Warnaco (WAC) 10-Q 2010 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 4, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-10857

THE WARNACO GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4032739
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

501 Seventh Avenue
New York, New York 10018
(Address of registrant’s principal executive offices)

Registrant’s telephone number, including area code: (212) 287-8000

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.þ Yeso No.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso No.*

* Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No.

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of August 7, 2009 is as follows: 45,422,872

THE WARNACO GROUP, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 4, 2009

	PAGE
	NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of July 4, 2009, January 3, 2009 and July 5, 2008		1
Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 4, 2009 and for the Three and Six Months Ended July 5, 2008		2
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Six Months Ended July 4, 2009 and for the Six Months Ended July 5, 2008		3
Consolidated Condensed Statements of Cash Flows for the Six Months Ended July 4, 2009 and for the Six Months Ended July 5, 2008		4
Notes to Consolidated Condensed Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		60
Item 4. Controls and Procedures		62
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		63
Item 1A. Risk Factors		63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63
Item 3. Defaults Upon Senior Securities		64
Item 4. Submission of Matters to a Vote of Security Holders		64
Item 5. Other Information		64
Item 6. Exhibits		65
SIGNATURES		66
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, excluding share and per share data)

(Unaudited)

	July 4, 2009			January 3, 2009			July 5, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	177,633		$	147,627		$	154,516
Accounts receivable, net of reserves of $84,414, $87,375 and $80,830 as of July 4, 2009, January 3, 2009 and July 5, 2008, respectively		281,400			251,886			310,883
Inventories		291,578			326,297			316,350
Assets of discontinued operations		373			6,279			10,520
Prepaid expenses and other current assets (including deferred income taxes of $65,693, $65,050, and $78,601 as of July 4, 2009, January 3, 2009, and July 5, 2008, respectively)		158,630			156,777			168,032
Total current assets		909,614			888,866			960,301
Property, plant and equipment, net		115,387			109,563			112,627
Other assets:
Licenses, trademarks and other intangible assets, net		287,915			282,656			321,687
Goodwill		102,225			100,136			111,355
Other assets (including deferred income taxes of $43,556, $76,196, and $70,864 as of July 4, 2009, January 3, 2009, and July 5, 2008, respectively)		80,618			114,872			103,682
Total assets	$	1,495,759		$	1,496,093		$	1,609,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	58,807		$	79,888		$	35,562
Accounts payable		124,531			146,030			143,988
Accrued liabilities		148,123			168,892			142,525
Liabilities of discontinued operations		11,363			12,055			17,141
Accrued income taxes payable (including deferred income taxes of $1,359 $1,406 and $1,824 as of July 4, 2009, January 3, 2009, and July 5, 2008, respectively)		7,831			7,447			25,109
Total current liabilities		350,655			414,312			364,325
Long-term debt		163,130			163,794			265,291
Other long-term liabilities (including deferred income taxes of $51,533, $51,192, and $68,830 as of July 4, 2009, January 3, 2009, and July 5, 2008, respectively)		122,699			129,246			121,453
Commitments and contingencies
Stockholders’ equity:
Warnaco Group Inc. stockholders’ equity:
Preferred stock (See Note 15)		—			—			—
Common stock: $0.01 par value, 112,500,000 shares authorized, 50,358,920, 50,122,614 and 49,508,960 issued as of July 4, 2009, January 3, 2009 and July 5, 2008, respectively		504			501			495
Additional paid-in capital		639,607			631,891			614,176
Accumulated other comprehensive income		21,885			12,841			95,161
Retained earnings		321,647			268,016			257,835
Treasury stock, at cost 4,937,038, 4,865,401 and 3,913,943 shares as of July 4, 2009, January 3, 2009 and July 5, 2008, respectively		(126,952	)		(125,562	)		(109,409	)
Total Warnaco Group Inc. stockholders’ equity		856,691			787,687			858,258
Noncontrolling interest		2,584			1,054			325
Total stockholders’ equity		859,275			788,741			858,583
Total liabilities and stockholders’ equity	$	1,495,759		$	1,496,093		$	1,609,652

See Notes to Consolidated Condensed Financial Statements.

1

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands, excluding share and per share amounts)

(Unaudited)

	Three Months Ended							Six Months Ended
	July 4, 2009				July 5, 2008			July 4, 2009			July 5, 2008
Net revenues	$	455,894			$	503,304		$	994,339		$	1,070,962
Cost of goods sold		266,758				278,473			579,643			592,010
Gross profit		189,136		��		224,831			414,696			478,952
Selling, general and administrative expenses		145,598				173,629			304,354			369,824
Amortization of intangible assets		2,242				2,588			4,369			5,062
Pension expense (income)		594				(291	)		1,131			(582	)
Operating income		40,702				48,905			104,842			104,648
Other loss (income)		2,799				(1,203	)		2,395			4,258
Interest expense		5,799				7,086			11,868			16,476
Interest income		(416	)			(671	)		(824	)		(1,604	)
Income from continuing operations before provision for income taxes and noncontrolling interest		32,520				43,693			91,403			85,518
Provision for income taxes		13,199				17,070			33,333			51,712
Income from continuing operations before noncontrolling interest		19,321				26,623			58,070			33,806
Income (loss) from discontinued operations, net of taxes		(649	)			(7,111	)		(1,569	)		3,626
Net income		18,672				19,512			56,501			37,432
Less: Net income attributable to the noncontrolling interest		(912	)			(148	)		(1,170	)		(359	)
Net income attributable to Warnaco Group, Inc.	$	17,760			$	19,364		$	55,331		$	37,073
Amounts attributable to Warnaco Group Inc. common shareholders:
Income from continuing operations, net of tax	$	18,409			$	26,475		$	56,900		$	33,447
Discontinued operations, net of tax		(649	)			(7,111	)		(1,569	)		3,626
Net income	$	17,760			$	19,364		$	55,331		$	37,073
Basic income per common share attributable to Warnaco Group, Inc. common shareholders (see Note 17):
Income from continuing operations	$	0.40			$	0.58		$	1.24		$	0.73
Income (loss) from discontinued operations		(0.01	)			(0.16	)		(0.03	)		0.08
Net income	$	0.39			$	0.42		$	1.21		$	0.81
Diluted income per common share attributable to Warnaco Group, Inc. common shareholders (see Note 17):
Income from continuing operations	$	0.40			$	0.56		$	1.23		$	0.71
Income (loss) from discontinued operations		(0.02	)			(0.15	)		(0.04	)		0.08
Net income	$	0.38			$	0.41		$	1.19		$	0.79
Weighted average number of shares outstanding used in computing income per common share (see Note 17):
Basic		45,412,175				45,340,695			45,356,680			44,953,200
Diluted		46,010,870				46,884,255			45,879,453			46,540,156

See Notes to Consolidated Condensed Financial Statements.

2

THE WARNACO GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	Warnaco Group Inc.
					Accumulated
			Additional		Other
	Common		Paid-in		Comprehensive			Retained		Treasury			Noncontrolling			Comprehensive
	Stock		Capital		Income			Earnings		Stock			Interest			Income			Total
Balance at December 29, 2007	$	482	$	587,099	$	69,583		$	220,762	$	(105,030	)	$	—		$	—		$	772,896
Comprehensive income:
Net income									37,073					359			37,432			37,432
Other comprehensive income, net of tax:
Foreign currency translation adjustments						25,508								19			25,527			25,527
Change in post retirement plans						(44	)										(44	)		(44	)
Loss on cash flow hedges						(125	)										(125	)		(125	)
Other						239											239			239
Other comprehensive income														19			25,597			25,597
Comprehensive income														378		$	63,029			63,029
Effect of consolidation of noncontrolling interest														(53	)					(53	)
Stock issued in connection with stock compensation plans		13		19,732																19,745
Compensation expense in connection with employee stock compensation plans				7,345																7,345
Purchase of treasury stock related to stock compensation plans											(4,379	)								(4,379	)
Balance at July 5, 2008	$	495	$	614,176	$	95,161		$	257,835	$	(109,409	)	$	325					$	858,583

	Warnaco Group Inc.
					Accumulated
			Additional		Other
	Common		Paid-in		Comprehensive			Retained			Treasury			Noncontrolling		Comprehensive
	Stock		Capital		Income/(Loss)			Earnings			Stock			Interest		Income			Total
Balance at January 3, 2009	$	501	$	631,891	$	12,841		$	268,016		$	(125,562	)	$	1,054	$	—		$	788,741
Comprehensive income:
Net income									55,331						1,170		56,501			56,501
Other comprehensive income, net of tax:
Foreign currency translation adjustments						9,522									344		9,866			9,866
Loss on cash flow hedges						(572	)										(572	)		(572	)
Other						94									16		110			110
Other comprehensive income															360		9,404			9,404
Comprehensive income															1,530	$	65,905			65,905
Correction of adjustment to initially adopt FIN 48									(1,700	)										(1,700	)
Stock issued in connection with stock compensation plans		3		1,023																1,026
Compensation expense in connection with employee stock compensation plans				6,693																6,693
Purchase of treasury stock related to stock compensation plans												(1,390	)							(1,390	)
Balance at July 4, 2009	$	504	$	639,607	$	21,885		$	321,647		$	(126,952	)	$	2,584				$	859,275

See Notes to Consolidated Condensed Financial Statements.

3

THE WARNACO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended
	July 4, 2009			July 5, 2008
Cash flows from operating activities:
Net income	$	56,501		$	37,432
Adjustments to reconcile net income to net cash provided by operating activities:
Foreign exchange (gain)		(2,355	)		(3,985	)
(Income) loss from discontinued operations		1,569			(3,626	)
Depreciation and amortization		21,276			22,332
Stock compensation		6,693			7,047
Provision for trade and other bad debts		3,366			2,747
Inventory writedown		8,421			11,944
Loss on repurchase of Senior Notes/ refinancing of debt facilities		—			3,160
Other		399			1,434
Changes in operating assets and liabilities:
Accounts receivable		(25,289	)		(40,015	)
Inventories		32,059			3,514
Prepaid expenses and other assets		2,000			(17,646	)
Accounts payable, accrued expenses and other liabilities		(52,858	)		(302	)
Accrued income taxes		18,657			32,385
Net cash provided by operating activities from continuing operations		70,439			56,421
Net cash provided by (used in) operating activities from discontinued operations		3,624			(17,881	)
Net cash provided by operating activities		74,063			38,540
Cash flows from investing activities:
Proceeds on disposal of assets and collection of notes receivable		175			170
Purchases of property, plant & equipment		(20,847	)		(19,555	)
Proceeds from the sale of businesses		—			27,855
Business acquisitions, net of cash acquired		—			(2,356	)
Purchase of intangible assets		—			(26,727	)
Net cash used in investing activities from continuing operations		(20,672	)		(20,613	)
Net cash used in investing activities from discontinued operations		—			—
Net cash used in investing activities		(20,672	)		(20,613	)
Cash flows from financing activities:
Repayments of Term B Note		—			(1,350	)
Repurchase of Senior Notes due 2013		—			(46,185	)
Premium on cancellation of interest rate swap		739
Decrease in short-term notes payable		(18,707	)		(25,087	)
Repayments under revolving credit facility		(4,102	)		—
Proceeds from the exercise of employee stock options		377			19,087
Purchase of treasury stock		(1,390	)		(4,379	)
Other		(515	)		(17	)
Net cash (used in) financing activities from continuing operations		(23,598	)		(57,931	)
Net cash used in financing activities from discontinued operations		—			—
Net cash (used in) financing activities		(23,598	)		(57,931	)
Effect of foreign exchange rate changes on cash and cash equivalents		213			2,602
Increase (Decrease) in cash and cash equivalents		30,006			(37,402	)
Cash and cash equivalents at beginning of period		147,627			191,918
Cash and cash equivalents at end of period	$	177,633		$	154,516

See Notes to Consolidated Condensed Financial Statements.

4

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, excluding share and per share amounts)

(Unaudited)

Note 1—Organization

The Warnaco Group, Inc. (“Warnaco Group’ and, collectively with its subsidiaries, the “Company”) was incorporated in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all of the outstanding shares of Warnaco Inc. (“Warnaco”). Warnaco is the principal operating subsidiary of Warnaco Group.

Note 2 — Basis of Consolidation and Presentation

The consolidated financial statements include the accounts of Warnaco Group and its wholly-owned subsidiaries. Non-controlling interest represents minority shareholders’ proportionate share of the equity in the Company’s consolidated subsidiary WBR Industria e Comercio de Vestuario S.A. All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the annual period ended January 3, 2009 (“Fiscal 2008”). The year end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Periods Covered:The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period January 4, 2009 to January 2, 2010 (“Fiscal 2009”) will contain 52 weeks of operations, while the period from December 30, 2007 to January 3, 2009 (“Fiscal 2008”) contained 53 weeks of operations. Additionally, the period from April 5, 2009 to July 4, 2009 (the “Three Months Ended July 4, 2009”) and the period from April 6, 2008 to July 5, 2008 (the “Three Months Ended July 5, 2008”) each contained thirteen weeks of operations. The period from January 4, 2009 to July 4, 2009 (the “Six Months Ended July 4, 2009”) and the period from December 30, 2007 to July 5, 2008 (the “Six Months Ended July 5, 2008”) contained twenty-six weeks and twenty-seven weeks of operations, respectively.

Reclassifications:Prior period items on the Company’s Consolidated Condensed Statements of Operations and Consolidated Condensed Statements of Cash Flows have been reclassified to give effect to the Company’s discontinued operations. In addition, certain prior period items on the Company’s Consolidated Condensed Statements of Operations and Consolidated Condensed Balance Sheets have been reclassified to give effect to the adoption of SFAS 160 (as defined below) on January 4, 2009. Basic and diluted earnings per share data have also been recalculated in accordance with the adoption of FSP EITF 03-06-1 (see below) on January 4, 2009.

5

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Stock-Based Compensation:601,350 and 613,850 stock options were granted during the Three and Six Months Ended July 4, 2009, respectively, and 417,400 stock options were granted during the Three Months Ended July 5, 2008. The fair values of stock options granted during the Three and Six Months Ended July 4, 2009 and the Three Months Ended July 5, 2008 were estimated at the date of grant using a Black-Scholes-Merton option pricing model with the following assumptions:

	Three Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Weighted average risk free rate of return (a)		1.83	%		3.21	%		1.84	%		3.21	%
Dividend yield (b)		—			—			—			—
Expected volatility of the market price of the Company’s common stock		59.3	%		36.1	%		59.3	%		36.1	%
Expected option life	3.72 years			6 years			3.72 years			6 years

(a)	Based on the quoted yield for U.S. five-year treasury bonds as of the date of grant.
(b)	The terms of the Company’s New Credit Agreements and the terms of the indenture governing its Senior Notes (each as defined below) limit the Company’s ability to make certain payments, including dividends, and require the Company to meet certain financial covenants. The Company has not paid dividends on its common stock in any of the last four fiscal years.

Beginning with the Three Months Ended July 4, 2009, the Company had accumulated sufficient historical data regarding stock option exercises and forfeitures to be able to rely on that data for the calculation of expected option life. Expected option life is an assumption that is used in the Black-Scholes-Merton option pricing model, which the Company uses to obtain a fair value of stock options granted. Accordingly, for options granted during the Three Months Ended July 4, 2009, the Company revised its method of calculating expected option life from the simplified method as described in Staff Accounting Bulletin No. 110 (which yielded an expected term of 6 years) to the use of historical data (which yielded an expected life of 3.72 years). Historical data will be used for stock options granted in all future periods.

