SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 2001 (Fiscal 2001)

Commission File Number 0-15898

DESIGNS, INC.

(Exact name of registrant as specified in its charter)

Delaware 04-2623104

(State or other jurisdiction of (IRS Employer

incorporation of principal executive offices) Identification No.)

66 B Street, Needham, MA 02494

(Address of principal executive offices) (Zip Code)

(781) 444-7222

(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

(Title of each Class)

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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 the registrant's knowledge, in definitive proxy or information

statements incorporated by reference in Part III of this Form 10-K or any

amendment to this Form 10-K. |X|

The aggregate market value of the voting stock of the registrant held by

non-affiliates of the registrant, based on the last sales price of such stock on

April 20, 2001, was approximately $22.6 million.

The registrant had 14,456,919 shares of Common Stock, $0.01 par value,

outstanding as of April 20, 2001.

continued

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DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>

Form 10-K Requirement Incorporated Document

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Part III

Item 10 Directors and Executive All information under the caption

Officers "Election of Directors" in the Company's definitive

Proxy Statement which is expected to be

filed within 120 days of the end of the

fiscal year ended February 3, 2001.

Item 11 Executive Compensation All information under the caption

"Executive Compensation" in the

Company's definitive Proxy Statement

which is expected to be filed within

120 days of the end of the fiscal

year ended February 3, 2001.

Item 12 Security Ownership of All information under the caption

Certain Beneficial Owners and Management "Security Ownership of Certain

Beneficial Owners and Management"

in the Company's definitive Proxy

Statement which is expected to be

filed within 120 days of the end of the

fiscal year ended February 3, 2001.

Item 13 Certain Relationships and All information under the caption

Related Transactions "Certain Relationships and Related

Transactions" in the Company's definitive

Proxy Statement which is expected to be

filed within 120 days of the end of the

fiscal year ended February 3, 2001.

</TABLE>

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DESIGNS, INC.

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Index to Annual Report on Form 10-K

Year Ended February 3, 2001

PART I Page

Item 1. Business ........................................................ 4

Item 2. Properties ...................................................... 10

Item 3. Legal Proceedings ............................................... 11

Item 4. Submission of Matters to a Vote of Security Holders ............. 11

PART II

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

Stockholder Matters ............................................. 12

Item 6. Selected Financial Data ......................................... 13

Item 7. Management's Discussion and Analysis of

Financial Condition and Results of Operations ................... 14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 20

Item 8. Financial Statements and Supplementary Data ..................... 21

Item 9. Changes in and Disagreements with Accountants

on Accounting and Financial Disclosure .......................... 45

PART III

Item 10. Directors and Executive Officers of the Registrant .............. 46

Item 11. Executive Compensation .......................................... 46

Item 12. Security Ownership of Certain Beneficial Owners

and Management .................................................. 46

Item 13. Certain Relationships and Related Transactions .................. 46

The information called for by Items 10, 11, 12 and 13, to

the extent not included in this document, is incorporated

herein by reference to the Company's definitive proxy

statement which is expected to be filed within 120 days

after the end of the Company's fiscal year ending February

3, 2001

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on

Form 8-K ........................................................ 47

<PAGE>

PART I.

Item 1. Business

Summary

Designs, Inc. (together with its subsidiaries, the "Company") is a retailer

based in the United States selling quality branded apparel and accessories made

exclusively by Levi Strauss & Co., and other manufacturers licensed by Levi

Strauss & Co. The Company markets a broad selection of Levi Strauss & Co. brand

merchandise through outlet and factory stores under the names

"Levi's(R)/Dockers(R) Outlet by Designs," "Levi's(R) Outlet by Designs,"

"Dockers(R) Outlet by Designs" and "Levi's(R)/Dockers(R) Factory Store by

Designs." The Company uses certain Levi Strauss & Co. trademarks, sells

exclusively Levi Strauss & Co. merchandise, and markets the Levi Strauss & Co.

brand products pursuant to a license agreement with Levi Strauss & Co.

Currently, the Company markets and sells Levi Strauss & Co. branded products at

its 102 stores located throughout the eastern half of the United States and

Puerto Rico.

The Company had incurred approximately $85 million in operating losses during

the fiscal years of 1998, 1999, and 2000 as a result of its strategy to market

and sell merchandise unrelated to Levi Strauss & Co. Starting in May 1995, with

the acquisition of the Boston Traders(R) brand, inclusive of certain retail

stores, from Boston Trading, Ltd. Inc., the Company embarked on a private label

diversification strategy concept that was later abandoned in fiscal year 1998,

when the Company began closing the Boston Trading Co. and Boston Traders Outlet

stores, eliminating all other brand name apparel (other than Levi's(R),

Dockers(R) and Slates(R)) and ultimately returning to its core competency of

marketing and selling exclusively Levi Strauss & Co. merchandise product.

In October 1999, the stockholders of the Company elected a new board of

directors and then in April 2000 appointed a new Chairman of the Board in

addition to a new Chief Executive Officer and President of the Company. Under

new management, the Company has renewed its strategy of marketing and selling

exclusively Levi Strauss & Co. branded merchandise products, expanding its

retail presence of selling Levi Strauss & Co. products, and remodeling existing

store formats to better present and market Levi Strauss & Co. branded

merchandise.

As used throughout this annual report on Form 10-K, the terms fiscal 2001, 2000

and 1999 refer to the Company's twelve month periods ended February 3, 2001,

January 29, 2000 and January 30, 1999, respectively.

Store Formats

The Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs

stores are located in outlet centers which are primarily in the eastern part of

the United States. In fiscal 2001, the Company also expanded its territory by

opening its first store in Puerto Rico. All of the Company's stores exclusively

sell Levi Strauss & Co. branded apparel purchased from Levi Strauss & Co. and

its licensees. Two years ago, the Company began to update its existing chain of

stores to a new store prototype, the Levi's(R)/Dockers(R) Outlet by Designs

store. The Company's new prototype, which is generally 8,000 to 9,000 square

feet, is a combined Dockers(R) Outlet store and Levi's(R) Outlet store that

separately displays each brand in its own unique environment. This differs from

the Company's older Levi's(R) Outlet store format, which averages 10,000 to

12,000 square feet and has no prominent marketing of the individual Levi's(R),

Dockers(R) and Slates(R) brands. By updating the store fixtures and enhancing

visual merchandising, the strong identity of each brand is maximized for the

customer. The total average square footage of the chain has decreased to

approximately 9,700 as the Company opens new stores and remodels its existing

stores to the smaller, more profitable prototype.

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At February 3, 2001, the Company operated 102 stores of which 34 are in the new

Levi's(R)/Dockers(R) Outlet by Designs store format. The Company also operates

14 Dockers(R) Outlet stores, which sell exclusively Dockers(R) and Slates(R)

brand products, and 15 Levi's(R) Outlet stores, which sell exclusively Levi's(R)

brand product. Several of these smaller Dockers(R) and Levi's(R) only stores are

located in the same outlet center and a few are even adjacent to each other. In

January 2001, the Company combined three pairs of its standalone Dockers(R) and

Levi's(R) outlet stores that were adjacent to each other into three

Levi's(R)/Dockers(R) Outlet stores. By combining the individual stores into one

store, the Company was able to reduce total square footage, reduce labor costs

and provide a cross-over environment for the brands. The Company will continue

to review other opportunities to combine similar store locations. The remaining

39 stores are the older Levi's(R) Outlet stores that carry a combination of

Levi's(R), Dockers(R) and Slates(R) apparel. The Company plans to continue to

update its store base by remodeling its remaining older stores to the new

format, relocating or closing stores and combining the individual Dockers(R) and

Levi's(R) outlet stores where feasible.

The Company operated 103 outlet stores under the names, "Levi's(R) Outlet by

Designs," "Dockers(R) Outlet by Designs" and "Levi's(R)/Dockers(R) Outlet by

Designs" in fiscal 2000 and 95 of these outlets in fiscal 1999. In fiscal 1999,

the Company also operated 18 stores, under various names such as "Buffalo

Jeans(R) Factory Outlets," "Boston Trading Co.(R)," "Designs/BTC(TM)" and

"Boston Traders(R) Outlet stores." These 18 stores were closed as part of the

Company's store closing program initiated in fiscal 2000.

