−−−−−−−−−−−−−
                                            Samuel J. Furrow, Jr.
                                            Chief Executive Officer
                                            (Principal Executive Officer)


                                            /s/ Marc B. Crossman
                                            −−−−−−−−−−−−−−−−−−−−
                                            Marc B. Crossman
                                            Chief Financial Officer
                                            (Principal Financial Officer)

</TEXT>
</DOCUMENT>

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