A summary of stock-based compensation expense is as follows:

	Three Months Ended				Six Months Ended
	July 4, 2009		July 5, 2008		July 4, 2009		July 5, 2008
Stock-based compensation expense before income taxes:
Stock options	$	1,529	$	1,393	$	2,619	$	2,664
Restricted stock grants		1,975		1,989		4,074		4,690
Total (a)		3,504		3,382		6,693		7,354
Income tax benefit:
Stock options		520		486		901		930
Restricted stock grants		664		312		1,210		736
Total		1,184		798		2,111		1,666
Stock-based compensation expense after income taxes:
Stock options		1,009		907		1,718		1,734
Restricted stock grants		1,311		1,677		2,864		3,954
Total	$	2,320	$	2,584	$	4,582	$	5,688

(a) Stock-based compensation has been reflected in the Company’s Consolidated Statements of Operations as follows:

	Three Months Ended				Six Months Ended
	July 4, 2009		July 5, 2008		July 4, 2009		July 5, 2008
Included in income from continuing operations before provision for income taxes and noncontrolling interest	$	3,504	$	3,382	$	6,693	$	7,047
Included in income from discontinued operations, net of income taxes		—		—		—		307
	$	3,504	$	3,382	$	6,693	$	7,354

6

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141(R)”) which replaces SFAS No.141,Business Combinations. SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. For example, (a) consideration paid in the form of equity securities will be measured on the closing date of the acquisition rather than on the announcement date, which introduces volatility in estimating the final acquisition price, (b) contingent consideration will be recorded at fair value on the acquisition date regardless of the likelihood of payment rather than when the contingency is resolved, which increases the initial purchase price and may give rise to more goodwill and (c) transaction costs will be expensed as incurred rather than added to the purchase price and allocated to net assets acquired, which decreases the initial purchase price and the amount of goodwill and reduces the acquirer’s earnings before and after the close of the transaction. SFAS 141(R) was effective for the Company from January 4, 2009 on a prospective basis for all business combinations for which the acquisition date was on or after that date, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and to acquired tax contingencies, such as uncertain tax positions under FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(“FIN 48”), associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R), so that such adjustments will be recognized in earnings rather than as an adjustment to goodwill. The Company expects that in the event it enters into a business combination or adjusts its valuation allowances subsequent to January 4, 2009, SFAS 141(R) may have a material impact on its financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51Consolidated Financial Statements(“ARB 51”) to establish new standards that will govern the accounting for and reporting of (1) noncontrolling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Significant changes to accounting for noncontrolling interests include (a) the inclusion of noncontrolling interests in the equity section of the controlling entity’s consolidated balance sheet rather than in the mezzanine section and (b) changes in the controlling entity’s interest in the noncontrolling interest, without a change in control, are recognized in the controlling entity’s equity rather than being accounted for by the purchase method, which would have given rise to goodwill. SFAS 160 was effective for the Company from January 4, 2009 on a prospective basis for all fiscal years, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which are applied retrospectively. The Company changed the presentation of noncontrolling interest (formerly called minority interests) in its Consolidated Condensed Balance Sheets and Consolidated Condensed Statements of Operations for all periods presented. Although the adoption of SFAS 160 affects certain performance and equity ratios, the Company does not expect that there will be a material effect on its ability to comply with the financial covenants contained in its debt covenant agreements.

The Company adopted the provisions of SFAS No. 157,Fair Value Measurements(“SFAS 157”) on December 30, 2007 for recurring financial assets and liabilities that are recognized or disclosed at fair value in the financial statements and on January 4, 2009 for non-recurring financial assets and liabilities and for all other non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures. However the application of this statement may change current practice. Beginning in Fiscal 2009, the full adoption of SFAS 157 includes application to financial assets and liabilities, primarily the Company’s derivative contracts, as well as non-financial assets and liabilities, such as assets and liabilities acquired in a business combination or impairment testing of long-lived assets. The adoption of SFAS 157 did not have a material effect on the Company’s financial condition or results of operations.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133(“SFAS 161”). The new standard requires additional disclosures regarding a company’s derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related as well as cross-referencing within the notes to the financial statements to enable financial statement users to locate important information about derivative instruments, financial performance, and cash flows. SFAS 161 is effective for the Company’s fiscal year and interim periods within such year, beginning January 4, 2009. The Company has presented the expanded disclosures inNote 11 of Notes to the Consolidated Condensed Financial StatementsandItem 3. Qualitative and Quantitative Disclosures About Market Risk — Foreign Exchange Risk.

7

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

In April 2008, the FASB issued FASB Staff Position (FSP) No.142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142Goodwill and Other Intangible Assets(“SFAS 142”).In particular, an entity will use its own assumptions based on its historical experience about renewal or extension of an arrangement even when there is likely to be substantial cost or material modification. In the absence of historical experience, an entity will use the assumptions that market participants would use (consistent with the highest and best use of the asset). FSP 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP 142-3 was effective for the Company’s financial statements issued for fiscal years from January 4, 2009, and interim periods within those fiscal years. The Company’s adoption of FSP 142-3 did not have a material impact on its financial condition, results of operations or cash flows.

In June 2008, the FASB issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“FSP EITF 03-06-1”), which clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are required to be included in the computation of both basic and diluted earnings per share pursuant to the two-class method as described in paragraphs 60 and 61 of FASB Statement No. 128,Earnings per Share.FSP EITF 03-06-1 was effective for the Company’s financial statements issued for fiscal years beginning January 4, 2009, and interim periods within those years. All prior-period earnings per share data presented are required to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with its provisions. The adoption of FSP EITF 03-06-1 by the Company did not have a material effect on the calculation of either basic or diluted earnings per share for any period presented, although shares of restricted stock, which are deemed to be participating securities, were included in those calculations for all periods presented.

On December 30, 2008, the FASB issued FSP FAS132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets(“FSP FAS 132R-1”). FSP FAS 132R-1 contains amendments to FASB Statement No. 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits(SFAS 132(R)),that are intended to enhance the transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plan. FSP FAS 132R-1 expands the disclosures set forth in FAS 132(R) by adding required disclosures about: (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentrations of risk. Additionally, FSP FAS 132R-1 requires an employer to disclose information about the valuation of plan assets similar to that required under SFAS 157. Those disclosures include: (1) the level within the fair value hierarchy in which fair value measurements of plan assets fall, (2) information about the inputs and valuation techniques used to measure the fair value of plan assets, and (3) a reconciliation of the beginning and ending balances of plan assets valued using significant unobservable inputs (Level 3 under SFAS 157). The new disclosures are required to be included in financial statements for fiscal years ending after December 15, 2009. The Company will provide the enhanced disclosures required by FSP FAS 132R-1in its Form 10-K for the year ending January 2, 2010 (Fiscal 2009).

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments(“FSP FAS 107-1 and FSP APB 28-1”). FSP FAS 107-1 and FSP APB 28-1 amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments,to require disclosures about fair value and the related carrying amount of financial instruments in interim financial statements as well as in annual financial statements and amends APB Opinion No. 28,Interim Financial Reporting,to require those disclosures in all interim financial statements. FSP FAS 107-1 and FSP APB 28-1 also requires disclosure about the method(s) and significant assumptions used to estimate the fair value of financial instruments. FAS FSP 107-1 and FSP APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Disclosures are required only on a prospective basis. The Company adopted FAS FSP 107-1 and FSP APB 28-1 for the Three Months Ended July 4, 2009 and has presented the required disclosures inNotes 10 and 11 of Notes to Consolidated Condensed Financial Statements.

8

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

In April 2009, the FASB issued FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly(“FSP FAS 157-4”), which confirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions (that is, in the inactive market). FSP FAS 157-4 provides guidance for identifying inactive markets and transactions that are not orderly and for making fair value measurements more consistent with the principles presented in FAS 157 in those circumstances. If a reporting entity determines that the market for the asset is not active, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS 157. The use of multiple valuation techniques may be appropriate (for example, the use of a market approach and a present value technique). When weighting indications of fair value resulting from the use of multiple valuation techniques, a reporting entity shall consider the reasonableness of the range of fair value estimates. The objective is to determine the point within that range that is most representative of fair value under current market conditions. A wide range of fair value estimates may be an indication that further analysis is needed. An entity is required to disclose the inputs and valuation techniques used to measure fair value, any change in valuation technique (and the related inputs) resulting from the application of FSP FAS 157-4 and to quantify its effects, if practicable. FSP FAS 157-4 is effective for the Company, on a prospective basis only, for interim and annual periods beginning with the Three Months Ended July 4, 2009. The adoption of FSP FAS 157-4 by the Company did not have a material effect on its financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies(“FSP FAS 141R-1”), which amends certain provisions of SFAS 141(R), including the elimination of the distinction between contractual and non-contractual contingencies, related to initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141R-1 revises the guidance in SFAS 141(R) to require that an asset or liability arising from a contingency that would be within the scope of SFAS 5,Accounting for Contingencies, be recognized at the acquisition date at fair value if fair value can be reasonably determined during the measurement period. FSP FAS 141R-1 provides guidance for assessing when fair value can be reasonably determined. If those conditions are not met, assets acquired and liabilities assumed are not recognized at the acquisition date. In subsequent periods, those assets and liabilities are accounted for under SFAS 5 or other applicable GAAP. Accounting for contingent consideration arrangements remains unchanged from SFAS 141(R). FSP FAS 141R-1 was effective for the Company for business combinations for which the acquisition date was on or after January 4, 2009. If it enters into a business combination, the Company will assess the impact of FSP FAS 141R-1 on its financial position, results of operations and cash flows.

In May 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. Public companies are required to evaluate subsequent events through the date that financial statements are issued. SFAS 165 requires disclosure of the date through which an entity has evaluated subsequent events and is effective for interim and annual periods ending after June 15, 2009. The Company has made the required disclosure inNote 21 to Notes to Consolidated Condensed Financial Statements.

In June 2009, the FASB issued SFAS No. 168,TheFASB Accounting Standards Codification^TMand the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162(“SFAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS 168, thus, establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by those entities. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The SEC Sections in the Codification are not the authoritative sources of such content and do not contain the entire population of SEC rules, regulations, interpretive releases, and staff guidance. All guidance contained in the Codification carries an equal level of authority. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates to the Codification. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will revise all references to accounting literature in accordance with the Codification beginning in its Form10-Q for the Three Months Ended October 3, 2009. The Company does not expect any changes to the accounting principles used to prepare its financial statements as a result of the adoption of SFAS 168.

9

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 3—Acquisitions

Businesses in Chile and Peru:On June 10, 2009, the Company acquired from Fashion Company S.A. (formerly Clemente Eblen S.A.) and Battery S.A. (collectively, “Eblen”), for cash consideration of $2,475, businesses relating to distribution and sale at wholesale and retail of jeanswear and underwear products bearing theCalvin Kleintrademarks in Chile and Peru, including the transfer and assignment to the Company by Eblen of the right to operate and conduct business at three retail locations in Chile and one retail location in Peru. The acquisition of these businesses is expected to increase the Company’s presence and profitability in South America.

2008 CK Licenses: In connection with the consummation of the January 31, 2006 acquisition of 100% of the shares of the companies (“the CKJEA Business”) that operate the wholesale and retail businesses ofCalvin Kleinjeanswear and accessories in Europe and Asia and theCK Calvin Klein “bridge” line of sportswear and accessories in Europe, the Company became obligated to acquire from the seller of the CKJEA Business, for no additional consideration and subject to certain conditions which were ministerial in nature, 100% of the shares of the company (the “Collection License Company”) that operates the license (the “Collection License”) for theCalvin Kleinmen’s and women’s Collection apparel and accessories worldwide. The Company acquired the Collection License Company on January 28, 2008. The Collection License was scheduled to expire in December 2013. However, pursuant to an agreement (the “Transfer Agreement”) entered into on January 30, 2008, the Company transferred the Collection License Company to Phillips-Van Heusen Corporation (“PVH”), the parent company of Calvin Klein, Inc. (“CKI”). In connection therewith, the Company paid approximately $42,000 (net of expected working capital adjustments) to, or on behalf of, PVH and entered into certain new, and amended certain existing, Calvin Klein licenses (collectively, the “2008 CK Licenses”).

The rights acquired by the Company pursuant to the 2008 CK Licenses include: (i) rights to operateCalvin KleinJeanswear Accessories Stores in Europe, Eastern Europe, Middle East, Africa and Asia, as defined; (ii) rights to operateCalvin KleinJeanswear Accessories Stores in Central and South America (excluding Canada and Mexico, which is otherwise included in the underlying grant of rights to the company to operateCalvin KleinJeanswear retail stores in Central and South America); (iii) rights to operateCK/Calvin KleinBridge Accessories Stores in Europe, Eastern Europe, Middle East and Africa, as defined; (iv) rights to operateCK/Calvin KleinBridge Accessories Stores in Central and South America (excluding Canada and Mexico, which is otherwise included in the underlying grant of rights to the Company to operateCalvin KleinBridge Accessories Stores in Central and South America); and (v) e-commerce rights in the Americas, Europe and Asia forCalvin KleinJeans and forCalvin Kleinjeans accessories. Each of the 2008 CK Licenses are long-term arrangements. In addition, pursuant to the Transfer Agreement, the Company has entered into and is continuing negotiations with respect to a grant of rights to sublicense and distributeCalvin KleinGolf apparel and golf related accessories in department stores, specialty stores and other channels in Asia.

During the Six Months Ended July 5, 2008, the Company recorded $24,700 of intangible assets related to the 2008 CK Licenses and recorded a restructuring charge (included in selling, general and administrative expenses) of $18,535 (the “Collection License Company Charge”) related to the transfer of the Collection License Company to PVH.

Retail Stores in China: Effective March 31, 2008, the Company acquired a business which operates 11 retail stores in China (which acquisition included the assumption of the leases related to the stores) for a total consideration of approximately $2,524.

Note 4—Discontinued Operations

As disclosed in its Annual Report on Form 10-K for Fiscal 2008, the Company discontinued certain operations in prior periods. Summarized operating results for the discontinued operations are as follows:

	Three Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Net revenues	$	—		$	4,627		$	31		$	40,910
Income (loss) before income tax benefit	$	(872	)	$	(11,672	)	$	(1,573	)	$	(58	)
Income tax provision (benefit)		(223	)		(4,561	)		(4	)		(3,684	)
Income (loss) from discontinued operations	$	(649	)	$	(7,111	)	$	(1,569	)	$	3,626

10

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Summarized assets and liabilities of the discontinued operations are presented in the consolidated condensed balance sheets as follows:

	July 4, 2009		January 3, 2009		July 5, 2008
Accounts receivable, net	$	195	$	5,396	$	8,931
Inventories, net		—		23		192
Prepaid expenses and other current assets		178		778		1,024
Deferred Tax Asset — Current		—		82		—
Property, plant and equipment		—		—		373
Assets of discontinued operations	$	373	$	6,279	$	10,520
Accounts payable	$	105	$	356	$	5,017
Accrued liabilities		9,380		9,735		9,563
Deferred Tax Liabilities		—		104		—
Other		1,878		1,860		2,561
Liabilities of discontinued operations	$	11,363	$	12,055	$	17,141

Note 5—Restructuring Expenses and Other Exit Costs

During the Three and Six Months Ended July 4, 2009, the Company incurred restructuring charges and other exit costs of $1,474 and $10,045, respectively, primarily related to (i) the continuation of the workforce reduction, which commenced during the fourth quarter of Fiscal 2008, in order to align the Company’s cost structure to match current economic conditions ($560 and $6,097, respectively); (ii) the rationalization and consolidation of the Company’s European operations, which had begun in Fiscal 2007 ($195 and $796, respectively) ; (iii) activities associated with management’s initiatives to increase productivity and profitability in the Swimwear Group, which had also begun in Fiscal 2007 ($696 and $1,139, respectively), and (iv) other exit activities, including contract termination costs, legal and other costs ($23 and $2,013, respectively).

During the Three and Six Months Ended July 5, 2008, the Company incurred restructuring charges and other exit costs of $5,975 and $26,317, respectively, primarily related to (i) the Collection License Company Charge ( zero and $18,535, respectively); (ii) activities associated with management’s initiatives to increase productivity and profitability in the Swimwear Group ($145 and $1,114, respectively); (iii) the rationalization and consolidation of the Company’s European operations ($322 and $619, respectively), and (iv) contract termination charges, employee termination costs and legal and other costs associated with various other exit activities ($5,508 and $6,049, respectively).

Restructuring charges and other exit costs have been recorded in the Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 4, 2009 and Three and Six Months Ended July 5, 2008, as follows:

	Three Months Ended				Six Months Ended
	July 4, 2009		July 5, 2008		July 4, 2009		July 5, 2008
Cost of goods sold	$	201	$	104	$	1,684	$	840
Selling, general and administrative expenses		1,273		5,871		8,361		25,477
	$	1,474	$	5,975	$	10,045	$	26,317
Cash portion of restructuring items	$	1,474	$	4,568	$	10,045	$	24,878
Non-cash portion of restructuring items		—		1,407				1,439

11

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Changes in liabilities related to restructuring expenses and other exit costs for the Six Months Ended July 4, 2009 are summarized below:

	Total
Balance at January 3, 2009	$	5,925
Charges for the Six Months Ended July 4, 2009		10,045
Cash reductions for the Six Months Ended July 4, 2009		(7,034	)
Non-cash changes and foreign currency effects		69
Balance at July 4, 2009 (a)	$	9,005

(a) Includes approximately $7,056 recorded in accrued liabilities (part of current liabilities) which amounts are expected to be settled over the next 12 months and includes approximately $1,949 recorded in other long term liabilities which amounts are expected to be settled over the next five years.