Store Expansion

In fiscal 2001, the Company opened six new Levi's(R)/Dockers(R) Outlet stores,

remodeled nine of its older locations and completed the combination of stores in

three centers where the Company had adjoining Dockers(R) Outlet stores with

Levi's(R) Outlet stores. In fiscal 2002, the Company expects to remodel or

relocate up to an additional eleven stores and combine two additional Dockers(R)

and Levi's(R) outlet store pairs. In addition, the Company has also opened three

new stores in fiscal 2002 and plans to open an additional two new stores, one of

which will be an additional location in Puerto Rico which is tentatively

scheduled to open in August 2001.

The capital expenditures for fiscal 2002 related to these new and remodeled

stores are expected to total approximately $6.0 million. The Company continually

evaluates the performance of its stores and may, from time to time, decide to

close or reduce the size of or remodel certain store locations.

Customer Base

The Company believes that its customer base primarily reflects that of the

Levi's(R), Dockers(R) and Slates(R) brand customer. The Company's Levi's(R) and

Dockers(R) Outlet stores also attract foreign travelers looking for these

well-known brands. The product selection offered in these stores is designed to

satisfy the casual apparel needs of customers in all age groups and income

brackets.

Merchandising

The Company offers exclusively a selection of Levi Strauss & Co. brands of

merchandise which include Levis (R), Dockers(R) and Slates(R). The Levis Strauss

& Co. brands target customers in all age groups and income levels. The Levis (R)

brand includes various men's and women's jeanswear products as well as an

assortment of woven and knit tops and accessories. Much of the jeanswear sold by

the Company is from the Levis(R) Red Tab(TM) product lines. The Dockers(R) brand

includes a broad range of casual khaki pants and are complemented by a variety

of tops and seasonal pant products in a range of fits, fabrics, colors and

styles. The Dockers(R) brand is primarily targeted towards the casual workplace

attire customer. According to a 2000 report by the Society for Human Resource

Managers, approximately 80% of U.S. workplaces today allow casual business wear

at least one day a week. The Slates(R) brand collection of pants, shirts,

sweaters and outerwear combines contemporary styles with modern fabrics and

colors. The Slates(R) brand for both men and women targets the 25- to

34-year-old consumer's desire for a younger and more sophisticated casual look.

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The Company's merchandise sales performance is partially dependent upon the

acceptance and growth of the Levi Strauss & Co. brands of merchandise. Since

1996, Levi Strauss & Co., sales have declined 35% from approximately $7.1

billion to $4.6 billion for that company's year ended November 26, 2000. The

Levi Strauss & Co. brands have significant competition across all brands from

private labels and fashion labels which include VF Corporation, marketer of the

Lee, Wrangler and Rustler brands; fashion-oriented designer apparel marketers,

including Polo Ralph Lauren Corporation, Calvin Klein, Nautica Enterprises,

Guess?, Inc. and Tommy Hilfiger Corp.; vertically integrated specialty stores,

including Gap Inc., Abercrombie & Fitch, American Eagle Outfitters Inc., J. Crew

and Eddie Bauer, Inc.; lower-volume but high visibility fashion-forward

jeanswear brands that appeal to the teenage market, including the FUBU, JNCO,

Lucky, MUDD and Diesel brands; casual wear manufacturers, including Haggar

Corp., Liz Claiborne, Inc. and Savane International Corp.; retailer private

labels, including J.C. Penney's Arizona brand and Sears' Canyon River Blues and

Canyon River Khakis brands; and mass merchandisers, including Wal-Mart Stores,

Inc., Target and Kmart. However, Levi Strauss & Co. has placed great emphasis on

its business turnaround strategy through supply chain improvements, product

innovation, new marketing campaigns and improved retail presentation.

Through the Company's license agreement with Levi Strauss & Co., merchandise

product is made available to the Company throughout the year. The Company has

worked closely with Levi Strauss & Co. to make wider assortments of its brand

offerings regularly available to the Company. As a result of these efforts, the

Company believes that its comparative sales performance will improve in the

second half of fiscal 2002 since many of the merchandising initiatives developed

in conjunction with Levi Strauss & Co. are scheduled for the Fall and Holiday

selling seasons. However, quarterly comparisons will likely be unfavorable

during the first half of the fiscal year, because the comparison will be against

prior-year sales and margins which benefited from significant price reductions

on inventories for which reserves were established at the end of fiscal 2000. In

addition, sales have been significantly impacted in all of the Company's retail

locations due to the liquidation of Bugle Boy, a 300-store retail chain selling

similar categories of casual apparel. Therefore, in the first quarter of fiscal

2002 we expect comparable store sales to reflect declines approximating in the

mid-teens.

The Company has historically purchased manufacturing overruns, discontinued

lines and irregulars from Levi Strauss & Co. at wholesale cost which has

historically been much less than the wholesale cost of other merchandise

purchases from Levi Strauss & Co. The Company's gross margins have been

influenced in part by the varying availability of this lower wholesale cost

merchandise from Levi Strauss & Co. If the availability of that merchandise is

decreased, the Company's gross margin percentages could be negatively impacted

in the future.

Distribution

In August 2000, the Company opened a new 60,000 square foot distribution

facility in Orlando, Florida for the purpose of distributing much of the

Company's purchases of jeanswear and casual slacks to its stores. Prior to

opening this facility, much of this product was shipped directly to the stores.

The new distribution facility was opened with the objective of better

controlling the Company's purchases and improving its inventory management. The

Company also utilizes a third party vendor to operate a 30,000 square foot

distribution center in Mansfield, Massachusetts.

The Company's distribution strategy is (1) to maintain warehouse facilities to

regulate the flow of merchandise into the stores to facilitate store level

handling, and (2) to flow through (cross-dock) the higher volume product in

order to maintain optimum inventory levels in the stores and maximize sales.

Trademark License Agreement

The Company operates under a trademark license agreement with Levi Strauss &

Co., which was most recently amended in October 1998 (as amended, the "Outlet

License Agreement"). This Outlet License Agreement authorizes the Company to use

certain Levi Strauss & Co. trademarks in connection with the operation of the

Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs stores in

25 states in the eastern portion of the United States and in Puerto Rico.

Subject to certain default provisions, the term of the Outlet License Agreement

was extended to September 30, 2004, and the license for any particular store is

the period co-terminous with the lease term for such store (including extension

options). The Outlet License Agreement now provides that the Company has the

opportunity to extend the term of the license associated with one or more of the

Company's older Levi's(R) Outlet by Designs stores by either renovating the

store or replacing the store with a new store

<PAGE>

that has updated format and fixturing. In order to extend the license associated

with each of the Company's 59 older outlet stores, the Company must, subject to

certain grace periods, complete these renovations or the construction of

replacement stores by December 31, 2004. As leases expire, the Company may lose

the right to use the Levi's(R) trademark in connection with certain Levi's(R)

Outlet by Designs stores and Dockers(R) Outlet by Designs stores. At February 3,

2001, the average remaining lease term (including extension options) of the

Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs stores

was approximately 8.8 years.

The Company, with the approval of Levi Strauss & Co., initiated a program to

remodel its existing outlet store base in fiscal 1999. This program allows the

Company to substitute new locations in the Company's existing territory for

older locations in maturing centers as management deems it appropriate to do.

See "Store Formats" above for more discussion concerning the Company's progress

with its remodel program.

The Company and Levi Strauss & Co. are presently in discussions aimed at

re-negotiating the Outlet License Agreement in certain respects. The Company

anticipates that the main areas of focus within the agreement will be (i)

product availability and selection, (ii) expansion of the Company's existing

territorial rights, (iii) price structure for wholesale merchandise and (iv) the

extension of the term of the Outlet License Agreement, although no agreement

regarding such matters have been reached.

Trademarks

"Dockers(R)," "Levi's(R)" and "Slates(R)" are registered trademarks of Levi

Strauss & Co.