Note 6—Business Segments and Geographic Information

Business Segments: The Company operates in three business segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group.

The Sportswear Group designs, sources and markets moderate to premium priced men’s and women’s sportswear under theCalvin KleinandChaps^®brands. As of July 4, 2009, the Sportswear Group operated 436Calvin Kleinretail stores worldwide (consisting of 40 full price free-standing stores, 29 outlet free standing stores, 366 shop-in-shop/concession stores and one on-line store). As of July 4, 2009, there were also 375 retail stores operated by third parties under retail licenses or distributor agreements.

The Intimate Apparel Group designs, sources and markets moderate to premium priced intimate apparel and other products for women and better to premium priced men’s underwear, sleepwear and loungewear under theCalvin Klein,Warner’s^®, Olga^®andBody Nancy Ganz/Bodyslimmers^®brand names. As of July 4, 2009, the Intimate Apparel Group operated: 567Calvin Kleinretail stores worldwide (consisting of 69 free-standing stores, 62 outlet free-standing stores and 435 shop-in-shop/concession stores and one on-line store). As of July 4, 2009, there were also 234Calvin Kleinretail stores operated by third parties under retail licenses or distributor agreements.

The Swimwear Group designs, licenses, sources and markets mass market to premium priced swimwear, fitness apparel, swim accessories and related products under theSpeedo^®,Lifeguard^®andCalvin Kleinbrand names. The Swimwear Group operates one on-line store.

12

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Information by business group is set forth below:

			Intimate
	Sportswear		Apparel		Swimwear		Group		Corporate /
	Group		Group		Group		Total		Other			Total
Three Months Ended July 4, 2009
Net revenues	$	223,527	$	158,122	$	74,245	$	455,894	$	—		$	455,894
Operating income (loss)		13,591		27,021		8,172		48,784		(8,082	)		40,702
Depreciation and amortization		7,012		2,783		589		10,384		767			11,151
Restructuring expense		352		311		852		1,515		(41	)		1,474
Capital expenditures		7,156		6,727		71		13,954		1,412			15,366
Three Months Ended July 5, 2008
Net revenues	$	249,395	$	172,215	$	81,694	$	503,304	$	—		$	503,304
Operating income (loss)		23,040		31,799		7,658		62,497		(13,592	)		48,905
Depreciation and amortization		6,787		2,894		614		10,295		782			11,077
Restructuring expense		4,401		18		144		4,563		1,412			5,975
Capital expenditures		2,089		3,620		85		5,794		2,192			7,986
Six Months Ended July 4, 2009
Net revenues	$	503,674	$	320,490	$	170,175	$	994,339	$	—		$	994,339
Operating income (loss)		51,912		56,423		20,727		129,062		(24,220	)		104,842
Depreciation and amortization		12,978		5,628		1,186		19,792		1,484			21,276
Restructuring expense		3,388		2,912		2,433		8,733		1,312			10,045
Capital expenditures		9,524		9,221		393		19,138		2,282			21,420
Six Months Ended July 5, 2008
Net revenues	$	549,514	$	339,244	$	182,204	$	1,070,962	$	—		$	1,070,962
Operating income (loss)		45,119		64,084		22,476		131,679		(27,031	)		104,648
Depreciation and amortization		13,668		5,668		1,101		20,437		1,895			22,332
Restructuring expense		23,096		695		1,114		24,905		1,412			26,317
Capital expenditures		5,450		6,361		132		11,943		4,284			16,227
Balance Sheet
Total Assets:
July 4, 2009	$	800,354	$	332,761	$	138,626	$	1,271,741	$	224,018		$	1,495,759
January 3, 2009		801,038		304,724		147,685		1,253,447		242,646			1,496,093
July 5, 2008		872,501		347,190		145,124		1,364,815		244,837			1,609,652
Property, Plant and Equipment:
July 4, 2009	$	29,332	$	40,133	$	3,864	$	73,329	$	42,058		$	115,387
January 3, 2009		26,525		33,921		4,091		64,537		45,026			109,563
July 5, 2008		23,750		27,986		4,070		55,806		56,821			112,627

All inter-company revenues and expenses are eliminated in consolidation. Management does not include inter-company sales when evaluating segment performance. Each segment’s performance is evaluated based upon operating income after restructuring charges but before unallocated corporate expenses, interest, foreign currency gains and losses, long-term inter-company notes and income taxes.

13

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The table below summarizes corporate/other expenses for each period presented:

	Three Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009		July 5, 2008
Unallocated corporate expenses	$	6,360		$	11,680		$	18,059	$	24,532
Foreign exchange losses (gains)		402			9			2,234		(226	)
Pension expense (income)		594			(291	)		1,131		(582	)
Restructuring expense		(41	)		1,412			1,312		1,412
Depreciation and amortization of corporate assets		767			782			1,484		1,895
Corporate/other expenses	$	8,082		$	13,592		$	24,220	$	27,031

A reconciliation of operating income from operating groups to income from continuing operations before provision for income taxes and noncontrolling interest is as follows:

	Three Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Operating income by operating groups	$	48,784		$	62,497		$	129,062		$	131,679
Corporate/other items		(8,082	)		(13,592	)		(24,220	)		(27,031	)
Operating income		40,702			48,905			104,842			104,648
Other (income) loss		2,799			(1,203	)		2,395			4,258
Interest expense		5,799			7,086			11,868			16,476
Interest income		(416	)		(671	)		(824	)		(1,604	)
Income from continuing operations before provision for income taxes and noncontrolling interest	$	32,520		$	43,693		$	91,403		$	85,518

Geographic Information: Net revenues summarized by geographic region are as follows:

	Three Months Ended
	July 4, 2009		%			July 5, 2008		%
Net revenues:
United States	$	232,320		51.0	%	$	254,484		50.6	%
Europe		98,274		21.5	%		119,791		23.8	%
Asia		70,676		15.5	%		71,790		14.3	%
Canada		29,226		6.4	%		30,817		6.1	%
Mexico, Central and South America		25,398		5.6	%		26,422		5.2	%
	$	455,894		100.0	%	$	503,304		100.0	%

	Six Months Ended
	July 4, 2009		%			July 5, 2008		%
	In thousands of dollars
Net revenues:
United States	$	502,064		50.5	%	$	511,498		47.7	%
Europe		240,989		24.3	%		291,956		27.3	%
Asia		153,457		15.4	%		158,373		14.8	%
Canada		49,923		5.0	%		57,749		5.4	%
Mexico, Central and South America		47,906		4.8	%		51,386		4.8	%
	$	994,339		100.0	%	$	1,070,962		100.0	%

14

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Information about Major Customers: For the Three Months Ended July 4, 2009, one customer accounted for approximately 10% of the Company’s net revenues. For the Six Months Ended July 4, 2009 and the Three and Six Months Ended July 5, 2008,no one customer accounted for 10% or more of the Company’s net revenues.

Note 7—Income Taxes

The effective tax rates for the Three Months Ended July 4, 2009 and July 5, 2008 were 40.6% and 39.1% respectively. The higher effective tax rate for the Three Months Ended July 4, 2009 primarily relates to a non-cash tax charge in the U.S., recorded during the Three Months Ended July 4, 2009, of approximately $2,500 in order to correct an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income in connection with the Company’s bankruptcy proceedings in 2003 (seeNote 6 to the Consolidated Financial Statementsin the Company’s Annual Report on Form 10-K for Fiscal 2008). In addition, there was a shift in earnings from lower to higher tax jurisdictions included in the effective tax rate for the Three Months Ended July 4, 2009.

In addition to increasing the Company’s provision for income taxes for the Three Months Ended July 4, 2009 by $2,500 (as discussed above), the Company corrected certain of its assets recorded in fresh start accounting resulting in a total reduction of $11,913 in non-current deferred tax assets (part of the “Other assets” line item on the Company’s Consolidated Condensed Balance Sheet), an increase of $7,342 in Licenses, trademarks and other intangible assets, a reduction of $1,700 in Retained earnings related to the correction of the adjustment to initially adopt FIN 48 and a $371 charge to income (loss) from discontinued operations. The errors were non-cash in nature and did not affect cash flows from operating, investing or financing activities in the current or any prior period. The Company determined that the errors were not material to the current or any previously issued financial statements.

The effective tax rates for the Six Months Ended July 4, 2009 and July 5, 2008 were 36.5% and 60.5% respectively. The lower effective tax rate for the Six Months Ended July 4, 2009 primarily relates to a non-cash tax charge of approximately $19,000 associated with the repatriation of theLejabysale proceeds (seeNote 3 to the Consolidated Financial Statementsin the Company’s Annual Report on Form 10-K for Fiscal 2008) recorded during the Six Months Ended July 5, 2008, partially offset, during the Six Months Ended July 4, 2009, by the effect of a shift in earnings from lower to higher tax jurisdictions and a non-cash tax charge of approximately $2,500 in the U.S. associated with the correction of an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income in connection with the Company’s bankruptcy proceedings in 2003.

The Company applies the provisions of FIN 48 to determine whether tax benefits associated with uncertain tax positions may be recognized in the financial statements. During the Six Months Ended July 4, 2009 the Company has not had a significant change to its liability for unrecognized tax benefits with the exception of a reduction in non-current deferred tax assets of $6,400 which amount included the effect of the error corrections discussed above. Additionally, the Company believes that its accruals for uncertain tax positions are adequate and that the ultimate resolution of these uncertainties will not have a material impact on its results of operations, financial position, or statement of cash flows.

While the Company remains under audit in various taxing jurisdictions, it is difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Company’s assessment of many factors, including past experience and complex judgments about future events, it is reasonably possible that within the next twelve months the amount of unrecognized tax benefits may increase between $3,000 and $6,000 (net of potential decreases), as a result of additional uncertain tax positions, the reevaluation of current uncertain tax positions arising from developments in examinations, the finalization of tax examinations, or from the closure of tax statutes.

Note 8—Employee Benefit and Retirement Plans

Defined Benefit Pension Plans

The Company has a defined benefit pension plan covering certain full-time non-union domestic employees and certain domestic employees covered by a collective bargaining agreement who had completed service prior to January 1, 2003 (the “Pension Plan”). Participants in the Pension Plan will not earn any additional pension benefits after December 31, 2002. The Company also sponsors a defined benefit plan for certain of its United Kingdom employees (the “U.K. Plan”). These pension plans are noncontributory and benefits are based upon years of service. The Company also has defined benefit health care and life insurance plans that provide post-retirement benefits to retired domestic employees (the “Postretirement Plans”). The Postretirement Plans are, in most cases, contributory with retiree contributions adjusted annually.

15

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The Company follows SFAS No. 87,Employers’ Accounting for Pensions(“SFAS 87”) and SFAS No. 158,Employer’s Accounting for Pensions, in regard to accounting for the Pension Plan. The U.K. Plan was not considered to be material for any period presented. Pursuant to SFAS 87, each quarter the Company recognizes interest cost of the Plan’s projected benefit obligation offset by the expected return on Pension Plan assets. The Company records pension expense as the effect of actual gains and losses exceeding the expected return on Pension Plan assets (including changes in actuarial assumptions) less changes in the Plan’s projected benefit obligation (including changes in actuarial assumptions) in the fourth quarter of each year. This accounting results in volatility in pension expense or income; therefore, the Company reports pension expense/income on a separate line of its statement of operations in each period.

The fair value of the Pension Plan’s assets fluctuates with market conditions and is subject to uncertainties that are difficult to predict. During the Six Months Ended July 4, 2009, the actual rate of return on the Pension Plan’s assets has been a gain of approximately 2.7%. However, based upon historical results, the Company has been using an assumed rate of return of 8% (gain) per year on Pension Plan assets to estimate pension income/expense on an interim basis.

The fair value of the Pension Plan’s assets, before contributions, was approximately $97,900 at July 4, 2009 compared to $100,587 at January 3, 2009. The fair value of the Pension Plan’s assets reflects a $1,400 decline from their assumed value of approximately $99,300, net of benefits paid but before contributions, at July 4, 2009.

The Company will record any changes in the fair value of the Pension Plan’s assets as Pension Plan income/expense in the fourth quarter of Fiscal 2009. Assuming that the fair value of the investment portfolio does not recover from its value at July 4, 2009, in light of the actual 2.7% increase in the fair value of the Company’s pension plan investment portfolio to $97,900 at July 4, 2009, the Company could recognize an additional $1,400 of pension expense for the year ending January 2, 2010. The Company’s pension income/expense is also affected by the discount rate used to calculate Pension Plan liabilities, Pension Plan amendments, Pension Plan benefit experience compared to assumed experience and other factors. These factors could increase or decrease the amount of pension income/expense ultimately recorded by the Company for Fiscal 2009.

During the Six Months Ended July 4, 2009, the Company made contributions of $9,500 to the Pension Plan, which increased the fair value of the Pension Plan’s assets, net of benefits paid, to approximately $107,400 at July 4, 2009. The Company’s contributions to the Pension Plan are expected to be $11,400 in total for Fiscal 2009.

The following table includes only the Pension Plan. The U.K. Plan was not considered to be material for any period presented. The components of net periodic benefit cost are as follows:

	Pension Plans						Postretirement Plans
	Three Months Ended						Three Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Service cost	$	—		$	—		$	39		$	5
Interest cost		2,549			2,472			52			81
Expected return on plan assets		(2,012	)		(2,763	)		—			—
Amortization of actuarial loss (gain)		—			—			(41	)		(22	)
Net benefit (income) cost (a)	$	537		$	(291	)	$	50		$	64

16

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Pension Plans						Postretirement Plans
	Six Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Service cost	$	—		$	—		$	78		$	122
Interest cost		5,098			4,949			105			161
Expected return on plan assets		(4,024	)		(5,531	)		—			—
Amortization of actuarial loss (gain)		—			—			(83	)		(44	)
Net benefit (income) cost (a)	$	1,074		$	(582	)	$	100		$	239

(a) Pension Plan net benefit (income) cost does not include (income) costs related to the U.K. Plan of $57 and $57 for the Three Months and Six Months Ended July 4, 2009.

Deferred Compensation Plans

The Company’s liability for employee contributions and investment activity was $2,334, $1,563 and $1,765 as of July 4, 2009, January 3, 2009 and July 5, 2008, respectively. This liability is included in other long-term liabilities. The Company’s liability for director contributions and investment activity was $531, $400 and $326 as of July 4, 2009, January 3, 2009 and July 5, 2008, respectively. This liability is included in other long-term liabilities.

Note 9—Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended						Six Months Ended
	July 4, 2009			July 5, 2008			July 4, 2009			July 5, 2008
Net income	$	18,672		$	19,512		$	56,501		$	37,432
Other comprehensive (loss) income:
Foreign currency translation adjustments		20,202			(3,177	)		9,866			25,527
Change in fair value of cash flow hedges		(910	)		(125	)		(572	)		(125	)
Other		111			(50	)		110			195
Total Comprehensive income		38,075			16,160			65,905			63,029
Less: Comprehensive income attributable to noncontrolling interest		(1,181	)		(167	)		(1,530	)		(378	)
Comprehensive income attributable to Warnaco Group Inc.	$	36,894		$	15,993		$	64,375		$	62,651

17

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The components of accumulated other comprehensive income as of July 4, 2009, January 3, 2009 and July 5, 2008 are summarized below:

	July 4,			January 3,			July 5,
	2009			2009			2008
Foreign currency translation adjustments (a)	$	22,720		$	13,198		$	96,118
Actuarial (losses), net related to post retirement medical plans		(29	)		(29	)		(837	)
Gain (Loss) on cash flow hedges		(900	)		(328	)		(125	)
Other		94			—			5
Total accumulated other comprehensive income	$	21,885		$	12,841		$	95,161

(a) The foreign currency translation adjustments reflect the change in the U.S. dollar relative to functional currencies where the Company conducts certain of its operations. The decrease of $73,398 in foreign currency translation adjustments at July 4, 2009 compared to July 5, 2008 reflects the decline in the strength of certain foreign currencies (principally the Euro, Canadian Dollar, Korean Won and Mexican Peso) relative to the U.S. dollar coupled with the fact that more than 65% of the Company’s assets are based outside of the U.S.

Note 10—Fair Value Measurement

The Company utilizes the market approach to measure fair value for financial assets and liabilities, which primarily relate to derivative contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:

Level 1 —	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 —	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 —	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Valuation Techniques

The fair value of interest rate swaps was estimated based on the amount that the Company would receive or pay to terminate the swaps on the valuation date. Those amounts are based on receipt of interest at a fixed interest rate of 8⁷/₈% and a payment of a variable rate based on a fixed interest rate above the six month LIBOR rate. As such, the fair value of the interest rate swaps is classified as level 2, as defined above.

The fair value of foreign currency exchange contracts and zero cost collars was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The fair value of these foreign currency exchange contracts is based on exchange-quoted prices that are adjusted based on a forward yield curve and, therefore, meets the definition of level 2 fair value, as defined above.

18

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following table represents the Company’s assets and liabilities measured at fair value as of July 4, 2009, as required by SFAS 157:

	(Level 1)		(Level 2)			(Level 3)
Assets
Interest rate swap (a)	$	—	$	1,508		$	—
Foreign currency exchange contracts		—		801			—
Liabilities
Foreign currency exchange contracts	$	—	$	(5,846	)	$	—

(a) The interest rate swap was called by the issuer on July 15, 2009. The Company received a debt premium of $1,479, which will be amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature). SeeNote 14 to Notes to Consolidated Condensed Financial Statements.

Note 11— Financial Instruments

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

Accounts Receivable: The carrying amount of the Company’s accounts receivable approximates fair value.

Accounts Payable: The carrying amount of the Company’s accounts payable is approximately equal to their fair value because accounts payable are short-term in nature and the carrying value is equal to the settlement value.

Short-term Revolving Credit Facilities: The carrying amount of the New Credit Agreements, CKJEA revolving credit facilities and other short term debt is approximately equal to their fair value because of their short-term nature and because amounts outstanding bear interest at variable rates which fluctuate with market rates.

Senior Notes: The Senior Notes mature on June 15, 2013 and bear interest at 8⁷/₈% payable semi-annually beginning December 15, 2003. The fair value of the Senior Notes is based upon quoted market prices for the Senior Notes.

Interest Rate Swaps: The fair value of the outstanding interest rate swaps is based upon the cost to terminate the contracts.

Letters of Credit: Letters of credit collateralize the Company’s obligations to third parties and have terms ranging from 30 days to one year. The face amounts of the letters of credit are a reasonable estimate of the fair value since the value for each is fixed over its relatively short maturity.

Foreign Currency Exchange Forward Contracts: The fair value of the outstanding foreign currency exchange forward contracts is based upon the cost to terminate the contracts.

19

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The carrying amounts and fair values of the Company’s financial instruments at July 4, 2009 are as follows:

		July 4, 2009
	Balance Sheet	Carrying		Fair
	Location	Amount		Value
Assets:
Accounts receivable	Accounts receivable, net of reserves	$	281,400	$	281,400
Open foreign currency exchange contracts	Prepaid expenses and other current assets		801		801
Interest rate swaps — net gain	Other assets		1,508		1,508
Liabilities:
Accounts payable	Accounts payable	$	124,531	$	124,531
Short-term revolving credit facilities	Short-term debt		58,807		58,807
Letters of credit	Short-term debt		—		62,102
Open foreign currency exchange contracts	Accrued liabilities		5,846		5,846
Senior Notes	Long-term debt		160,890		161,694

Derivative Financial Instruments

The Company is exposed to foreign exchange risk related to U.S. dollar-denominated purchases or sales of inventory, payment of minimum royalty and advertising costs and intercompany loans and payables by subsidiaries whose functional currencies are the Euro, Canadian Dollar, Korean Won, Mexican Peso or British Pound. The Company or its foreign subsidiaries enter into foreign exchange forward contracts, including zero-cost collar option contracts, to offset certain of its foreign exchange risk. The Company does not use derivative financial instruments for speculative or trading purposes.

The Company also utilizes interest rate swaps to convert a portion of the interest obligation related to its long-term debt from a fixed rate to floating rates. SeeNote 14. A number of international financial institutions are counterparties to the Company’s outstanding letters of credit, interest rate swap agreements, zero cost collars and foreign exchange contracts. The Company monitors its positions with, and the credit quality of, these counterparty financial institutions and does not anticipate nonperformance by these counterparties. Management believes that the Company would not suffer a material loss in the event of nonperformance by these counterparties.

During the Six Months Ended July 4, 2009, one of the Company’s European subsidiaries and one of the Company’s Canadian subsidiaries entered into foreign exchange forward contracts which were designed to satisfy certain U.S. dollar denominated purchases of inventory. As of July 4, 2009, the Company’s Korean and European subsidiaries also continued their hedging programs from Fiscal 2008 with foreign exchange forward contracts which were designed to satisfy the first 50% of U.S. dollar denominated purchases of inventory over an 18-month period, or payment of 100% of the minimum royalty and advertising expenses, respectively. All of the foregoing forward contracts were designated as cash flow hedges in accordance with SFAS 133.

During the Six Months Ended July 4, 2009, Warnaco Inc. entered into foreign currency forward contracts on behalf of one of its Mexican subsidiaries. In addition, as of July 4, 2009, the hedging programs also continued from Fiscal 2008 in which Warnaco Inc. has entered into foreign currency exchange contracts, including, zero-cost collars, on behalf of certain of its European, Korean and Canadian subsidiaries. These forward contracts were designed to fix the number of euros, Korean won, Canadian dollars or Mexican pesos required to satisfy (i) the first 50% of U.S. dollar denominated purchases of inventory over an 18-month period; (ii) 50% of intercompany sales to a British subsidiary or (iii) U.S. dollar denominated intercompany loans and payables. All of these foregoing foreign exchange contracts were accounted for as economic hedges, not subject to SFAS 133. In addition, one European subsidiary continued its hedging program of forward contracts related to purchases of inventory, which did not qualify for hedge accounting under SFAS 133 and was accounted for as an economic hedge. See alsoItem 3. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Riskin this Quarterly Report on Form 10-Q for further details. The Company also entered into interest rate swaps, which were designated as fair value hedges under SFAS 133, related to its long-term debt. SeeNote 14 to Notes to Consolidated Condensed Financial Statements.

20

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following table summarizes the Company’s derivative instruments as of July 4, 2009:

		Asset Derivatives			Liability Derivatives
		As of July 4, 2009			As of July 4, 2009
		Balance Sheet			Balance Sheet
	Type (a)	Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments under SFAS 133
Foreign exchange contracts	CF				Accrued liabilities	$	(656	)
Interest rate swaps	FV	Other assets	$	1,508
Total derivatives designated as hedging instruments under SFAS 133			$	1,508		$	(656	)
Derivatives not designated as hedging instruments under SFAS 133
Foreign exchange contracts		Prepaid expenses and other current assets	$	801	Accrued liabilities	$	(5,190	)
Total derivatives not designated as hedging instruments under SFAS 133			$	801		$	(5,190	)
Total derivatives			$	2,309		$	(5,846	)

(a) CF = cash flow hedge; FV = fair value hedge

21

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following table summarizes the effect of the Company’s derivative instruments on the Consolidated Condensed Statement of Operations for the Three Months and Six Months Ended July 4, 2009:

															Location of Gain
								Location of Gain							(Loss) Recognized in
								(Loss) Reclassified							Income on
Derivatives in SFAS 133								from Accumulated	Amount of Gain (Loss) Reclassified						Derivative	Amount of Gain (Loss) Recognized
Cash Flow Hedging	Nature of Hedged	Amount of Gain (Loss) Recognized in						OCI into Income	from Accumulated OCI into						(Ineffective	in Income on Derivative (Ineffective
Relationships	Transaction	OCI on Derivatives (Effective Portion)						(Effective Portion)	Income (Effective Portion)						Portion) (c)	Portion)
		Three Months			Six Months				Three Months			Six Months				Three Months			Six Months
		Ended			Ended				Ended			Ended				Ended			Ended
		July 4, 2009			July 4, 2009				July 4, 2009			July 4, 2009				July 4, 2009			July 4, 2009
Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	(555	)	$	(107	)	cost of goods sold	$	(27	)	$	70		other loss/income	$	(21	)	$	(6	)
Foreign exchange contracts	Purchases of inventory (b)		(485	)		(490	)	cost of goods sold		(105	)		(95	)	other loss/income		(4	)		(11	)
Total		$	(1,040	)	$	(597	)		$	(132	)	$	(25	)		$	(25	)	$	(17	)

(a)	At July 4, 2009, the amount hedged was $9,652; contracts expire March 2010.
(b)	At July 4, 2009, the amount hedged was $13,292; contracts expire October 2010.
(c)	No amounts were excluded from effectiveness testing.

Location of Gain

Derivatives not designated as

(Loss) Recognized in

Amount of Gain (Loss)

hedging instruments

Nature of Hedged

Income on

Recognized in Income on

under SFAS 133

Transaction

Instrument

Amount Hedged

Maturity Date

Derivative

Derivative

Three Months

Six Months

Ended

Ended

July 4, 2009

July 4, 2009

July 4, 2009

Foreign exchange contracts (d)

Purchases of inventory

Forward contracts

$

24,185

August 2009 — August 2010

other loss/income

$

(1,852

)

$

(2,560

)

Foreign exchange contracts (e)

Intercompany sales of inventory

Forward contracts

3,840

December 2009

other loss/income

(605

)

(698

)

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

10,000

April 2010

other loss/income

(504

)

(510

)

Foreign exchange contracts

Intercompany loans

Zero-cost collars

14,728

November 2009 — April 2010

other loss/income

500

415

Foreign exchange contracts

Intercompany payables

Zero-cost collars

35,000

July 2009 — January 2010

other loss/income

3

216

Foreign exchange contracts

Intercompany payables

Zero-cost collars

20,000

July 2009 — May 2010

selling, general and administrative

710

1,560

Total

$

(1,748

)

$

(1,577

)

(d)	Forward contracts used to offset 50% of U.S. dollar-denominated purchases of inventory by the Company’s foreign subsidiaries whose functional currencies were the Euro, Canadian dollar and Mexican peso, entered into by Warnaco Inc. on behalf of foreign subsidiaries and the euro, entered into by a European subsidiary.
(e)	Forward contracts used to offset 50% of euro-denominated intercompany sales to a subsidiary whose functional currency is the British pound.
(f)	Forward contracts used to offset payment of minimum royalties and advertising costs related to sales of inventory by the Company’s foreign subsidiary whose functional currency was the euro, entered into by Warnaco Inc. on behalf of a foreign subsidiary.

22

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

During the twelve months following July 4, 2009, the net amount of losses that were reported in Other Comprehensive Income (“OCI”) at that date that are estimated to be amortized into earnings is $885. During the Six Months Ended July 4, 2009, no amount of gains or losses was reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transactions will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter.

A reconciliation of the balance of Accumulated Other Comprehensive Income during the Six Months Ended July 4, 2009 related to cash flow hedges of foreign exchange forward contracts is as follows:

Balance January 3, 2009	$	(328	)
Derivative losses recognized		(614	)
Amount amortized to earnings		42
Balance July 4, 2009	$	(900	)

Note 12—Inventories

Inventories are valued at the lower of cost to the Company (using the first-in-first-out method) or market and are summarized as follows:

	July 4, 2009		January 3, 2009		July 5, 2008
Finished goods	$	290,315	$	322,095	$	314,675
Raw materials		1,263		4,202		1,675
	$	291,578	$	326,297	$	316,350

SeeNote 11 to Notes to Consolidated Condensed Financial Statementsfor details on the Company’s hedging programs related to purchases and sales of inventory.

23

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 13—Intangible Assets and Goodwill

The following tables set forth intangible assets as of July 4, 2009, January 3, 2009 and July 5, 2008 and the activity in the intangible asset accounts for the Six Months Ended July 4, 2009:

	July 4, 2009						January 3, 2009						July 5, 2008
	Gross						Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net		Amount		Amortization		Net
Finite-lived intangible assets:
Licenses for a term (Company as licensee)	$	286,852	$	40,467	$	246,385	$	281,800	$	36,894	$	244,906	$	314,679	$	33,346	$	281,333
Other		16,298		7,525		8,773		16,204		6,729		9,475		17,789		5,710		12,079
		303,150		47,992		255,158		298,004		43,623		254,381		332,468		39,056		293,412
Indefinite-lived intangible assets:
Trademarks		22,530		—		22,530		19,366		—		19,366		19,366		—		19,366
Licenses in perpetuity		10,227		—		10,227		8,909		—		8,909		8,909		—		8,909
		32,757		—		32,757		28,275		—		28,275		28,275		—		28,275
Intangible Assets	$	335,907	$	47,992	$	287,915	$	326,279	$	43,623	$	282,656	$	360,743	$	39,056	$	321,687

			Licenses		Finite-lived
			in		Intangible
	Trademarks		Perpetuity		Assets			Other			Total
Balance at January 3, 2009	$	19,366	$	8,909	$	244,906		$	9,475		$	282,656
Recapture of tax basis (a)		3,164		1,318		2,860			—			7,342
Amortization expense		—		—		(3,573	)		(796	)		(4,369	)
Translation adjustments		—		—		2,192			94			2,286
Balance at July 4, 2009	$	22,530	$	10,227	$	246,385		$	8,773		$	287,915

(a) Relates to the correction of certain intangible assets recorded in fresh start accounting. SeeNote 7 to Consolidated Condensed Financial Statements.

24

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The following table summarizes the Company’s estimated amortization expense for intangible assets for the next five years:

2010	$	9,202
2011		8,585
2012		8,396
2013		8,300
2014		7,396

The following table summarizes the changes in the carrying amount of goodwill for the Six Months Ended July 4, 2009:

	Sportswear		Intimate		Swimwear
	Group		Apparel Group		Group		Total
Goodwill balance at January 3, 2009	$	99,118	$	376	$	642	$	100,136
Adjustment:
Translation adjustments		1,361		30		—		1,391
Other (a)		—		698		—		698
Goodwill balance at July 4, 2009	$	100,479	$	1,104	$	642	$	102,225

(a) Relates to the acquisition of businesses in Chile and Peru (seeNote 3 to Notes to Consolidated Condensed Financial Statements).

The Company reviews its intangible assets and goodwill for impairment in the fourth quarter of each fiscal year or sooner if events or changes in circumstances indicate that the carrying amount of any of those assets may not be recoverable. Such events may include, among others, (a) a significant adverse change in legal factors or the business climate; (b) an adverse action or assessment by a regulator; (c) unanticipated competition; (d) a loss of key personnel; (e) a more-likely-than-not expectation that a reporting unit, or a significant part of a reporting unit, will be sold or disposed of; (f) the determination of a lack of recoverability of a significant “asset group” within a reporting unit; (g) reporting a goodwill impairment loss by a subsidiary that is a component of a reporting unit; and (h) a significant decrease in the Company’s stock price.

During the Three Months Ended July 4, 2009, the Company considered the potential of an impairment in its goodwill or intangible assets, consisting of licenses and trademarks primarily for itsCalvin Kleinproducts, by reviewing these factors. The Company concluded that there were no triggering events or changes in circumstances since the end of Fiscal 2008 which would require the Company to conduct an impairment evaluation of either goodwill or intangible assets.

25

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 14—Debt

Debt was as follows:

	July 4,		January 3,		July 5,
	2009		2009		2008
Short-term debt:
CKJEA notes payable and other	$	50,133	$	67,893	$	33,762
Revolving credit facilities		8,674		11,995		—
Current portion of Term B Note due 2012		—		—		1,800
		58,807		79,888		35,562
Long-term debt:
8 7/8% Senior Notes due 2013		160,890		160,890		160,890
Unrealized gain on swap agreements		1,508		2,904		251
Debt premium on 2004 swap		732		—		—
Term B Note due 2012		—		—		104,150
		163,130		163,794		265,291
Total Debt	$	221,937	$	243,682	$	300,853

Senior Notes

During March 2008, the Company purchased $44,110 aggregate principal amount of the outstanding 8⁷/₈% Senior Notes due 2013 (“Senior Notes”) for a total consideration of $46,185 in the open market. In connection with the purchase, the Company recognized a loss of approximately $3,160, which included the write-off of approximately $1,085 of deferred financing costs. The loss on the repurchase is included in the other loss (income) line item in the Company’s Consolidated Statement of Operations. The aggregate principal amount outstanding under the Senior Notes was $160,890 as of July 4, 2009, January 3, 2009 and July 5, 2008.