Store Operations

The Company currently employs one Vice President and Director of Store

Operations who reports directly to the President and Chief Executive Officer of

the Company. Two regional managers, who report to the Vice President and

Director of Store Operations, are responsible for the operations and

profitability of stores within specific geographic regions.

In order to provide management development and guidance to individual store

managers, the Company employs approximately 12 district managers. Each district

manager is responsible for hiring and developing store managers at the stores

assigned to that district manager's area and for the sales and overall

profitability of those stores. District managers report directly to a regional

manager.

The Company's stores utilize interior design and merchandise layout plans

designed to promote customer identification as a specialty outlet store selling

quality branded apparel and accessories. The merchandise layout is further

customized by store management and the Company's visual merchandising department

to suit each particular store location. The stores prominently display

Levi's(R), Dockers(R) and Slates(R) brand logos and utilize distinctive

promotional displays. The Company uses Levi Strauss & Co. logos and trademarks

on store signs with the permission of Levi Strauss & Co.

During fiscal 2001, in conjunction with the Company's initiatives to improve

shrink and inventory management, the Company outsourced its loss prevention

department to LP Innovations, Inc., a leader in loss prevention management.

Customer Service & Training

"Designs University" was established in fiscal 1996 to implement associate

training and development programs throughout the organization. The Company's

Operational Support and Development team is responsible for developing and

teaching creative programs that will enhance associate performance.

Sales associate expectations are established at all levels of training,

beginning with the Sales Associate Development Program. This program introduces

the associate to the Company's operational policies, product information and

customer service objectives. Through this program, associates are taught that

servicing the customer is the highest priority. Management believes that sales

associates are trained towards accomplishing the goal of reinforcing the

customer's perception of the Company's stores as branded specialty stores and of

differentiating its stores from those of the Company's competitors.

<PAGE>

All members of store management participate in the Store Management Development

Program. Associates learn how to perform critical management functions required

to successfully operate a store. The Store Management Development Program

focuses on fundamental operational procedures, expense control and personnel

management.

Each Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs store employs

approximately 20 associates. Store staffing typically includes a store manager,

one or more assistant managers and shift supervisors, and a team of full-time

and part-time sales associates. Store manager candidates or assistant manager

candidates may also be included on the team in specific stores. The store

management team is responsible for all operational matters in the store,

including the hiring and training of sales associates.

Management Information Systems

The Company's management information systems, located at both its corporate

headquarters in Needham, Massachusetts and all of its retail stores, consist of

a full range of retail merchandising and financial systems which include

merchandise planning and reporting, distribution center processing, inventory

allocation, in-store systems, sales reporting, and financial processing and

reporting. The Company's primary business applications, JDA Merchandising

Management Systems and Lawson Financial Systems, operate on an AS/400 platform.

All of the Company's stores have point-of-sale terminals supplied by IBM and

supported by point-of-sale business application provided by CRS, that captures

daily transaction information by item, color and size (SKU). The Company

utilizes barcode technology in tracking sales, inventory and pricing

information. Communications between the corporate office and all stores is

facilitated on a daily basis through the use of an electronic mail system. The

JDA Merchandising Management System is updated daily with all store transactions

and provide daily sales, inventory, pricing and merchandise information and

management reports in assisting the Company operate its retail business. Its

merchandising system applications also facilitate the placement of purchase

orders and their tracking, primarily through electronic data interchange (EDI).

The Company evaluates this information, together with weekly reports on

merchandise statistics, prior to making merchandising decisions regarding

reorders of fast-selling items and the allocation of merchandise.

In fiscal 2001, the Company purchased JDA Arthur, a planning and allocation

system that should further enhance the Company's inventory management and

visibility. The added inventory management applications will be installed and

implemented during fiscal 2002. In addition, the Company will be enhancing its

warehouse management systems either through the further development of its

existing system with JDA, or through the purchase of a warehouse management

application from a third-party provider. These added applications should greatly

enhance the Company's inventory management capabilities.

The Company utilizes a client server based network with mixed NT and Novel

environment running on a local area network to communicate and work share within

its corporate headquarters. The Company also utilizes the services of an outside

payroll processing provider, ADP, in preparing, distributing and reporting its

weekly payroll.

Advertising

The Company relies on the visibility and recognition of the Levi's(R),

Dockers(R) and Slates(R) brand names, as well as the natural flow of traffic

that results from locating stores in areas of high retail activity including

destination outlet centers and regional malls. The Company's Outlet License

Agreement with Levi Strauss & Co. limits the Company's advertising ability to

billboards and specific outlet center promotions.

The Company has a complete visual merchandising program that, through the use of

in-store signage, focuses on product knowledge and marketing of the individual

Levi's(R), Dockers(R) and Slates(R) brands and communicates its value to the

customer. During fiscal 2002, the Company plans to update its visual marketing

programs by redesigning its communication and education in-store signage with

the intention of better guiding the customer through the shopping experience.

<PAGE>

Competition

The United States casual apparel market is highly competitive with many national

and regional department stores, specialty apparel retailers and discount stores

offering a broad range of apparel products similar to those sold by the Company.

The Company considers any casual apparel manufacturer operating in outlet parks

throughout the United States to be a competitor in the casual apparel market.

The Company's business involves the sale of branded apparel and accessories sold

by or manufactured under license from Levi Strauss & Co. Levi Strauss & Co. is

involved in the highly competitive fashion apparel industry. Levi's(R) brand

jeans have been impacted by the increased competition from private label as well

as fashion jeans market entrants and by a decrease in national sales trends of

Levi's(R) brand products.

Management believes that the Company competes with other apparel retailers by

offering superior selection, quality merchandise, knowledgeable in-store service

and competitive price points. The Company stresses product training with its

sales staff and, with the assistance of Levi Strauss & Co. merchandise

materials, provides its sales personnel with substantial product knowledge

training across all product lines.

Employees

As of February 3, 2001, the Company employed approximately 1,750 associates, of

whom 418 were full-time personnel. The Company hires additional temporary

employees during the peak Fall and Holiday seasons.

All qualified full-time employees are entitled, when eligible, to life, medical,

disability and dental insurance and to participate in the Company's 401(k)

retirement savings plan. Store managers, district managers, regional managers

and corporate office employees are eligible to receive incentive compensation

subject to the achievement of specific performance objectives related to sales,

profitability and expense control. Vice Presidents, regional managers and

district managers are also entitled to use an automobile provided by the Company

or to receive an automobile allowance. Sales personnel are compensated on an

hourly basis and, generally, receive no commissions, but from time to time are

eligible to earn sales incentive payments from individual store sales contests.

Regional and district managers, store managers and certain corporate office

employees have been granted stock options to purchase shares of the Company's

common stock. None of the Company's employees are represented by any collective

bargaining agreement.

<PAGE>

Item 2. Properties

As of February 3, 2001, the Company operated 102 Levi's(R) Outlet by Designs and

Dockers(R) Outlet by Designs stores. All of these stores are leased by the

Company directly from outlet center owners. The average square footage of the

chain had decreased to approximately 9,700 as the Company opens new smaller size

stores and remodels its existing stores to a smaller, more profitable prototype.

The store leases are generally five years in length and contain renewal options

extending their terms to between 10 and 15 years. Most of the Company's outlet

store leases provide for annual rent based on a percentage of store sales,

subject to guaranteed minimum amounts.

Sites for store expansion are selected on the basis of several factors intended

to maximize the exposure of each store to the Company's target customers. These

factors include the demographic profile of the area in which the site is

located, the types of stores and other retailers in the area, the location of

the store within the center and the attractiveness of the store layout. The

Company also utilizes financial models to project the profitability of each

location using assumptions such as the center's sales per square foot averages,

estimated occupancy costs and return on investment requirements. The Company

believes that its selection of locations enables the Company's stores to attract

customers from the general shopping traffic and to generate its own customers

from surrounding areas.

The lease for the Company's headquarters office at 66 B Street, Needham,

Massachusetts, which began in November 1995, is for a period of ten years. The

lease provides for the Company to pay all occupancy costs associated with the

land and the 80,000 square foot building. Beginning in fiscal 1998, the Company

began subleasing excess office space as a result of its downsizing. As of

February 3, 2001, the Company has three subtenants who combined lease

approximately 43,000 of the 80,000 square feet. These leases are for various

terms ranging from five to seven years.

On November 13, 2000, the Company announced that it had entered into an option

agreement with the landlord of its corporate headquarters. The agreement

provides the landlord with the option, if exercised within 15 months from

November 2000 which was the date of the agreement, to terminate the Company's

lease for its corporate headquarters, which currently will expire on January 31,

2006. If such option is exercised by the landlord, then the Company will be

entitled to receive $8.9 million provided that certain conditions in connection

with vacating the leased property are met. If the option is exercised, the

Company would have seven months thereafter to vacate the premises. If the

Company failed to perform all the conditions of the option agreement, the

Company would forfeit its right up to the entire $8.9 million payment.

During fiscal 2001, the Company opened its own 60,000 square foot distribution

center located in Orlando, Florida. The Company has leased the property for five

years through August 14, 2005 at which time the Company has the option to extend

its lease for an additional five years. The lease also contains certain exit

rights, which would allow the Company to terminate the lease on August 14, 2002

with six months prior notice. Subsequent to fiscal year end, the Company also

entered into another lease agreement to lease an additional 16,000 square feet

of warehouse space in Orlando, Florida. The lease for the additional space

expires March 31, 2005 and also contains certain exit rights which would allow

the Company to terminate the lease on March 31, 2003 with three months prior

notice. The Company utilizes a 30,000 square foot third-party distribution

center in Mansfield, Massachusetts.

See "Management's Discussion and Analysis of Financial Condition and Results of

Operations - Liquidity and Capital Resources - Capital Expenditures."

<PAGE>

Item 3. Legal Proceedings

The Company is a party to litigation and claims arising in the course of its

business. Management does not expect the results of these actions to have a

material adverse effect on the Company's business or financial condition.

In May 1995, the Company purchased from Boston Trading Ltd., Inc. certain assets

including various trademarks and license agreements. The terms of the Asset

Purchase Agreement, which was dated April 25, 1995 (the "Purchase Agreement"),

included the Company delivering a $1 million promissory note ("Purchase Note")

for the balance of the purchase price. The principal amount of the Purchase Note

was stated to be payable in two equal annual installments through May 1997. In

the first quarter of fiscal 1997, the Company asserted certain indemnification

rights under the Purchase Agreement. In accordance with the terms of the

Purchase Agreement, the Company, when exercising its indemnification rights, had

the right, among other courses of action, to offset against the payment of

principal and interest due and payable under the Purchase Note. Accordingly, the

Company did not make the two $500,000 principal payments on the Purchase Note

that were due on May 2, 1996 and May 2, 1997. The Company paid all interest on

the original principal amount through May 2, 1996 and continued to pay interest

thereafter through January 31, 1998 on $500,000 of principal. In January 1998,

Atlantic Harbor, Inc. filed a lawsuit against the Company for failing to pay the

outstanding principal amount of the Purchase Note, which was issued to Boston

Trading Ltd., Inc. (d/b/a Atlantic Harbor, Inc.). In March 1998, the Company

filed a counterclaim against Atlantic Harbor, Inc. alleging that the Company

suffered damages in excess of $1 million because of the breach of certain

representations and warranties made by Atlantic Harbor, Inc. and its

stockholders concerning the existence and condition of certain foreign trademark

registrations and license agreements.

Subsequent to fiscal 2001, the Company has entered into a settlement agreement

with Atlantic Harbor, Inc. whereby the Company has agreed to pay cash of

$450,000 to Atlantic Harbor, Inc. as settlement for all obligations outstanding

under the Purchase Note. In exchange, the Company agreed to transfer and assign

all trademarks and license agreements acquired as part of the Purchase Agreement

to a new entity in which the Company would have a 15% equity interest, with

Atlantic Harbor, Inc. and its affiliates retaining the remaining interest. The

Company would also be entitled to receive up to an additional $150,000 from

existing license royalties over the next four years. At February 3, 2001, the

Company recorded a gain related to the settlement of this matter in the amount

of $550,000, which is included in "Provision for impairment of assets, store

closings and severance" on the Consolidated Statements of Operations.

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

None.

<PAGE>

PART II.

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

Matters

The Company's common stock trades on the Nasdaq National Market tier of The

Nasdaq Stock Market under the symbol "DESI."

The following table sets forth, for the periods indicated, the high and low per

share closing sales prices for the common stock, as reported on the Nasdaq

consolidated reporting system.

Fiscal Year Ending

February 3, 2001 High Low

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

First Quarter $ 1.5000 $ 1.0938

Second Quarter 2.1250 1.1875

Third Quarter 2.5625 1.9375

Fourth Quarter 2.4688 2.0000

Fiscal Year Ending

January 29, 2000 High Low

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

First Quarter $ 2.7812 $ 1.8437

Second Quarter 2.5625 1.3750

Third Quarter 1.8125 1.1562

Fourth Quarter 1.7187 1.1875

As of April 20, 2001, based upon data provided by independent shareholder

communication services and the transfer agent for the common stock, there were

approximately 308 holders of record of common stock and approximately 3,200

beneficial holders of common stock.

The Company has not paid and does not anticipate paying cash dividends on its

common stock. For a description of financial covenants in the Company's loan

agreement that may restrict dividend payments, see Note C of Notes to

Consolidated Financial Statements.

<PAGE>

Item 6. Selected Financial Data

<TABLE>

Fiscal Years Ended (1)

February 3, January 29, January 30, January 31, February 1,

2001 2000 1999 1998 1997

(Fiscal 2001) (Fiscal 2000) (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)

(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

INCOME STATEMENT DATA:

Sales $ 194,530 $ 192,192 $ 201,634 $ 265,726 $ 289,593

Gross profit, net of occupancy costs 54,985 47,440(3) 42,249(4) 38,358(5) 86,229

Provision for impairment of assets,

store closing and severance 107 14,535(3) 15,729(4) 21,600(5) --

EBITDA (2) 12,671 (2,569) (20,659) (34,945) 20,293

Pre-tax income (loss) 5,488 (10,278)(3) (29,269)(4) (46,562)(5) 10,364

Net income (loss) 3,216 (12,493) (18,541) (29,063) 6,264

Earnings (loss) per share- basic $ 0.20 $ (0.78) $ (1.17) $ (1.86) $ 0.40

Earnings (loss) per share- diluted $ 0.20 $ (0.78) $ (1.17) $ (1.86) $ 0.40

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

Weighted average shares outstanding

For earnings per share- basic 16,015 16,088 15,810 15,649 15,755

Weighted average shares outstanding

For earnings per share -diluted 16,292 16,088 15,810 15,649 15,833

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

BALANCE SHEET DATA:

Working capital $ 16,306 $ 19,624 $ 24,078 $ 42,104 $ 72,320

Inventories 57,675 57,022 57,925 54,972 79,958

Property and equipment, net 18,577 16,737 17,788 35,307 39,216

Total assets 95,070 95,077 99,317 116,399 141,760

Shareholders' equity 49,825 52,269 63,956 82,380 111,045

OPERATING DATA:

Net sales per square foot $ 192 $ 190 $ 187 $ 220 $ 234

Number of stores open at fiscal year end 102 103 113 125 150

</TABLE>

(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday

closest to January 31. The fiscal year ended February 3, 2001 covered 53

weeks.

(2) The Company defines EBITDA as Net Income before Taxes, Interest expense

net and Depreciation and amortization.

(3) Pre-tax loss for fiscal 2000 includes the $15.2 million charge taken in

the fourth quarter related to inventory markdowns, the abandonment of the

Company's Boston Traders(R) trademark, severance, and the closure of the

Company's five remaining Designs/BTC(TM) stores and its five Buffalo(R)

Jeans Factory stores. Of the $15.2 million charge, $7.8 million, or 4.1%

of sales, is reflected in gross margin. The pre-tax loss for fiscal 2000

also includes $717,000 of non-recurring income related to excess reserves

from the fiscal 1999 restructuring program.