Interest Rate Swap Agreements

The Company entered into interest rate swap agreements on September 18, 2003 (the “2003 Swap Agreement”) and November 5, 2004 (the “2004 Swap Agreement”). The 2003 Swap Agreement provided that the Company would receive interest at 8⁷/₈% and pay a variable rate of interest based upon six month LIBOR plus 4.11% (5.33% at July 4, 2009). The 2004 Swap Agreement provided that the Company would receive interest of 8⁷/₈% and pay a variable rate of interest based upon six months LIBOR plus 4.34%. In June 2009, the 2004 Swap Agreement was called by the issuer and the Company received a debt premium of $740, which is being amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature). On July 15, 2009, the 2003 Swap Agreement was called by the issuer and the Company received a debt premium of $1,479, which will be amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature). As a result of the 2003 Swap Agreement and the 2004 Swap Agreement, the weighted average effective interest rate of the Senior Notes was 7.77% as of July 4, 2009, 7.77% as of January 3, 2009 and 8.15% as of July 5, 2008.

26

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

The fair value of the Company’s outstanding interest rate swap agreements reflect the termination premium (unrealized loss) or termination discount (unrealized gain) that the Company would realize if such swaps were terminated on the valuation date. Since the provisions of the Company’s 2003 Swap Agreement and 2004 Swap Agreement match the provisions of the Company’s outstanding Senior Notes (the “Hedged Debt”), changes in the fair value of the outstanding swaps do not have any effect on the Company’s results of operations but are recorded in the Company’s consolidated balance sheets. Unrealized gains on the outstanding interest rate swap agreements are included in other assets with a corresponding increase in the Hedged Debt. Unrealized losses on the outstanding interest rate swap agreements are included as a component of long-term debt with a corresponding decrease in the Hedged Debt. The table below summarizes the unrealized gain (loss) of the Company’s outstanding swap agreements:

	July 4,		January 3,		July 5,
	2009		2009		2008
Unrealized gain (loss):
2003 Swap Agreement	$	1,508	$	1,972	$	301
2004 Swap Agreement		—		932		(50	)
Net unrealized gain	$	1,508	$	2,904	$	251

New Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “New Credit Agreement”) and Warnaco of Canada Company (“Warnaco Canada”), an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “New Canadian Credit Agreement” and, together with the New Credit Agreement, the “New Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit.

The New Credit Agreement provides for a five-year asset-based revolving credit facility under which up to $270,000 initially will be available. In addition, during the term of the New Credit Agreement, Warnaco may make up to three requests for additional credit commitments in an aggregate amount not to exceed $200,000. The New Canadian Credit Agreement provides for a five-year asset-based revolving credit facility in an aggregate amount up to U.S. $30,000. The New Credit Agreements mature on August 26, 2013.

The New Credit Agreement has interest rate options that are based on (i) a Base Rate (as defined in the New Credit Agreement) plus 0.75% (4.00% at July 4, 2009) or (ii) a LIBOR (as defined in the New Credit Agreement) plus 1.75% (2.31% at July 4, 2009) in each case, on aper annumbasis. The interest rate payable on outstanding borrowing is subject to adjustments based on changes in the Company’s leverage ratio. The New Canadian Credit Agreement has interest rate options that are based on (i) the prime rate announced by Bank of America (acting through its Canada branch) plus 0.75% (3.00% at July 4, 2009), or (ii) a BA Rate (as defined in the New Canadian Credit Agreement) plus 1.75% (2.06% at July 4, 2009), in each case, on aper annumbasis and subject to adjustments based on changes in the Company’s leverage ratio. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) as its rate of interest for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

As of July 4, 2009, the Company had approximately $69 in loans and approximately $62,102 in letters of credit outstanding under the New Credit Agreement, leaving approximately $186,228 of availability (including $42,017 of available cash) under the New Credit Agreement. As of July 4, 2009, there was $8,605 in loans and no letters of credit outstanding under the New Canadian Credit Agreement and the available line of credit was approximately $17,942. As of July 4, 2009, the Company was in compliance with all financial covenants contained in the New Credit Agreements.

Revolving Credit Facility; Amended and Restated New Credit AgreementandForeign Revolving Credit Facility

On August 26, 2008, the Company terminated the Amended and Restated Credit Agreement, including the Term B Note, in connection with the closing of the New Credit Agreements (see above). In addition, during the third quarter of Fiscal 2008, the Company terminated the Foreign Revolving Credit Facility under which no amounts were outstanding. All guarantees, mortgages, liens and security interests related to both of those agreements were terminated at that time.

Euro-Denominated CKJEA Notes Payable and Other

The total CKJEA notes payable of $48,402 at July 4, 2009 consists of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA notes payable was 2.39% as of July 4, 2009, 4.50% as of January 3, 2009 and 5.67% as of July 5, 2008. All of the CKJEA notes payable are short-term and were renewed during the Six Months Ended July 4, 2009 for additional terms of no more than 12 months. In addition, one of the Company’s Korean subsidiaries had an outstanding note payable of $1,568 with an interest rate of 4.7% per annum and $3,785 with an interest rate of 8.84% per annum at July 4, 2009 and January 3, 2009, respectively.

27

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 15—Stockholders’ Equity

Preferred Stock

The Company has authorized an aggregate of 20,000,000 shares of preferred stock, par value $0.01 per share, of which 112,500 shares are designated as Series A preferred stock, par value $0.01 per share. There were no shares of preferred stock issued and outstanding at July 4, 2009, January 3, 2009 and July 5, 2008.

Stock Incentive Plans

A summary of stock option award activity under the Company’s stock incentive plans as of and for the Six Months Ended July 4, 2009 is presented below:

				Weighted
				Average
				Exercise
	Options			Price
Outstanding as of January 3, 2009		2,148,812		$	25.50
Granted		613,850			26.85
Exercised		(16,300	)		22.93
Forfeited / Expired		(21,600	)		42.88
Outstanding as of July 4, 2009		2,724,762		$	25.68
Options Exercisable as of July 4, 2009		1,720,500		$	21.02

A summary of the activity for unvested restricted share/unit awards under the Company’s stock incentive plans as of and for the Six Months Ended July 4, 2009 is presented below:

				Weighted Average
	Restricted			Grant Date Fair
	shares/units			Value
Unvested as of January 3, 2009		664,956		$	34.30
Granted		340,269			25.62
Vested		(211,681	)		25.71
Forfeited		(23,313	)		37.40
Unvested as of July 4, 2009		770,231		$	32.73

28

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 16—Supplemental Cash Flow Information

	Six Months Ended
	July 4,			July 5,
	2009			2008
Cash paid (received) during the period for:
Interest expense	$	11,585		$	15,167
Interest income		(1,973	)		(1,185	)
Income taxes, net of refunds received		14,676			19,381
Supplemental non-cash investing and financing activities:
Accounts payable for purchase of fixed assets		4,279			1,662

Note 17—Income per Common Share

The following table presents the calculation of both basic and diluted income per common share attributable to Warnaco Group, Inc. common shareholders in accordance with FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,which the Company adopted on January 1, 2009 (SeeNote 2 to Notes to Consolidated Condensed Financial Statements). The Company has determined that based on a review of its share-based awards, only its restricted stock awards are deemed participating securities, which participate equally with common shareholders. The weighted average restricted shares outstanding were 526,413 and 532,760 for the Three Months Ended July 4, 2009 and the Three Months Ended July 5, 2008, respectively, and 511,771 and 586,455, for the Six Months Ended July 4, 2009 and the Six Months Ended July 5, 2008, respectively. Undistributed income allocated to participating securities is based on the proportion of restricted shares outstanding to the sum of weighted average number of common shares outstanding attributable to Warnaco Group, Inc. common shareholders and restricted stock outstanding for each period presented.

29

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Six Months Ended
	July 4, 2009			July 5, 2008
Numerator for basic and diluted income per common share:
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders and participating securities	$	56,900		$	33,447
Less: allocation to participating securities		(635	)		(431	)
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders	$	56,265		$	33,016
Income (loss) from discontinued operations, net of tax, attributable to Warnaco Group, Inc. common shareholders and participating securities	$	(1,569	)	$	3,626
Less: allocation to participating securities		18			(47	)
Income (loss) from discontinued operations attributable to Warnaco Group, Inc. common shareholders	$	(1,551	)	$	3,579
Net income attributable to Warnaco Group, Inc. common shareholders and participating securities	$	55,331		$	37,073
Less: allocation to participating securities		(617	)		(478	)
Net income attributable to Warnaco Group, Inc. common shareholders	$	54,714		$	36,595
Basic income per common share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing income per common share		45,356,680			44,953,200
Income per common share from continuing operations	$	1.24		$	0.73
Income per common share from discontinued operations		(0.03	)		0.08
Net income per common share	$	1.21		$	0.81
Diluted income per share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing basic income per common share		45,356,680			44,953,200
Effect of dilutive securities:
Stock options and restricted stock units		522,773			1,586,956
Weighted average number of shares and share equivalents used in computing income per common share		45,879,453			46,540,156
Income per common share from continuing operations	$	1.23		$	0.71
Income per common share from discontinued operations		(0.04	)		0.08
Net income per common share	$	1.19		$	0.79
Number of anti-dilutive “out-of-the-money” stock options outstanding (a)		1,270,349			417,400

30

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Three Months Ended
	July 4, 2009			July 5, 2008
Numerator for basic and diluted income per common share:
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders and participating securities	$	18,409		$	26,475
Less: allocation to participating securities		(211	)		(307	)
Income from continuing operations attributable to Warnaco Group, Inc. common shareholders	$	18,198		$	26,168
Income (loss) from discontinued operations, net of tax, attributable to Warnaco Group, Inc. common shareholders and participating securities	$	(649	)	$	(7,111	)
Less: allocation to participating securities		7			83
Income (loss) from discontinued operations attributable to Warnaco Group, Inc. common shareholders	$	(642	)	$	(7,028	)
Net income attributable to Warnaco Group, Inc. common shareholders and participating securities	$	17,760		$	19,364
Less: allocation to participating securities		(204	)		(224	)
Net income attributable to Warnaco Group, Inc. common shareholders	$	17,556		$	19,140
Basic income per common share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing income per common share		45,412,175			45,340,695	��
Income per common share from continuing operations	$	0.40		$	0.58
Income per common share from discontinued operations		(0.01	)		(0.16	)
Net income per common share	$	0.39		$	0.42
Diluted income per share attributable to Warnaco Group, Inc. common shareholders:
Weighted average number of common shares outstanding used in computing basic income per common share		45,412,175			45,340,695
Effect of dilutive securities:
Stock options and restricted stock units		598,695			1,543,560
Weighted average number of shares and share equivalents used in computing income per common share		46,010,870			46,884,255
Income per common share from continuing operations	$	0.40		$	0.56
Income per common share from discontinued operations		(0.02	)		(0.15	)
Net income per common share	$	0.38		$	0.41
Number of anti-dilutive “out-of-the-money” stock options outstanding (a)		431,000			415,500

(a) Options to purchase shares of common stock at an exercise price greater than the average market price of the underlying shares are anti-dilutive and therefore not included in the computation of diluted income per common share from continuing operations.

Note 18—Legal Matters

SEC Inquiry: As disclosed in its Annual Report on Form 10-K for Fiscal 2008, the Company announced, on August 8, 2006, that it would restate its previously reported financial statements for the fourth quarter of 2005, fiscal 2005 and the first quarter of 2006. The restatements were required as a result of certain irregularities discovered by the Company during the Company’s 2006 second quarter closing review and certain other errors. The irregularities primarily related to the accounting for certain returns and customer allowances at the Company’sChapsmenswear division. These matters were reported to the Company’s Audit Committee, which engaged outside counsel, who in turn retained independent forensic accountants, to investigate and report to the Audit Committee. Based on information obtained in that investigation, and also to correct for an error which resulted from the implementation of the Company’s new systems infrastructure at its Swimwear Group during the first quarter of 2006, and certain immaterial errors, the Audit Committee accepted management’s recommendation that the Company restate its financial statements.

31

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

In connection with the restatements, the Company contacted the SEC staff to inform them of the restatements and the Company’s related investigation. Thereafter, the SEC staff initiated an informal inquiry, and on February 22, 2008, informed the Company that in September 2007 the SEC had issued a formal order of investigation, with respect to these matters. The Company is cooperating fully with the SEC.

OP Litigation: On August 19, 2004, the Company acquired 100% of the outstanding common stock of Ocean Pacific Apparel Corp. (“OP”). The terms of the acquisition agreement required the Company to make certain contingent payments to the sellers (the “Sellers”) under certain circumstances. On November 6, 2006, the Company sold the OP business. The Sellers of OP have filed an action against the Company alleging that certain contingent purchase price payments are due to them as a result of the Company’s sale of the OP business in November 2006. The Company believes that the Sellers’ lawsuit is without merit and intends to defend itself vigorously. The Company believes that it is adequately reserved for any potential settlements.

Other:In addition, from time to time, the Company is involved in arbitrations or legal proceedings that arise in the ordinary course of its business. The Company cannot predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any such arbitration and/or legal proceeding that it expects to have a material effect on its financial condition, results of operations or business.

Note 19—Supplemental Consolidating Condensed Financial Information

The following tables set forth supplemental consolidating condensed financial information as of July 4, 2009, January 3, 2009 and July 5, 2008 and for the Three and Six Months Ended July 4, 2009 and the Three and Six Months Ended July 5, 2008 for: (i) The Warnaco Group, Inc.; (ii) Warnaco Inc.; (iii) the subsidiaries that guarantee the Senior Notes (the “Guarantor Subsidiaries”); (iv) the subsidiaries other than the Guarantor Subsidiaries (the “Non-Guarantor Subsidiaries”); and (v) The Warnaco Group, Inc. on a consolidated basis. The Senior Notes are guaranteed by substantially all of Warnaco Inc.’s domestic subsidiaries.