(4) Pre-tax loss for fiscal 1999 includes the $13.4 million charge taken in

the third quarter related to closing 30 unprofitable stores. Also included

in the pre-tax loss for fiscal 1999 is the $5.2 million charge related to

the closing of one Designs store, three BTC(TM) stores and four Boston

Traders(R) outlet stores, all eight of which were closed in fiscal 2000.

Of the $5.2 million charge, $800,000, or 0.4% of sales, is reflected in

gross margin. In addition, the Company recognized $2.9 million in

restructuring income in the fourth quarter which was the result of

favorable lease negotiations associated with the original estimated $13.4

million charge.

(5) Pre-tax loss for fiscal 1998 includes the $20 million charge taken in the

second quarter related to the Company's strategy shift and the fourth

quarter charge of $1.6 million for the Company's reduction in work force.

Of the $20 million charge, $13.9 million, or 5.2% of sales, is reflected

in gross margin.

<PAGE>

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

of Operations

The following table provides a five-year history of the total sales results of

the Company, together with a summary of the number of stores in operation and

the change in the Company's comparable store sales. "Changes in comparable store

sales" measures the percentage change in sales in comparable stores, which are

those stores open for at least one full fiscal year.

<TABLE>

FISCAL YEARS ENDED (1)

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

Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 1,

2001 2000 1999 1998 1997

(Fiscal 2001) (Fiscal 2000) (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)

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

Total Sales (In Thousands) $ 194,530 $ 192,192 $ 201,634 $ 265,726 $ 289,593

Number of stores in operation at end of the

fiscal year:

Store Type

Levi's(R) Outlet and Dockers(R) Outlet by Designs 102 103 95 59 58

Designs and BTC(TM) (2) -- -- 9 22 44

Buffalo Jeans(R) Factory Outlets(2) -- -- 5 -- --

Boston Trading Co.(R) (2) -- -- -- 11

Boston Traders(R) outlets(2) -- -- 4 12 27

Joint Venture:

Original Levi's Stores(TM)(2) -- -- -- 11 11

Levi's(R) Outlet stores (2) -- -- -- 11 10

Total stores 102 103 113 126 150

Comparable stores 92 87 80 112 142

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

Changes in total sales 1% (5%) (24%) (8%) (4%)

Changes in comparable store sales (4%) (1%) (18%) (10%) (5%)

</TABLE>

(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday

closest to January 31. The fiscal year ended February 3, 2001 covered 53

weeks. Comparable store sales for fiscal 2001 were based upon 52-week

comparisons.

(2) As part of store closing programs in fiscal 1998, 1999 and 2000, the

Company closed all of its non-profitable store concepts.

RESULTS OF OPERATIONS

SALES

Sales for fiscal 2001 were $194.5 million, an increase of 1.2% compared with

fiscal 2000 sales of $192.2 million. There were 53 weeks in fiscal 2001 and 52

weeks in fiscal years 2000 and 1999. The increase in sales in fiscal 2001, as

compared to fiscal 2000, was due to an additional week of sales of approximately

$2 million and sales from new and remodeled stores offset slightly by a

comparable store sale decrease of 3.8% from the prior year. Sales for fiscal

2000 decreased 4.7% compared with fiscal 1999 sales of $201.6 million.. The

decrease in sales in fiscal 2000 as compared to fiscal 1999 was due to an 1%

decrease in comparable store sales and 23 store closings in fiscal 2000 and 37

store closings in fiscal 1999. This decrease was partially offset by sales from

new stores of $32.6 million.

Comparable store sales decreases in both fiscal 2001 and fiscal 2000 were due

primarily to lower sales in men's Levi's(R) brand jeans and tops resulting from

limited availability and reduced demand for Levi's(R) brand products. These

sales decreases were partially offset by increased sales of women's Levi's(R)

brand jeans and men's and women's Dockers(R) brand apparel.

The Company has worked closely with Levi Strauss & Co. to make wider assortments

of its brand offerings available to the Company throughout the upcoming year. As

a result of these efforts, the Company believes that its comparative sales

performance should improve in the second half of fiscal 2002 since many of the

merchandising initiatives developed in conjunction with Levi Strauss & Co. are

scheduled for the Fall and Holiday selling seasons. However, the Company expects

that quarterly comparisons will likely be unfavorable during the first half of

fiscal 2002 because the comparison will be against prior-year sales and margins

which benefited from significant price reductions on inventories for which

reserves were established at the end of fiscal 2000. In addition, sales in the

first quarter of fiscal 2002 have been significantly impacted in all of the

Company's retail locations due to the liquidation of Bugle Boy, a 300-store

retail chain selling similar categories of casual apparel. Therefore, in the

first quarter of fiscal 2002 we expect comparable store sales to reflect

declines approximating in the mid-teens.

<PAGE>

GROSS MARGIN

Gross margin, which includes occupancy costs, was 28.3% for fiscal 2001 as

compared with 24.7% in fiscal 2000. The improved gross margin was primarily due

to a substantial markdown reserve recorded in fiscal 2000 of $7.8 million, which

was not recurring in fiscal 2001. In addition, through favorable lease

negotiations with several existing landlords, the Company has reduced its

occupancy costs as a percentage of sales by 0.3 percentage points. These

favorable improvements in gross margin are partially offset by a slight

deterioration in initial margins due to increasing costs on merchandise

purchases. During fiscal 2001, in an effort by the Company to provide full

merchandise assortments, the Company's average cost of merchandise purchased

increased while retail selling prices remained constant. Merchandise margins in

fiscal 2000 included a LIFO benefit of approximately $558,000.

Gross margin in fiscal 2000 was 24.7% as compared with 20.9% in fiscal 1999. The

improved margin in fiscal 2000 as compared to fiscal 1999 was due to the shift

in the Company's store portfolio away from lower margin specialty, generally

mall-based stores, towards the traditionally higher margin outlet store

operations and a benefit of approximately $558,000 from LIFO. Included in gross

margin for fiscal 2000 is approximately $7.8 million for markdowns related to

reserves established for aged and excess outlet store inventory and liquidation

markdowns associated with the ten stores closed in the fourth quarter of fiscal

2000, discussed below under "Restructuring - Fiscal 2000." Based on the recent

changes in the Company and its shift to an exclusively outlet business, the

Company changed its current markdown strategy in the fourth quarter of fiscal

2000 in an effort to improve inventory turnover and significantly reduce the

amount of aged merchandise on hand. Included in gross margin for fiscal 1999 is

approximately $800,000 of markdowns related to store closings in fiscal 1999,

discussed below under "Restructuring Fiscal 1999."

In fiscal 2002, the Company anticipates that the average cost of merchandise

should continue to increase which may negatively impact gross margin, after

considering anticipated favorable improvements in shrinkage and reduced freight

expense.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses as a percentage of sales were 21.7%

or $42.2 million in fiscal 2001, 22.6% or $43.4 million in fiscal 2000 and 23.8%

or $48.0 million in fiscal 1999. The steady decrease in selling, general and

administrative expenses as a percentage of sales over the past three years is a

result of a series of expense reduction actions undertaken over the past three

years that are still ongoing. Expenses in prior years which have been reduced or

are not recurring include the Company's proxy expenses, expenses reimbursed to

Jewelcor Management, Inc., costs related to the termination of the Company's

Shareholder Rights Agreement, and other costs associated with the

change-in-control.

IMPAIRMENT OF ASSETS

The Company accounts for long-lived assets in accordance with Statement of

Financial Accounting Standards No. 121, "Accounting for the Impairment of

Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." The Company

reviews its long-lived assets for events or changes in circumstances that

indicate the carrying amount of the assets may not be recoverable. The Company

assesses the recoverability of the assets by determining whether the carrying

value of such assets over the remaining lives can be recovered through projected

undiscounted future cash flows. The amount of impairment, if any, is measured

based on projected discounted future cash flows using a discount rate reflecting

the Company's average cost of funds. At February 3, 2001, the Company recorded

an impairment charge of $837,000 for the write-down of fixed assets. The

impairment charge related to stores whose expected cash flows from operations

are not expected to exceed their net book value prior to the expiration of their

expected lease term. In fiscal 2000, the Company had recorded an impairment

charge of $611,000 for the write-down of fixed assets which was included as part

of the $15.2 million non-recurring charge recorded in the fourth quarter of

fiscal 2000. See "Restructuring - Fiscal 2000" below. No such impairment charge

was recorded in fiscal 1999. These charges are reflected in Provision for

impairment of assets, store closings and severance on the Consolidated

Statements of Operations for fiscal 2001 and 2000.

<PAGE>

RESTRUCTURING

Fiscal 2000

During the fourth quarter of fiscal 2000, the Company recorded a pre-tax charge

of $15.2 million, or $0.59 per share after tax, related to inventory markdowns,

the abandonment of the Company's Boston Traders(R) and related trademarks,

severance, and the closure of the Company's five Buffalo Jeans(R) Factory Stores

and its five remaining Designs stores. Of the $15.2 million charge, $7.8 million

relating to inventory markdowns was reflected in gross margin in fiscal 2000.

This pre-tax charge of $15.2 million included cash costs of approximately $3.6

million related to lease terminations and corporate and store severance, and

approximately $11.6 million of non-cash costs related to inventory markdowns and

the impairment of trademarks and store assets. At February 3, 2001, the

remaining reserve balance related to this $15.2 million charge was $852,000,

which primarily related to landlord settlements and remaining severance

payments.

As a result of the above charges recorded, the Company recorded a net operating

loss for fiscal 2000. Because of an additional year of net operating losses, the

Company recorded a further write-down of tax assets of $6.0 million or $0.37 per

share after tax attributable to the potential that certain deferred federal and

state tax assets may not be realizable.

After the recording of these restructuring charges, all operating assets related

to businesses other than the remaining Levi's(R)/Dockers(R) Outlet stores had

been written off leaving only the operations and related assets of its retail

outlet and factory stores which sell exclusively product made by or for Levi

Strauss & Co.

Based on management's review of the Company's Levi's(R) and Dockers(R) Outlet by

Designs stores at the end of fiscal 2001, no additional store closing reserves

were needed at February 3, 2001.

Fiscal 1999

During the third quarter of fiscal 1999, the Company announced its plans to

close, through lease terminations and expirations, 14 unprofitable Designs

stores, eight unprofitable Boston Trading Co.(R)/BTC(TM) stores and eight

Original Levi's Stores(TM) operated by the the Designs/OLS Partnership. This

store closing strategy resulted in the Company recording a pre-tax charge of

$13.4 million. The total cost to close these stores was $10.5 million, which is

$2.9 million less than the original charge, primarily due to favorable landlord

negotiations on lease termination payments. As a result, the Company recognized

pre-tax income of $2.9 million in the fourth quarter of fiscal 1999. Total cash

costs were $4.2 million related to lease terminations, employee severance and

other related expenses. The remainder of the $10.5 million charge consists of

non-cash costs of approximately $6.3 million in store fixed asset write-offs.

All of these stores were closed by the end of fiscal 1999.

In the fourth quarter of fiscal 1999, the Company recorded a pre-tax charge of

$5.2 million, or $0.20 per share after tax, related to the decision to close

three BTC(TM) mall stores, one Designs mall store, and four Boston Traders(R)

Outlet stores and to further reduce corporate headcount. The pre-tax charge

included cash costs of approximately $2.8 million related to lease terminations

and corporate severance and other related expenses. The total cost of severance

and store closings was $717,000 less than the original charge due to favorable

landlord negotiations on lease termination payments. As a result, the Company

recognized income of $717,000 or $0.03 earnings per share after tax in the

fourth quarter of fiscal 2000.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for fiscal year 2001 decreased to $5.4

million from $6.5 million in fiscal 2000 and $9.7 million in 1999, primarily due

to the aging of the Company's older stores and stores closed in fiscal 2000

offset slightly by depreciation for new and remodeled stores. "See Liquidity and

Capital Resources -Capital Expenditures."

INTEREST EXPENSE, NET

Net interest expense for fiscal 2001 was $1.8 million compared to $1.2 million

in fiscal 2000 and $576,000 in fiscal 1999. This increase, as compared to fiscal

2000, is primarily a result of higher average borrowing levels and increased

interest rates under the Company's credit facility as compared to the prior

year. Similarly, the increase in interest expense in fiscal 2000 as compared

with fiscal 1999, was due to higher average borrowings and increased interest

rates. See "Liquidity and Capital Resources."

<PAGE>

INCOME TAX PROVISION/(BENEFITS)

The effective tax rate for fiscal 2001 was 41.4% as compared with an effective

rate of 21.6% in fiscal 2000. The effective tax rate for fiscal 2000 included an

increase to the Company's valuation allowance of $6.0 million which was

attributable to the potential that certain federal and state tax assets may not

be realized.

Realization of the Company's deferred tax assets, which relate principally to

net operating loss carryforwards which expire 2017 through 2019, is dependent on

generating sufficient taxable income during the carryforward period.

Accordingly, the valuation allowance at February 3, 2001 is primarily

attributable to the potential that certain deferred federal and state tax assets

will not be realizable. Although realization is not assured, management believes

it is more likely than not that all of the remaining deferred tax assets will be

realized. In reaching this determination, management considered the Company's

historical performance, noting that the losses in fiscal 1998, 1999 and 2000

which generated the net operating loss carryforwards described above were

principally the result of charges incurred to exit unprofitable businesses and

that the Company's core business of selling Levi Strauss branded apparel in

outlet stores has been consistently profitable. Assuming future operating

results consistent with fiscal 2001, the Company could expect to realize its

deferred tax assets in the next 6 to 7 years; however, management projections of

future results, which are based, in part, on results from new stores expected to

open over the next two to three years, anticipate increases in profitability

which are expected to result in realization of the deferred tax assets over the

next three years. As a result, no additional charge to the valuation allowance

was deemed necessary at February 3, 2001. The amount of the deferred tax assets

considered realizable could be reduced in the near term if projections of future

taxable income during the carryforward period are reduced.

At February 3, 2001, the Company has net operating loss carryforwards of

$33,997,000 for federal income tax purposes and $75,035,000 for state income tax

purposes, which are available to offset future taxable income through fiscal

year 2019. Additionally, the Company has alternative minimum tax credit

carryforwards of $1,138,000, which are available to reduce further income taxes

over an indefinite period.

During the first quarter of fiscal year 1999, the Internal Revenue Service

("IRS") completed an examination of the Company's federal income tax returns for

fiscal years 1992 through 1996. Taxes on the adjustments proposed by the IRS,

excluding interest, amount to approximately $4.9 million. The IRS has challenged

the fiscal tax years in which various income and expense deductions were

recognized, resulting in potential timing differences of previously paid federal

income taxes. The Company appealed these proposed adjustments through the IRS

appeals process. The Company and the IRS have reached a preliminary settlement,

which the Company believes will result in final cash payments of approximately

$1.9 million as compared to the original assessment of $4.9 million. In the

opinion of management, adequate provisions have been made for all related income

taxes and interest.

NET INCOME (LOSS)

The Company reported net income of $3.2 million or $0.20 per diluted share for

fiscal 2001 as compared to a net loss of $(12.5) million or $(0.78) per diluted

share for fiscal 2000 and a net loss of $(18.5) million or $(1.17) per diluted

share in fiscal 1999. Fiscal 2000 and fiscal 1999 included non-recurring

restructuring charges of $15.2 million and $18.6 million, respectively. Fiscal

2000 also included the write-down of certain tax assets in the amount of $6.0

million. See "Restructuring" for further discussion.