	July 4, 2009
	The Warnaco		Warnaco		Guarantor			Non-Guarantor		Elimination
	Group, Inc.		Inc.		Subsidiaries			Subsidiaries		Entries			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	48,062	$	(2	)	$	129,573	$	—		$	177,633
Accounts receivable, net		—		37,798		80,707			162,895		—			281,400
Inventories		—		61,453		58,201			171,924		—			291,578
Prepaid expenses and other current assets		—		63,693		15,990			78,947		—			158,630
Assets of discontinued operations		—		—		187			186		—			373
Total current assets		—		211,006		155,083			543,525		—			909,614
Property, plant and equipment, net		—		48,525		5,697			61,165		—			115,387
Investment in subsidiaries		1,101,234		551,617		—			—		(1,652,851	)		—
Other assets		—		51,196		53,605			365,957		—			470,758
Total assets	$	1,101,234	$	862,344	$	214,385		$	970,647	$	(1,652,851	)	$	1,495,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Liabilities of discontinued operations	$	—	$	17	$	8,183		$	3,163	$	—		$	11,363
Accounts payable, accrued liabilities, short-term debt and accrued taxes		—		65,132		37,100			237,060		—			339,292
Total current liabilities		—		65,149		45,283			240,223		—			350,655
Intercompany accounts		241,959		119,676		(510,489	)		148,854		—			—
Long-term debt		—		163,130		—			—		—			163,130
Other long-term liabilities		—		37,495		2,725			82,479		—			122,699
Stockholders’ equity		859,275		476,894		676,866			499,091		(1,652,851	)		859,275
Total liabilities and stockholders’ equity	$	1,101,234	$	862,344	$	214,385		$	970,647	$	(1,652,851	)	$	1,495,759

32

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	January 3, 2009
	The Warnaco		Warnaco		Guarantor			Non-Guarantor		Elimination
	Group, Inc.		Inc.		Subsidiaries			Subsidiaries		Entries			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	30,771	$	(2	)	$	116,858	$	—		$	147,627
Accounts receivable, net		—		22,755		57,709			171,422		—			251,886
Inventories		—		67,251		83,205			175,841		—			326,297
Prepaid expenses and other current assets		—		59,586		23,786			73,405		—			156,777
Assets of discontinued operations		—		—		5,381			898		—			6,279
Total current assets		—		180,363		170,079			538,424		—			888,866
Property, plant and equipment, net		—		51,220		6,045			52,298		—			109,563
Investment in subsidiaries		1,036,139		551,617		—			—		(1,587,756	)		—
Other assets		—		80,644		51,408			365,612		—			497,664
Total assets	$	1,036,139	$	863,844	$	227,532		$	956,334	$	(1,587,756	)	$	1,496,093
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Liabilities of discontinued operations	$	—	$	—	$	7,445		$	4,610	$	—		$	12,055
Accounts payable, accrued liabilities, short-term debt and accrued taxes		—		84,286		47,619			270,352		—			402,257
Total current liabilities		—		84,286		55,064			274,962		—			414,312
Intercompany accounts		247,398		97,543		(480,490	)		135,549		—			—
Long-term debt		—		163,794		—			—		—			163,794
Other long-term liabilities		—		45,814		2,648			80,784		—			129,246
Stockholders’ equity		788,741		472,407		650,310			465,039		(1,587,756	)		788,741
Total liabilities and stockholders’ equity	$	1,036,139	$	863,844	$	227,532		$	956,334	$	(1,587,756	)	$	1,496,093

	July 5, 2008
	The Warnaco		Warnaco		Guarantor			Non-Guarantor		Elimination
	Group, Inc.		Inc.		Subsidiaries			Subsidiaries		Entries			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	9,557	$	233		$	144,726	$	—		$	154,516
Accounts receivable, net		—		—		130,819			180,064		—			310,883
Inventories		—		68,582		59,136			188,632		—			316,350
Prepaid expenses and other current assets		—		72,286		16,544			79,202		—			168,032
Assets of discontinued operations		—		269		8,682			1,569		—			10,520
Total current assets		—		150,694		215,414			594,193		—			960,301
Property, plant and equipment, net		—		53,806		6,091			52,730		—			112,627
Investment in subsidiaries		1,107,551		551,615		—			—		(1,659,166	)		—
Other assets		—		78,150		51,691			406,883		—			536,724
Total assets	$	1,107,551	$	834,265	$	273,196		$	1,053,806	$	(1,659,166	)	$	1,609,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Liabilities of discontinued operations	$	—	$	81	$	9,506		$	7,554	$	—		$	17,141
Accounts payable, accrued liabilities, short-term debt and accrued taxes		—		64,945		32,194			250,045		—			347,184
Total current liabilities		—		65,026		41,700			257,599		—			364,325
Intercompany accounts		248,968		17,385		(420,852	)		154,499		—			—
Long-term debt		—		265,291		—			—		—			265,291
Other long-term liabilities		—		12,425		2,743			106,285		—			121,453
Stockholders’ equity		858,583		474,138		649,605			535,423		(1,659,166	)		858,583
Total liabilities and stockholders’ equity	$	1,107,551	$	834,265	$	273,196		$	1,053,806	$	(1,659,166	)	$	1,609,652

33

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Three Months Ended July 4, 2009
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries			Consolidated
Net revenues	$	—		$	110,996		$	121,324		$	223,574		$	—		$	455,894
Cost of goods sold		—			74,551			80,034			112,173			—			266,758
Gross profit		—			36,445			41,290			111,401			—			189,136
SG&A expenses (including amortization of intangible assets)		—			26,941			23,687			97,212			—			147,840
Pension expense (income)		—			537			—			57			—			594
Operating income (loss)		—			8,967			17,603			14,132			—			40,702
Equity in income of subsidiaries		(17,760	)		—			—			—			17,760			—
Intercompany		—			(3,114	)		(704	)		3,818			—			—
Other (income) loss		—			3,573			—			(774	)		—			2,799
Interest (income) expense, net		—			4,129			1			1,253			—			5,383
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest		17,760			4,379			18,306			9,835			(17,760	)		32,520
Provision (benefit) for income taxes		—			1,659			7,251			4,289			—			13,199
Income (loss) from continuing operations before noncontrolling interest		17,760			2,720			11,055			5,546			(17,760	)		19,321
Income (loss) from discontinued operations, net of income taxes		—			—			(364	)		(285	)		—			(649	)
Net Income (loss)		17,760			2,720			10,691			5,261			(17,760	)		18,672
Less: Net Income (loss) attributable to the noncontrolling interest		—			—			—			(912	)		—			(912	)
Net income (loss) attributable to Warnaco Group, Inc.	$	17,760		$	2,720		$	10,691		$	4,349		$	(17,760	)	$	17,760
Amounts attributable to Warnaco Group Inc. common shareholders:
Income from continuing operations, net of tax	$	17,760		$	2,720		$	11,055		$	4,634		$	(17,760	)	$	18,409
Discontinued operations, net of tax		—			—			(364	)		(285	)		—			(649	)
Net Income	$	17,760		$	2,720		$	10,691		$	4,349		$	(17,760	)	$	17,760

	Three Months Ended July 5, 2008
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries			Consolidated
Net revenues	$	—		$	116,221		$	135,397		$	251,686		$	—		$	503,304
Cost of goods sold		—			74,303			89,610			114,560			—			278,473
Gross profit		—			41,918			45,787			137,126			—			224,831
SG&A expenses (including amortization of intangible assets)		—			38,032			27,930			110,255			—			176,217
Pension expense (income)		—			(291	)		—			—			—			(291	)
Operating income (loss)		—			4,177			17,857			26,871			—			48,905
Equity in income of subsidiaries		(19,364	)		—			—			—			19,364			—
Intercompany		—			(2,305	)		(713	)		3,018			—			—
Other (income) loss		—			332			(983	)		(552	)		—			(1,203	)
Interest (income) expense, net		—			6,048			—			367			—			6,415
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest		19,364			102			19,553			24,038			(19,364	)		43,693
Provision (benefit) for income taxes		—			(22,412	)		15,924			23,558			—			17,070
Income (loss) from continuing operations before noncontrolling interest		19,364			22,514			3,629			480			(19,364	)		26,623
Income (loss) from discontinued operations, net of income taxes		—			(17	)		(6,096	)		(998	)		—			(7,111	)
Net income (loss)		19,364			22,497			(2,467	)		(518	)		(19,364	)		19,512
Less: Net income attributable to the noncontrolling interest		—			—			—			(148	)		—			(148	)
Net income (loss) attributable to Warnaco Group, Inc.	$	19,364		$	22,497		$	(2,467	)	$	(666	)	$	(19,364	)	$	19,364
Amounts attributable to Warnaco Group Inc. common shareholders:
Income from continuing operations, net of tax	$	19,364		$	22,514		$	3,629		$	332		$	(19,364	)	$	26,475
Discontinued operations, net of tax		—			(17	)		(6,096	)		(998	)		—			(7,111	)
Net Income	$	19,364		$	22,497		$	(2,467	)	$	(666	)	$	(19,364	)	$	19,364

34

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Six Months Ended July 4, 2009
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries			Consolidated
Net revenues	$	—		$	228,729		$	273,336		$	492,274		$	—		$	994,339
Cost of goods sold		—			152,662			180,625			246,356			—			579,643
Gross profit		—			76,067			92,711			245,918			—			414,696
SG&A expenses (including amortization of intangible assets)		—			62,333			50,358			196,032			—			308,723
Pension expense (income)		—			1,074			—			57			—			1,131
Operating income (loss)		—			12,660			42,353			49,829			—			104,842
Equity in income of subsidiaries		(55,331	)		—			—			—			55,331			—
Intercompany		—			(8,144	)		(1,270	)		9,414			—			—
Other (income) loss		—			5,297			—			(2,902	)		—			2,395
Interest (income) expense, net		—			8,444			1			2,599			—			11,044
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest		55,331			7,063			43,622			40,718			(55,331	)		91,403
Provision (benefit) for income taxes		—			2,576			15,908			14,849			—			33,333
Income (loss) from continuing operations before noncontrolling interest		55,331			4,487			27,714			25,869			(55,331	)		58,070
Income (loss) from discontinued operations, net of income taxes		—			—			(1,161	)		(408	)		—			(1,569	)
Net Income (loss)		55,331			4,487			26,553			25,461			(55,331	)		56,501
Less: Net Income (loss) attributable to the noncontrolling interest		—			—			—			(1,170	)		—			(1,170	)
Net income (loss) attributable to Warnaco Group, Inc.	$	55,331		$	4,487		$	26,553		$	24,291		$	(55,331	)	$	55,331
Amounts attributable to Warnaco Group Inc. common shareholders:
Income from continuing operations, net of tax	$	55,331		$	4,487		$	27,714		$	24,699		$	(55,331	)	$	56,900
Discontinued operations, net of tax		—			—			(1,161	)		(408	)		—			(1,569	)
Net Income	$	55,331		$	4,487		$	26,553		$	24,291		$	(55,331	)	$	55,331

	Six Months Ended July 5, 2008
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries			Consolidated
Net revenues	$	—		$	222,379		$	279,910		$	568,673		$	—		$	1,070,962
Cost of goods sold		—			144,963			186,896			260,151			—			592,010
Gross profit		—			77,416			93,014			308,522			—			478,952
SG&A expenses (including amortization of intangible assets)		—			77,198			58,649			239,039			—			374,886
Pension expense (income)		—			(582	)		—			—			—			(582	)
Operating income (loss)		—			800			34,365			69,483			—			104,648
Equity in income of subsidiaries		(37,073	)		—			—			—			37,073			—
Intercompany		—			(3,729	)		(2,955	)		6,684			—			—
Other (income) loss		—			3,524			(170	)		904			—			4,258
Interest (income) expense, net		—			13,531			(1	)		1,342			—			14,872
Income (loss) from continuing operations before provision for income taxes and noncontrolling interest		37,073			(12,526	)		37,491			60,553			(37,073	)		85,518
Provision (benefit) for income taxes		—			(7,563	)		22,648			36,627			—			51,712
Income (loss) from continuing operations before noncontrolling interest		37,073			(4,963	)		14,843			23,926			(37,073	)		33,806
Income (loss) from discontinued operations, net of income taxes		—			(127	)		(8,497	)		12,250			—			3,626
Net income (loss)		37,073			(5,090	)		6,346			36,176			(37,073	)		37,432
Less: Net income attributable to the noncontrolling interest		—			—			—			(359	)		—			(359	)
Net income (loss) attributable to Warnaco Group, Inc.	$	37,073		$	(5,090	)	$	6,346		$	35,817		$	(37,073	)	$	37,073
Amounts attributable to Warnaco Group Inc. common shareholders:
Income from continuing operations, net of tax	$	37,073		$	(4,963	)	$	14,843		$	23,567		$	(37,073	)	$	33,447
Discontinued operations, net of tax		—			(127	)		(8,497	)		12,250			—			3,626
Net Income	$	37,073		$	(5,090	)	$	6,346		$	35,817		$	(37,073	)	$	37,073

35

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

	Six Months Ended July 4, 2009
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries		Consolidated
Net cash provided by (used in) operating activities from continuing operations	$	1,013		$	21,246		$	(3,758	)	$	51,938		$	—	$	70,439
Net cash provided by (used in) operating activities from discontinued operations		—			(232	)		4,535			(679	)		—		3,624
Net cash provided by (used in) operating activities		1,013			21,014			777			51,259			—		74,063
Cash flows from investing activities:
Proceeds on disposal of assets and collection of notes receivable		—			—			—			175			—		175
Purchase of property, plant and equipment		—			(3,867	)		(777	)		(16,203	)		—		(20,847	)
Net cash used in investing activities from continuing operations		—			(3,867	)		(777	)		(16,028	)		—		(20,672	)
Net cash provided by (used in) investing activities from discontinued operations		—			—			—			—			—		—
Net cash used in investing activities		—			(3,867	)		(777	)		(16,028	)		—		(20,672	)
Cash flows from financing activities:
Premium on cancellation of interest rate swap		—			739			—			—			—		739
Repayments under revolving credit facility		—			(80	)		—			(4,022	)		—		(4,102	)
Repurchase of Senior Notes due 2013		—			—			—			—			—		—
Decrease in short-term notes payable		—			—			—			(18,707	)		—		(18,707	)
Deferred financing		—			(515	)		—			—			—		(515	)
Proceeds from the exercise of employee stock options		377			—			—			—			—		377
Purchase of treasury stock		(1,390	)		—			—			—			—		(1,390	)
Other		—						—			���			—		—
Net cash provided by (used in) financing activities		(1,013	)		144			—			(22,729	)		—		(23,598	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			—			213			—		213
Decrease in cash and cash equivalents		—			17,291			—			12,715			—		30,006
Cash and cash equivalents at beginning of period		—			30,771			(2	)		116,858			—		147,627
Cash and cash equivalents at end of period	$	—		$	48,062		$	(2	)	$	129,573		$	—	$	177,633

	Six Months Ended July 5, 2008
	The Warnaco						Guarantor			Non-Guarantor			Elimination
	Group, Inc.			Warnaco Inc.			Subsidiaries			Subsidiaries			Entries		Consolidated
Net cash provided by (used in) operating activities from continuing operations	$	(14,708	)	$	(8,623	)	$	13,415		$	66,337		$	—	$	56,421
Net cash provided by (used in) operating activities from discontinued operations		—			(1,695	)		(10,304	)		(5,882	)		—		(17,881	)
Net cash provided by (used in) operating activities		(14,708	)		(10,318	)		3,111			60,455			—		38,540
Cash flows from investing activities:
Proceeds on disposal of assets and collection of notes receivable		—			6			—			164			—		170
Purchase of property, plant and equipment		—			(6,726	)		(645	)		(12,184	)		—		(19,555	)
Proceeds from the sale of business, net		—			—			(2,430	)		30,285			—		27,855
Business acquisitions, net of cash acquired		—			—			—			(2,356	)		—		(2,356	)
Purchase of intangible assets		—			(2,027	)		—			(24,700	)		—		(26,727	)
Net cash provided by (used in) investing activities from continuing operations		—			(8,747	)		(3,075	)		(8,791	)		—		(20,613	)
Net cash used in investing activities from discontinued operations		—			—			—			—			—		—
Net cash provided by (used in) investing activities		—			(8,747	)		(3,075	)		(8,791	)		—		(20,613	)
Cash flows from financing activities:
Repayment of Term B Note		—			(1,350	)		—			—			—		(1,350	)
Borrowings under revolving credit facility		—			—			—			—			—		—
Repurchase of Senior Notes due 2013		—			(46,185	)		—			—			—		(46,185	)
Decrease in short-term notes payable		—			—			—			(25,087	)		—		(25,087	)
Proceeds from the exercise of employee stock options		19,087			—			—			—			—		19,087
Purchase of treasury stock		(4,379	)		—			—			—			—		(4,379	)
Payment of deferred financing costs		—			(17	)		—			—			—		(17	)
Net cash provided by (used in) financing activities		14,708			(47,552	)		—			(25,087	)		—		(57,931	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			—			2,602			—		2,602
Increase (decrease) in cash and cash equivalents		—			(66,617	)		36			29,179			—		(37,402	)
Cash and cash equivalents, at beginning of period		—			76,174			197			115,547			—		191,918
Cash and cash equivalents, at end of period	$	—		$	9,557		$	233		$	144,726		$	—	$	154,516

36

THE WARNACO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share and per share amounts)
(Unaudited)

Note 20 — Commitments

Except as set forth below, the contractual obligations and commitments in existence as of July 4, 2009 did not differ materially from those disclosed as of January 3, 2009 in the Company’s Annual Report on Form 10-K for Fiscal 2008.

	Payments Due by Year
	2009		2010		2011			2012		2013		Thereafter			Total
Operating leases entered into during the Six Months Ended July 4, 2009 (a)	$	6,051	$	11,030	$	10,545		$	8,820	$	7,564	$	45,365		$	89,375
Other contractual obligations pursuant to agreements entered into during the Six Months Ended July 4, 2009		32,078		145		(17	)		—		264		(98	)		32,372
Total	$	38,129	$	11,175	$	10,528		$	8,820	$	7,828	$	45,267		$	121,747

(a) Includes approximately $33,900 related to a distribution center in the Netherlands through January 2025 (SeeManagement’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Liquidity,below).

As of July 4, 2009, the Company was also party to outstanding hedging instruments (seeNote 11 of Notes to the Consolidated Condensed Financial StatementsandItem 3 — Qualitative and Quantitative Disclosures About Market Risk -Foreign Exchange Risk).

As of July 4, 2009, the Company remains under audit in various taxing jurisdictions, although it is difficult to predict the final timing and resolution of any particular uncertain tax position. Based upon the Company’s assessment of many factors, including past experience and complex judgments about future events it is reasonably possible that within the next twelve months the amount of unrecognized tax benefits may increase between $3,000 and $6,000 (net of potential decreases), as a result of additional uncertain tax positions, the reevaluation of current uncertain tax positions arising from developments in examinations, the finalization of tax examinations, or from the closure of tax statutes.

Note 21 — Subsequent Event

The Company evaluated subsequent events through August 12, 2009, the date the financial statements were issued. On July 15, 2009, the Company’s 2004 interest rate swap was called by the issuer.See Note 14 to Notes to Consolidated Condensed Financial Statements.

37

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

The Warnaco Group, Inc. (“Warnaco Group” and, collectively with its subsidiaries, the “Company”) is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and that could affect the market value of the Company’s common stock. Except for the historical information contained herein, this Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements that involve risks and uncertainties. See “Statement Regarding Forward-Looking Disclosure.”

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the consolidated condensed financial statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 (“Fiscal 2008”).

The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period January 4, 2009 to January 2, 2010 (“Fiscal 2009”) will contain 52 weeks of operations, while the period from December 30, 2007 to January 3, 2009 (“Fiscal 2008”) contained 53 weeks of operations. Additionally, the period from April 5, 2009 to July 4, 2009 (the “Three Months Ended July 4, 2009”) and the period from April 6, 2008 to July 5, 2008 (the “Three Months Ended July 5, 2008”) each contained thirteen weeks of operations. The period from January 4, 2009 to July 4, 2009 (the “Six Months Ended July 4, 2009”) and the period from December 30, 2007 to July 5, 2008 (the “Six Months Ended July 5, 2008”) contained twenty-six weeks and twenty-seven weeks of operations, respectively.

References to “Calvin KleinJeans” refer to jeans, accessories and “bridge” products. “Core Intimates” refer to the Intimate Apparel Group’sWarner’s^®,Olga^®andBody Nancy Ganz/Bodyslimmers^® brand names and intimate apparel private labels. References to “Retail” within each operating Group refer to the Company’s owned full price free standing stores, owned outlet stores, concession / “shop-in-shop” stores and on-line stores. Results related to stores operated by third parties under retail licenses or distributor agreements are included in “Wholesale” within each operating Group.

Overview

The Company designs, sources, markets, licenses and distributes intimate apparel, sportswear and swimwear worldwide through a line of highly recognized brand names. The Company’s products are distributed domestically and internationally in over 100 countries, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty and other stores, mass merchandisers and the internet. As of July 4, 2009, the Company operated: (i) 1,003Calvin Kleinretail stores worldwide (consisting of 200 free-standing stores (including 109 full price and 91outlet stores), 801 shop-in-shop/concession stores, oneCalvin KleinUnderwear on-line store and oneCalvin KleinJeans on-line store); and (ii) oneSpeedo^®on-line store. As of July 4, 2009, there were also 609Calvin Kleinretail stores operated by third parties under retail licenses or distributor agreements.

Highlights for the Three and Six Months Ended July 4, 2009 included:

• Net revenue decreased $47.4 million, or 9.4%, to $455.9 million for the Three Months Ended July 4, 2009 and decreased $76.6 million, or 7.2%, to $994.3 million for the Six Months Ended July 4, 2009, reflecting decreases of $25.9 million, and $45.8 million, respectively, in the Sportswear Group, $14.1 million and $18.8 million, respectively, in the Intimate Apparel Group and $7.4 and $12.0 million, respectively, in the Swimwear Group. The decline in net revenues was primarily related to the unfavorable effect of fluctuations in foreign currency exchange rates (see below). In addition, the Six Months Ended July 5, 2008 benefitted from one additional week of operating activity as the Six Months Ended July 4, 2009 contained twenty-six weeks of operations while the Six Months Ended July 5, 2008 contained twenty-seven weeks of operations. Net revenues related to the extra week of operations during the Six Months Ended July 5, 2008 were approximately $23.0 million. Net revenues from comparable store sales increased 1% and 3% for the Three and Six Months Ended July 4, 2009, respectively. Net revenues were favorably affected by the Company’s use of its diversified channels of distribution which helped it to mitigate the effects of the challenging global economy.

• Operating income decreased $8.2 million, or 16.8%, to $40.7 million for the Three Months Ended July 4, 2009 from $48.9 million for the Three Months Ended July 5, 2008 and increased $0.2 million, or 0.2%, to $104.8 million for the Six Months Ended July 4, 2009 from $104.6 million for the Six Months Ended July 5, 2008. For the Three and Six Months Ended July 4, 2009, fluctuations in foreign currency adversely affected operating income (see below). Operating income includes restructuring charges of $1.5 million and $10.0 million, respectively, for the Three and Six Months Ended July 4, 2009. Operating income for the Three and Six Months Ended July 5, 2008 includes restructuring expenses of $6.0 and $26.3 million, respectively, including a charge of $18.5 million (the “Collection License Company Charge”) in the Six Months Ended July 5, 2008 recorded in the Sportswear segment related to the transfer of the Collection License Company (seeNote 3 to Notes to the Consolidated Condensed Financial Statements)to Phillips-Van Heusen Corporation (“PVH”).

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• Both net revenues and operating income for the Three and Six Months Ended July 4, 2009 were negatively affected by fluctuations in foreign currencies. On average, for the Three and Six Months Ended July 4, 2009 compared to the Three and Six Months Ended July 5, 2008, the U.S. dollar strengthened relative to the functional currencies of countries where the Company conducts certain of its operations overseas (primarily the Euro, Korean Won, Canadian Dollar and Mexican Peso), as follows: the U.S. dollar strengthened relative to the Euro by 11.9% and 12.6%, the Korean Won by 20.7% and 27.0%, the Canadian Dollar by 12.7% and 16.4% and the Mexican Peso by 22.6% and 23.9%, respectively. Therefore for the Three and Six Months Ended July 4, 2009, net revenue includes decreases of $45.0 million and $105.9 million, respectively, and operating income includes decreases of $7.7 million and $24.4 million, respectively, due to fluctuations in foreign currencies (seeItem 3. Quantitative and Qualitative Disclosure About Market Risk — Foreign Exchange Risk,below).

• Income from continuing operations for the Three Months Ended July 4, 2009 was $0.40 per diluted share, a 28.6% decrease compared to the $0.56 per diluted share for the Three Months Ended July 5, 2008. Income from continuing operations for the Six Months Ended July 4, 2009 was $1.23 per diluted share, a 73.2% increase compared to the $0.71 per diluted share for the Six Months Ended July 5, 2008. Included in income from continuing operations for the Six Months Ended July 4, 2009 are restructuring charges of $7.2 million (net of income tax benefits of $2.8 million), or $0.16 per diluted share. Income from continuing operations for the Six Months Ended July 5, 2008 included an estimated tax charge of approximately $19.0 million, or $0.41 per diluted share, related to the repatriation, to the U.S., of the proceeds received in connection with the sale of the Company’sLejabybusiness, net of adjustments for working capital, as well as restructuring charges of $25.1 million (net of income tax benefit of $1.2 million), or $0.54 per diluted share.

• In anticipation of further effects of the economic downturn and in order to align its cost structure to match current economic conditions, the Company continued its workforce reduction, which commenced in the fourth quarter of Fiscal 2008. During the first six months of Fiscal 2009, this reduction resulted in the termination of 181 employees (in both the Company’s domestic and foreign operations) at a cost of approximately $6.8 million.

• The Company launched an on-line store for the sale ofCalvin KleinJeans at www.calvinkleinjeans.com.

• Pursuant to its strategy of expanding its operations in South America, on June 10, 2009, the Company paid cash consideration of $2.5 million and acquired businesses relating to distribution and sale at wholesale and retail of jeanswear and underwear products bearing theCalvin Kleintrademarks in Chile and Peru, including the transfer and assignment to the Company of the right to operate and conduct business at three retail locations in Chile and one retail location in Peru.

Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in its consolidated condensed financial statements and accompanying notes. See the Company’s Annual Report on Form 10-K for Fiscal 2008 for a discussion of the Company’s critical accounting policies.

Beginning with the Three Months Ended July 4, 2009, the Company had accumulated sufficient historical data regarding stock option exercises and forfeitures to be able to rely on that data for the calculation of expected option life. Expected option life is an assumption that is used in the Black-Scholes-Merton option pricing model, which the Company uses to obtain a fair value of stock options granted. Accordingly, for options granted during the Three Months Ended July 4, 2009, the Company revised its method of calculating expected option life from the simplified method as described in Staff Accounting Bulletin No. 110 (which yielded an expected term of 6 years) to the use of historical data (which yielded an expected life of 3.72 years). Historical data will be used for stock options granted in all future periods.

Among those estimates and assumptions, the Company reviews its intangible assets and goodwill for impairment in the fourth quarter of each fiscal year or sooner if events or changes in circumstances indicate that the carrying amount of any of those assets may not be recoverable. Such events may include, among others, (a) a significant adverse change in legal factors or the business climate; (b) an adverse action or assessment by a regulator; (c) unanticipated competition; (d) a loss of key personnel; (e) a more-likely-than-not expectation that a reporting unit, or a significant part of a reporting unit, will be sold or disposed of; (f) the determination of a lack of recoverability of a significant “asset group” within a reporting unit; (g) reporting a goodwill impairment loss by a subsidiary that is a component of a reporting unit; and (h) a significant decrease in the Company’s stock price.

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During the Three Months Ended July 4, 2009, the Company considered the potential of an impairment in its goodwill or intangible assets, consisting of licenses and trademarks primarily for itsCalvin Kleinproducts, by reviewing these factors. The Company concluded that there were no triggering events or changes in circumstances since the end of Fiscal 2008 which would require the Company to conduct an impairment evaluation of either goodwill or intangible assets.

Recent Accounting Pronouncements

SeeNote 2 to Notes to Consolidated Condensed Financial Statementsfor a description of accounting pronouncements that have recently been issued and the Company’s assessment of the effect of their adoption on its financial position, results of operations and cash flows.

Results of Operations

Statement of Operations (Selected Data)

The following tables summarize the historical results of operations of the Company for the Three Months Ended July 4, 2009 compared to the Three Months Ended July 5, 2008 and the Six Months Ended July 4, 2009 compared to the Six Months Ended July 5, 2008. The results of the Company’s discontinued operations are included in “Income from discontinued operations, net of taxes” for all periods presented. Results of operations contained 13 weeks of activity for the Three Months Ended July 4, 2009 and for the Three Months Ended July 5, 2008, 26 weeks of activity for the Six Months Ended July 4, 2009 and 27 weeks of activity for the Six Months Ended July 5, 2008.

	Three Months						Three Months						Six Months						Six Months
	Ended July 4,			% of Net			Ended July 5,			% of Net			Ended July 4,			% of Net			Ended July 5,			% of Net
	2009			Revenues			2008			Revenues			2009			Revenues			2008			Revenues
	(in thousands of dollars)
Net revenues	$	455,894			100.0	%	$	503,304			100.0	%	$	994,339			100.0	%	$	1,070,962			100.0	%
Cost of goods sold		266,758			58.5	%		278,473			55.3	%		579,643			58.3	%		592,010			55.3	%
Gross profit		189,136			41.5	%		224,831			44.7	%		414,696			41.7	%		478,952			44.7	%
Selling, general and administrative expenses		145,598			31.9	%		173,629			34.5	%		304,354			30.6	%		369,824			34.5	%
Amortization of intangible assets		2,242			0.5	%		2,588			0.5	%		4,369			0.4	%		5,062			0.5	%
Pension expense (income)		594			0.1	%		(291	)		-0.1	%		1,131			0.1	%		(582	)		-0.1	%
Operating income		40,702			8.9	%		48,905			9.7	%		104,842			10.5	%		104,648			9.8	%
Other income (loss)		2,799						(1,203	)					2,395						4,258
Interest expense		5,799						7,086						11,868						16,476
Interest income		(416	)					(671	)					(824	)					(1,604	)
Income from continuing operations before provision for income taxes and noncontrolling interest		32,520						43,693						91,403						85,518
Provision for income taxes		13,199						17,070						33,333						51,712
Income from continuing operations before noncontrolling interest		19,321						26,623						58,070						33,806
Income (loss) from discontinued operations, net of taxes		(649	)					(7,111	)					(1,569	)					3,626
Net income		18,672						19,512						56,501						37,432
Less: Net Income attributable to the noncontrolling interest		(912	)					(148	)					(1,170	)					(359	)
Net income attributable to Warnaco Group, Inc.	$	17,760					$	19,364					$	55,331					$	37,073

Net Revenues

Net revenues by group were as follows:

	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase			%			Ended July 4,		Ended July 5,		Increase			%
	2009		2008		(Decrease)			Change			2009		2008		(Decrease)			Change
	(in thousands of dollars)
Sportswear Group	$	223,527	$	249,395	$	(25,868	)		-10.4	%	$	503,674	$	549,514	$	(45,840	)		-8.3	%
Intimate Apparel Group		158,122		172,215		(14,093	)		-8.2	%		320,490		339,244		(18,754	)		-5.5	%
Swimwear Group		74,245		81,694		(7,449	)		-9.1	%		170,175		182,204		(12,029	)		-6.6	%
Net revenues (a)	$	455,894	$	503,304	$	(47,410	)		-9.4	%	$	994,339	$	1,070,962	$	(76,623	)		-7.2	%

(a) Includes $305.0 million and $344.8 million for the Three Months Ended July 4, 2009 and July 5, 2008, respectively, and $686.6 million and $745.9 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to the Company’s totalCalvin Kleinbusinesses (a decrease of 11.6% and 8.0%, respectively).

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Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

The $47.4 million decrease in consolidated net revenues relates primarily to the unfavorable effect of fluctuations in foreign currency exchange rates in countries where the Company conducts certain of its operations (primarily the Euro, Korean Won, Canadian Dollar and Mexican Peso). This unfavorable effect resulted in a $45.0 million decrease in net revenues for the Three Months Ended July 4, 2009 compared to the prior year. The unfavorable effects of fluctuations in foreign currencies on Sportswear, Intimate Apparel and Swimwear Group net revenues were decreases of $26.0 million, $16.6 million and $2.4 million, respectively.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

The $76.6 million decrease in consolidated net revenues primarily relates to the unfavorable effect of fluctuations in foreign currency exchange rates in countries where the Company conducts certain of its operations (primarily the Euro, Korean Won, Canadian Dollar and Mexican Peso). This unfavorable effect resulted in a $105.9 million decrease in net revenues for the Six Months Ended July 4, 2009 compared to the prior year. The unfavorable effects of fluctuations in foreign currencies on Sportswear, Intimate Apparel and Swimwear Group net revenues were decreases of $60.0 million, $39.6 million and $6.3 million, respectively. The Six Months Ended July 5, 2008 also benefitted from an extra week of operations.