SEASONALITY

<TABLE>

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

FISCAL 2001 FISCAL 2000 FISCAL 1999

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

(SALES DOLLARS IN THOUSANDS)

First quarter $ 39,379 20.2% $ 39,835 20.7% $ 43,400 21.5%

Second quarter 45,693 23.5% 42,907 22.3% 47,078 23.4%

Third quarter 56,587 29.1% 56,703 29.5% 58,714 29.1%

Fourth quarter 52,871 27.2% 52,747 27.5% 52,442 26.0%

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

$194,530 100.0% $192,192 100.0% $201,634 100.0%

</TABLE>

A comparison of sales in each quarter of the past three fiscal years is

presented above. The amounts shown are not necessarily indicative of actual

trends, since such amounts also reflect the addition of new stores and the

remodeling and closing of others during these periods. Historically, the Company

has experienced seasonal fluctuations in revenues and income, exclusive of

<PAGE>

non-recurring charges, with increases occurring during the Company's third and

fourth quarters as a result of "Fall" and "Holiday" seasons. A comparison of

quarterly sales, gross profit, net income (loss) per share for the past two

fiscal years is presented in Note M of Notes to Consolidated Financial

Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs are for operating expenses, including cash

outlays associated with inventory purchases and capital expenditures for new and

remodeled stores. The Company expects that cash flow from operations, short-term

revolving borrowings and trade credit will enable it to finance its current

working capital, remodeling and expansion requirements.

The following table sets forth financial data regarding the Company's liquidity

position at the end of the past three fiscal years:

FISCAL YEARS

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

2001 2000 1999

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

(DOLLARS IN THOUSANDS)

Cash provided by operations $ 9,025 $ 863 $ 1,936

Working capital 16,306 19,624 24,078

Current ratio 1.4:1 1.5:1 1.7:1

The Company has financed its working capital requirements, store remodel and

expansion program, and stock repurchase programs with cash flow from operations,

borrowings under the Company's credit facility, and proceeds from common stock

offerings. Cash provided by operating activities was $9.0 million, $863,000, and

$1.9 million in fiscal 2001, 2000 and 1999, respectively. The favorable cash

flow from operations in fiscal 2001 is due to the Company's return to

profitability and the utilization of net operating loss carryforwards to reduce

its tax liabilities. During fiscal 2001, the Company used its $9.0 million of

cash flow from operations to finance its store expansion and remodel programs in

addition to other capital requirements in the amount of $7.2 million and the

Company's repurchase of its Common Stock in the amount of $6.6 million.

Therefore, the Company's net borrowing position increased to $24.3 million

compared to a net borrowing position of $22.2 million at January 29, 2000.

In addition to the Company's cash flow from operations, its other primary source

of working capital is its Credit Agreement with Fleet Retail Finance, Inc. This

agreement, which was amended most recently on December 7, 2000, provides a

revolving line of credit of up to $45 million and the ability to issue

documentary and standby letters of credit up to $10 million. The Credit

Agreement, which expires on November 30, 2003, was amended to reduce the

borrowing costs and tie future interest costs to excess borrowing availability,

eliminate all existing financial performance covenants and adopt a minimum

availability covenant, increase the amount that can potentially be borrowed by

increasing the advance rate formula to 68% of the Company's eligible inventory,

provide the Company the ability to enter into stock buyback programs and reduce

the total commitment from $50 million to $45 million. The Company's obligation

under the Credit Agreement continues to be secured by a lien on all of its

assets. The Company is subject to a prepayment penalty for the first two years

of the extended facility.

At February 3, 2001, the Company had borrowings of approximately $23.9 million

outstanding under this credit facility and had five outstanding standby letters

of credit totaling approximately $3.8 million. Average borrowings outstanding

under this credit facility for fiscal year 2001 were approximately $18.3

million. In fiscal 2001, the average unused availability under this credit

facility was approximately $15.0 million. This access to working capital was

further enhanced by the re-negotiation of the credit facility through the

increasing of the advance rate on eligible borrowings, the reduction of

outstanding letters of credit by approximately $1 million and the benefit of

entering into collateralized-based letters of credit for merchandise if needed.

The Company's favorable cash flow from operations in fiscal 1999 was principally

due to an income tax refund of $12.9 million resulting from tax carrybacks

related to fiscal 1998 operating losses.

Inventory

At February 3, 2001, total inventories increased 1.2% to $57.7 million from

$57.0 million at January 29, 2000. This increase was mainly due to the change in

the inventory markdown reserve from January 29, 2000. Inventory at January 29,

2000 included a markdown reserve of $3.5 million. This remaining reserve was

part of the $15.2 million charge recorded by the Company in the fourth quarter

of fiscal 2000, see discussion "Restructuring - Fiscal 2000."

<PAGE>

The Company continues to evaluate and, within the discretion of management, act

upon opportunities to purchase substantial quantities of Levi's(R) and

Dockers(R) brand products for its Levi's(R) Outlet and Dockers(R) Outlet stores.

Stock Repurchase Programs

During the second and third quarters of fiscal 2000, the Company repurchased

863,000 shares of its Common Stock at an aggregate cost of $1,861,000 under a

Stock Repurchase Program that was approved by the Company's Board of Directors

in June 2000.

On December 28, 2000, the Company purchased 1.8 million shares at $2.50 through

a "Dutch Auction" tender offer. Under the terms of the offer, the Company

invited its shareholders to tender their shares to the Company at prices

specified by the tendering shareholders not in excess of $3.00 nor less than

$2.20 per share, in ten-cent ($0.10) increments. The Company selected the lowest

single per-share purchase price that would allow it to buy 1.5 million shares,

or up to an additional 1.0 million shares at the Company's option.

These shares were purchased in the open market and were recorded by the Company

as treasury stock and are reflected as a reduction in stockholders' equity.

Litigation

At February 3, 2000, the Company had a $1 million promissory note which was

payable to Atlantic Harbor, Inc. in conjunction with the Company's acquisition

of certain assets from Boston Trading Ltd., Inc. ("Boston Trading") in May 1995.

In the first quarter of fiscal 1997, the Company asserted certain

indemnification rights. Accordingly, the Company did not make the two $500,000

payments of principal on the promissory note which were due on May 2, 1996 and

May 2, 1997. In January 1998, Atlantic Harbor, Inc. filed a lawsuit against the

Company for failing to pay the outstanding principal amount of the promissory

note, and in March 1998, the Company filed a counterclaim against Atlantic

Harbor, Inc. alleging that the Company suffered damaged in excess of $1 million

because of the breach of certain representations and warranties made by Atlantic

Harbor, Inc. and its stockholders concerning the existence and condition of

certain foreign trademark registrations and license agreements. In March 2001,

the Company has entered into a settlement agreement with Atlantic Harbor, Inc.

whereby the Company has agreed to pay cash of $450,000 to Atlantic Harbor, Inc.

as settlement for all obligations under the outstanding promissory note. In

exchange, the Company agreed to transfer and assign all trademarks and license

agreements acquired as part of the original purchase agreement to a new entity

in which the Company would have a 15% equity interest, with Atlantic Harbor, Inc

and its affiliates retaining the remaining interest. In addition, the Company

would also be entitled to receive up to an additional $150,000 from existing

license royalties over the next four years. At February 3, 2001, the Company

recorded a gain on the settlement of this matter in the amount of $550,000,

which is included in "Provision for impairment of assets, store closing and

severance" on the Consolidated Statement of Operations. See "Item 3. Legal

Proceedings" for more discussion.

CAPITAL EXPENDITURES

The following table sets forth the stores opened, remodeled and closed and the

capital expenditures incurred for the fiscal years presented:

2001 2000 1999(1)

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

New Stores:

Levi's(R)/Dockers(R)

Outlets 6 10 --

Dockers(R) Outlets -- 2 --

Remodeled Stores:

Remodeled Levi's(R) Outlet

By Designs 9 6 --

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

Total new and remodeled 15 18 --

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

Total closed stores 4 23 37

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Capital expenditures (000's) $5,823 $6,006 --

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(1) Excludes 16 Dockers(R) Outlet stores and 9 Levi's(R) Outlet stores

acquired by the Company on September 30, 1998.

<PAGE>

During fiscal 2001, the Company received approximately $2.9 million in landlord

allowances against the total store capital expenditures of $5.8 million. The

Company incurred capital expenditures of $1.4 million in fiscal 2001 related to

miscellaneous leasehold improvements at the Company's corporate headquarters,

technology expenditures and other store capital.

The Company's present plans for expansion in fiscal 2002, barring unforeseen

circumstances, includes opening up to 5 new stores and remodeling or relocating

up to 11 existing Levi's(R) Outlet by Designs stores. As previously announced,

Levi Strauss & Co. has given the Company approval to open an additional

Levi's(R)/Dockers(R) Outlet by Designs stores in Puerto Rico in fiscal 2001. The

capital expenditures related to these 5 new stores and the remodeled or

relocated stores are expected, barring unforeseen circumstances, to total

approximately $3.2 million. This amount is net of committed landlord allowances

that the Company will receive during fiscal 2002. The estimated cost to remodel

or build a new Levi's(R)/Dockers(R) Outlet store is approximately $30-$35 per

square foot.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board issued SFAS No.137, "Accounting for

Derivative Instruments and Hedging Activities- Deferral of the Effective Date of

FASB Statement No. 133," in July 1999 making SFAS No. 133, "Accounting for

Derivative Instruments and Hedging Activities," effective for all fiscal

quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133

requires companies to record derivatives on the balance sheet as assets or

liabilities, measured at their fair value. Gains or losses resulting from

changes in the values of those derivatives would be accounted for depending on

the use of the derivative and whether it qualifies for hedge accounting. The

adoption of SFAS No. 133 will not have a significant effect on the Company's

results of operations or financial position.

EFFECTS OF INFLATION

Although the Company's operations are influenced by general economic trends, the

Company does not believe that inflation has had a material effect on the results

of its operations in the last three fiscal years.

Risks and Uncertainties

The Annual Report on Form 10-K, including the foregoing discussion of results of

operations, liquidity, capital resources and capital expenditures, contains

certain forward-looking statements within the meaning of Section 27A of the

Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act

of 1934. Forward-looking statements are statements other than historical

information or statements of current conditions. Some forward-looking statements

may be identified by use of terms such as "believe," "anticipate," "intends," or

"expects." These forward-looking statements in this Annual Report on Form 10-K

should not be regarded as a representation by the Company or any other person

that the objectives or plans of the Company will be achieved. Numerous factors

could cause the Company's actual results to differ materially from such

forward-looking statements. The Company encourages readers to refer to the

Company's Current Report on Form 8-K, previously filed with the Securities and

Exchange Commission on April 28, 2000, which identifies certain risks and

uncertainties that may have an impact on future earnings and the direction of

the Company. The Company undertakes no obligation to release publicly the

results of any future revisions it may make to forward-looking statements to

reflect events or circumstances after the date hereof or to reflect the

occurrence of unanticipated events.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the financial position and results of

operations of the Company are routinely subject to a variety of risks, including

market risk associated with interest rate movements on borrowings. The Company

regularly assesses these risks and has established policies and business

practices to protect against the adverse effect of these and other potential

exposures. The Company utilizes cash from operations and a revolving credit

facility to fund its working capital needs. The Company's revolving credit

facility is not used for trading or speculative purposes. In addition, the

Company has available letters of credit as sources of financing for its working

capital requirements. Borrowings under this credit agreement, which expires in

November 2003, bear interest at variable rates based on FleetBoston, N.A.'s

prime rate or the London Interbank Offering Rate ("LIBOR"). These interest rates

at February 3, 2001 were 9.0% for prime and included various LIBOR contracts

with interest rates ranging from 7.573% to 7.805%. Based upon sensitivity

analysis as of February 3, 2001, a 10% increase in interest rates would result

in a potential loss to future earnings of approximately $165,000.

<PAGE>

Item 8. Financial Statements and Supplementary Data

DESIGNS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

----

Management's Responsibility for Financial Reporting 22

Report of Independent Auditors 23

Independent Auditors' Report 24

Report of Independent Public Accountants 25

Consolidated Financial Statements:

Consolidated Balance Sheets at February 3, 2001

and January 29, 2000 26

Consolidated Statements of Operations for the Fiscal Years Ended

February 3, 2001, January 29, 2000 and January 30, 1999 27

Consolidated Statements of Changes in Stockholders'

Equity for the Fiscal Years Ended February 3, 2001,

January 29, 2000 and January 30, 1999 28

Consolidated Statements of Cash Flows for the Fiscal Years

Ended February 3, 2001, January 29, 2000 and January 30, 1999 29

Notes to Consolidated Financial Statements 30

<PAGE>

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The integrity and objectivity of the financial statements and the related

financial information in this report are the responsibility of the management of

the Company. The financial statements have been prepared in conformity with

generally accepted accounting principles and include, where necessary, the best

estimates and judgments of management.

The Company maintains a system of internal accounting control designed to

provide reasonable assurance, at appropriate cost, that assets are safeguarded,

transactions are executed in accordance with management's authorization and the

accounting records provide a reliable basis for the preparation of the financial

statements. The system of internal accounting control is regularly reviewed by

management and improved and modified as necessary in response to changing

business conditions.

The Audit Committee of the Board of Directors, consisting solely of outside

directors, meets periodically with management and the Company's independent

auditors to review matters relating to the Company's financial reporting, the

adequacy of internal accounting control and the scope and results of audit work.

The independent auditors have free access to the Audit Committee.

Ernst & Young LLP, independent auditors, have been engaged to examine the

financial statements of the Company for the fiscal year ended February 3, 2001.

The Report of Independent Auditors expresses an opinion as to the fair

presentation of the financial statements in accordance with generally accepted

accounting principles and is based on an audit conducted in accordance with

auditing standards generally accepted in the United States.

/s/ DAVID A. LEVIN /s/ DENNIS R. HERNREICH

David A. Levin Dennis R. Hernreich

President and Chief Executive Officer Senior Vice President,

Chief Financial Officer

& Treasurer

<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Designs, Inc:

We have audited the accompanying consolidated balance sheet of Designs, Inc. as

of February 3, 2001 and the related consolidated statements of operations,

changes in stockholders' equity and cash flows for the year then ended. Our

audit also included the financial statement schedule for the year ended February

3, 2001 listed in the Index at Item 14 (a). These financial statements and

schedule are the responsibility of the Company's management. Our responsibility

is to express an opinion on the financial statements and schedule based on our

audit.

We conducted our audit 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 audit provides 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 Designs, Inc. as

of February 3, 2001, and the consolidated results of its operations and its cash

flows for the year then ended 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.

Boston, Massachusetts

March 26, 2001 /s/ ERNST & YOUNG LLP

<PAGE>

Independent Auditors' Report

To the Board of Directors and Stockholders of Designs, Inc:

We have audited the accompanying consolidated balance sheet of Designs, Inc. as

of January 29, 2000 and the related consolidated statements of operations,

changes in stockholders' equity and cash flows for the year then ended. Our

audit also included the financial statement schedule for the year ended January

29, 2000 listing in the Index as Item 14 (a)(2). These financial statements and

financial statement schedule are the responsibility of the Company's management.

Our responsibility is to express an opinion on the financial statements and

financial statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted

in the United States of America. 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 audit provides a

reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material

respects, the consolidated financial position of Designs, Inc. as of January 29,

2000, and the consolidated results of its operations and its cash flows for the

year then ended in conformity with accounting principles generally accepted in

the United States of America. Also, in our opinion, such financial statement

schedule for the year ended January 29, 2000, when considered in relation to the

basic financial statements taken as a whole, presents fairly in all material

respects, the information set forth therein.

Boston, Massachusetts

April 11, 2000 /s/ DELOITTE & TOUCHE LLP

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Designs, Inc:

We have audited the accompanying consolidated statements of operations, changes

in stockholders' equity and cash flows of Designs, Inc. and subsidiaries for the

year ended January 30, 1999. These financial statements are the responsibility

of the Company's management. Our responsibility is to express an opinion on the

financial statements based on our audit.