The following tables summarize the Company’s net revenues by channel of distribution and region for the Six Months Ended July 4, 2009 and the Six Months Ended July 5, 2008:

	Six Months			Six Months
	Ended July 4,			Ended July 5,
	2009			2008
United States — wholesale
Department stores and independent retailers		10	%		14	%
Specialty stores		9	%		9	%
Chain stores		9	%		6	%
Mass merchandisers		2	%		2	%
Membership clubs		10	%		8	%
Off price and other		10	%		8	%
Total United States — wholesale		50	%		47	%
International — wholesale		30	%		33	%
Retail		20	%		20	%
Net revenues — consolidated		100	%		100	%

By Region:

	Net Revenues										Net Revenues
	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase /			%			Ended July 4,		Ended July 5,		Increase /			%
	2009		2008		(Decrease)			Change			2009		2008		(Decrease)			Change
	In thousands of dollars										In thousands of dollars
United States	$	232,320	$	254,484	$	(22,164	)		-8.7	%	$	502,064	$	511,498	$	(9,434	)		-1.8	%
Europe		98,274		119,791		(21,517	)		-18.0	%		240,989		291,956		(50,967	)		-17.5	%
Asia		70,676		71,790		(1,114	)		-1.6	%		153,457		158,373		(4,916	)		-3.1	%
Canada		29,226		30,817		(1,591	)		-5.2	%		49,923		57,749		(7,826	)		-13.6	%
Mexico, Central and South America		25,398		26,422		(1,024	)		-3.9	%		47,906		51,386		(3,480	)		-6.8	%
	$	455,894	$	503,304	$	(47,410	)		-9.4	%	$	994,339	$	1,070,962	$	(76,623	)		-7.2	%

By Channel:

	Net Revenues										Net Revenues
	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase /			%			Ended July 4,		Ended July 5,		Increase /			%
	2009		2008		(Decrease)			Change			2009		2008		(Decrease)			Change
	In thousands of dollars										In thousands of dollars
Wholesale	$	350,324	$	396,433	$	(46,109	)		-11.6	%	$	794,125	$	858,750	$	(64,625	)		-7.5	%
Retail		105,570		106,871		(1,301	)		-1.2	%		200,214		212,212		(11,998	)		-5.7	%
Total	$	455,894	$	503,304	$	(47,410	)		-9.4	%	$	994,339	$	1,070,962	$	(76,623	)		-7.2	%

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Sportswear Group

Sportswear Group net revenues were as follows:

	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase			%			Ended July 4,		Ended July 5		Increase			%
	2009		2008		(Decrease)			Change			2009		, 2008		(Decrease)			Change
	(in thousands of dollars)
Calvin KleinJeans	$	117,057	$	141,392	$	(24,335	)		-17.2	%	$	299,680	$	335,020	$	(35,340	)		-10.5	%
Chaps		43,022		42,442		580			1.4	%		80,102		82,159		(2,057	)		-2.5	%
Sportswear wholesale		160,079		183,834		(23,755	)		-12.9	%		379,782		417,179		(37,397	)		-9.0	%
Sportswear retail		63,448		65,561		(2,113	)		-3.2	%		123,892		132,335		(8,443	)		-6.4	%
Sportswear Group (a) (b)	$	223,527	$	249,395	$	(25,868	)		-10.4	%	$	503,674	$	549,514	$	(45,840	)		-8.3	%

(a)	Includes net revenues of $12.7 million and $15.4 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $39.3 million and $42.3 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to theCalvin Kleinaccessories business in Europe and Asia.
(b)	Includes approximately $11.5 million and $12.9 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $22.0 million and $25.8 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to certain sales ofCalvin Kleinunderwear in regions managed by the Sportswear Group.

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

The $24.3 million decrease inCalvin Kleinjeans wholesale net revenues reflects decreases of $16.8 million in Europe, $7.7 million in the U.S. and $2.1 million in Canada, partially offset by increases of $2.1 million in Asia and $0.2 million in Mexico, Central and South America. The decrease in Europe primarily reflects the unfavorable effects of foreign currency fluctuations coupled with a decline in sales, partially offset by a decrease in customer allowances. The decrease in the U.S. primarily reflects a decrease in sales to membership clubs (due to shipments which occurred in the first quarter of Fiscal 2009 when comparable sales took place in the second quarter of 2008), a decrease in sales to department stores (primarily related to decreases in the men’s and women’s jeans businesses coupled with an increase in customer allowances, partially offset by an increase in the Petite size jeans business, which launched in the fourth quarter of 2008) and a decrease in sales to specialty stores, partially offset by an increase in sales to the off-price channel of distribution. The decrease in Canada primarily reflects a decline in sales to membership clubs and department stores and the negative effect of foreign currency fluctuations, partially offset by an increase in sales to the off-price channel. The increase in Asia primarily reflects an increase in net revenues in local currencies, partially offset by the unfavorable effects of foreign currency fluctuations, primarily in Korea. The increase in net revenues in local currencies relates to the Company’s expansion efforts in this region, particularly in China, including an increase in the number of stores operated by distributors, as well as increased sales in Korea primarily due to the sale of off-season merchandise and increased sales in Australia and New Zealand. The increase in Mexico, Central and South America primarily reflects increased sales in Brazil, partially offset by decreased sales in Mexico in the department store channel, due primarily to a decrease in sales volume and increased customer allowances, and the unfavorable effects of foreign currency fluctuations.

The $0.6 million increase inChapsnet revenues reflects an increase of $1.2 million in Canada, partially offset by decreases in the U.S. and Mexico, Central and South America of $0.1 million and $0.5 million, respectively. The increase inChapsnet revenues in Canada was due primarily to a increased sales to membership clubs and department stores, partially offset by a decline in sales to the off-price channel. The decrease inChapsnet revenues in the U.S primarily reflects volume decreases in sales to customers in the department store and specialty store distribution channels coupled with an increase in customer allowances, partially offset by increases in sales to the off-price and chain store channels. Decreases in Mexico, Central and South America primarily reflect a decrease in sales to department stores, partially offset by an increase in sales to membership clubs, coupled with an increase in customer allowances.

The $2.1 million decrease in Sportswear retail net revenues primarily reflects a $5.3 million decrease in Asia (primarily related to the unfavorable effects of foreign currency fluctuations, which more than offset increases in new store openings in China and Korea), partially offset by increases of $1.9 million in Europe (primarily related to volume increases in outlet stores and the effect of new store openings, partially offset by the unfavorable effect of foreign currency fluctuations) and $1.2 million in Mexico, Central and South America (reflecting increased sales in Brazil, partially offset by decreased sales in Mexico, which the Company believes was due to the downturn in the economy and an epidemic of influenza, which temporarily caused the closure of retail stores).

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Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

The $35.3 million decrease inCalvin Kleinjeans wholesale net revenues reflects decreases of $32.4 million in Europe, $2.1 million in the U.S., $3.6 million in Canada and $1.0 million in Mexico, Central and South America, partially offset by an increase of $3.8 million in Asia. The decrease in Europe primarily reflects the unfavorable effects of foreign currency fluctuations coupled with a decline in sales volumes, partially offset by a decrease in customer allowances. The decrease in the U.S. primarily reflects a decrease in sales to department stores (primarily related to decreases in the men’s and women’s jeans business and an increase in customer allowances, partially offset by an increase in the Petite size jeans business, which launched in the fourth quarter of 2008), a decrease in sales to membership clubs and a decrease in specialty stores, partially offset by an increase in sales to the off-price store channel of distribution. The decrease in Mexico, Central and South America primarily reflects the unfavorable effects of foreign currency fluctuations coupled with volume decreases and increased customer allowances in the department store channel, which the Company believes was due mainly to the downturn in the economy, in Mexico, partially offset by increased sales in Brazil. The decrease in Canada primarily reflects a decline in sales to membership clubs and department stores and the unfavorable effect of foreign currency fluctuations, partially offset by an increase in sales to the off-price channel. The increase in Asia primarily reflects an increase in net revenues in local currencies, partially offset by the unfavorable effects of foreign currency fluctuations, primarily related to Korea. The increase in net revenues in local currencies relates to the Company’s expansion efforts in this region, particularly in China, including an increase in the number of stores operated by distributors, as well as increased sales in Korea primarily due to the sale of off-season merchandise and promotional events and discounts.

The $2.1 million decrease inChapsnet revenues reflects decreases in the U.S. and Mexico, Central and South America of $1.4 million and $0.8 million, respectively, partially offset by an increase in Canada of $0.1 million. The decrease inChapsnet revenues in the U.S primarily reflects decreases in sales to customers in the department store, specialty store and membership club distribution channels coupled with an increase in customer allowances, partially offset by increases in sales to the off-price and chain store channels. Decreases in Mexico, Central and South America primarily reflect a decrease in sales volume and an increase in customer allowances in the department store channel of distribution, partially offset by an increase in sales to membership clubs.

The $8.4 million decrease in Sportswear retail net revenues primarily reflects a $13.0 million decrease in Asia (primarily related to the unfavorable effects of foreign currency fluctuations, which more than offset increases in same store sales and new store openings in China and Korea), partially offset by increases of $2.6 million in Europe (primarily related to volume increases in outlet stores and the effect of new store openings, partially offset by the unfavorable effect of foreign currency fluctuations) and $1.8 million in Mexico, Central and South America (primarily reflecting an increase in sales in Brazil, partially offset by a decline in sales in Mexico, which the Company believes is due to the downturn in the economy, and an epidemic of influenza, which caused the temporary closure of certain retail stores).

Intimate Apparel Group

Intimate Apparel Group net revenues were as follows:

	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase			%			Ended July 4,		Ended July 5,		Increase			%
	2009		2008		(Decrease)			Change			2009		2008		(Decrease)			Change
	(in thousands of dollars)
Calvin KleinUnderwear	$	78,827	$	93,619	$	(14,792	)		-15.8	%	$	175,357	$	183,112	$	(7,755	)		-4.2	%
Core Intimates		43,448		44,345		(897	)		-2.0	%		77,422		86,479		(9,057	)		-10.5	%
Intimate Apparel wholesale		122,275		137,964		(15,689	)		-11.4	%		252,779		269,591		(16,812	)		-6.2	%
Calvin KleinUnderwear retail		35,847		34,251		1,596			4.7	%		67,711		69,653		(1,942	)		-2.8	%
Intimate Apparel Group	$	158,122	$	172,215	$	(14,093	)		-8.2	%	$	320,490	$	339,244	$	(18,754	)		-5.5	%

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

The $14.8 million decrease inCalvin KleinUnderwear wholesale net revenues reflects a decrease in the U.S. of $9.9 million, a decrease of $6.1 million in Europe and a decrease of $0.9 million in Mexico, Central and South America, partially offset by increases of $1.4 million in Asia and $0.7 million in Canada. The decrease in the U.S. of the Company’sCalvin KleinUnderwear wholesale business primarily related to decreases in sales to membership clubs (due to shipments made in the first quarter of Fiscal 2009 where comparable shipments were made in the second quarter of Fiscal 2008), to decreased sales to department stores, which the Company believes is due to the downturn in the economy, and to decreased sales to the off-price channel of distribution, due to a shift in timing of comparable shipments, which occurred in the first quarter of Fiscal 2009 when comparable shipments occurred in the second quarter of Fiscal 2008. The decrease in Europe primarily relates to the negative impact of foreign currency fluctuations and decreases in sales of both men’s and women’s lines, especially to department stores. The decrease in Mexico, Central and South America reflects a decrease in sales volume coupled with an increase in customer allowances in department stores, partially offset by increases in sales to membership clubs. The increase in Asia is primarily related to the expansion of the Company’s distribution network in China and an increase in shipments to distributors in Japan and Australia. The increase in Canada resulted from an increase in sales to membership clubs and department stores, partially offset by a decline in the mass merchant channel.

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The $0.9 million decrease in Core Intimates net revenues reflects decreases of $2.1 million in Canada, and $1.2 million in Mexico, Central and South America, partially offset by an increase of $2.4 million in the U.S. The decrease in Canada was primarily due to lower sales in the mass merchant channel. The decrease in Mexico, Central and South America primarily reflects a decline in sales volume and an increase in customer allowances in department stores. The increase in the U.S. is primarily related to increased sales of the Company’sWarner’sproduct to the chain store channel of distribution (JC Penney and Kohl’s) (due to an increase from the introduction of new styles, a new panty program in the second quarter of Fiscal 2009, an overall increase in replenishment orders and the favorable effects of reductions in the level of customer allowances), the introduction of certainWarner’sproduct in the mass merchant channel in the second quarter of 2009, increased sales of theOlgaline (primarily related to strong sales of new styles and a new panty program introduced in the second quarter of 2009 as well as an increase in replenishment orders), partially offset by weak replenishment orders to department stores, which the Company believes is related to the downturn in the economy, and a reduction in private label and off-price businesses.

The $1.6 million increase inCalvin KleinUnderwear retail net revenues primarily reflects increases of $1.2 million in Canada, $0.7 million in Mexico, Central and South America and $0.7 million in Asia, partially offset by decreases of $0.6 million in Europe and $0.4 million in the U.S. The increase in Canada was primarily related to the opening of new stores. The increase in Mexico, Central and South America primarily reflects an increase in sales at outlet stores, partially offset by the effects of an increase in customer promotions at full-price stores. The increase in Asia primarily reflects an increase in the number of stores in Hong Kong and China and an increase in same store sales in China, partially offset by a decline in same store sales in Hong Kong, which the Company believes relates to the downturn in the economy. The decrease in Europe primarily reflects the unfavorable effect of foreign currency fluctuations which more than offset increases in sales at outlet and full-price stores due to opening of additional new stores. The decrease in the U.S. reflects a decline in sales on the Company’s e-commerce website and the Soho store.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

The $7.8 million decrease inCalvin KleinUnderwear wholesale net revenues reflects decreases in Europe of $12.1 million, in Mexico, Central and South America of $1.8 million and in Canada of $0.1 million, partially offset by an increase in the U.S. of $2.4 million and an increase of $3.9 million in Asia. The decrease in Europe primarily relates to the negative impact of foreign currency fluctuations and the decline in sales of men’s lines (which the Company believes is related to the downturn in the economy), partially offset by increased strength in the women’s business. The decrease in Mexico, Central and South America reflects a decrease in sales volume, an increase in customer allowances to department stores and the unfavorable effects of foreign currency fluctuations partially offset by an increase in sales to membership clubs. The decrease in Canada resulted from the unfavorable effect of foreign currency fluctuations and a decline in sales to the mass merchant channel, which more than offset increases in sales to membership clubs and department stores. The increase in the U.S. of the Company’sCalvin Klein Underwear wholesale business primarily related to increases in sales to membership clubs and to stores operated by the licensor of theCalvin Kleinbrand (due to an increase in new stores opened in the first quarter of Fiscal 2009). Those increases were partially offset by a decrease in sales to department stores. The increase in Asia is primarily related to the expansion of the Company’s distribution network in China and an increase in shipments to distributors in Japan and Australia.

The $9.0 million decrease in Core Intimates net revenues reflects decreases of $2.6 million in the U.S., $4.4 million in Canada, $1.9 million in Mexico, Central and South America and $0.1 million in Asia. The decrease in the U.S. is primarily relates to decreased sales of the Company’sWarner’sproduct to department stores (due to weak replenishment orders, which the Company believes is related to the downturn in the economy), partially offset by an increase in sales to the chain store channel of distribution (JC Penney and Kohl’s) (primarily related to the introduction of new styles, a new panty program during the second quarter of Fiscal 2009 and reductions in the level of customer allowances) and the introduction of certainWarner’sproduct in the mass merchant channel in the second quarter of 2009, increased sales of theOlgaline (primarily related to strong sales of new styles and a new panty program introduced in the second quarter of 2009 as well as an increase in replenishment orders), partially offset by a reduction in the private label business. The decrease in Canada was due to lower sales volume (which the Company believes is due to the downturn in the economy) coupled with an increase in customer allowances in the department store channel, lower sales in the mass merchant channel and the unfavorable effect of foreign currency fluctuations. The decrease in Mexico, Central and South America primarily reflects a decline in sales volume (which the Company believes is due to the downturn in the economy) coupled with an increase in customer allowances in the department store channel and the unfavorable effect of foreign currency fluctuations.

The $1.9 million decrease inCalvin KleinUnderwear retail net revenues primarily reflects decreases of $4.2 million in Europe and $1.0 million in the U.S., partially offset by increases of $1.9 million in Canada, $1.0 million in Mexico, Central and South America and $0.4 million in Asia. The decrease in Europe primarily reflects the unfavorable effect of foreign currency fluctuations which more than offset increases in sales at outlet and full-price stores due to opening of additional new stores. The decrease in the U.S. reflects a decline in e-commerce sales on the Company’s website and the Soho store. The increase in Canada was primarily related to the opening of new stores. The increase in Mexico, Central and South America primarily reflects an increase in sales at outlet stores, partially offset by the effects of an increase in customer promotional discounts at full-price stores. The increase in Asia primarily reflects an increase in same store sales in China and an increase in the number of stores in Hong Kong and China, partially offset by a decrease in same store sales in Hong Kong, which the Company believes relates to the downturn in the economy.

44

Swimwear Group

Swimwear Group net revenues were as follows:

	Three Months		Three Months								Six Months		Six Months
	Ended July 4,		Ended July 5,		Increase			%			Ended July 4,		Ended July 5,		Increase			%
	2009		2008		(Decrease)			Change			2009		2008		(Decrease)			Change
	(in thousands of dollars)
Speedo	$	61,747	$	68,271	$	(6,524	)		-9.6	%	$	145,520	$	150,176	$	(4,656	)		-3.1	%
Calvin Klein		6,223		6,364		(141	)		-2.2	%		16,044		21,804		(5,760	)		-26.4	%
Swimwear wholesale		67,970		74,635		(6,665	)		-8.9	%		161,564		171,980		(10,416	)		-6.1	%
Swimwear retail (a)		6,275		7,059		(784	)		-11.1	%		8,611		10,224		(1,613	)		-15.8	%
Swimwear Group	$	74,245	$	81,694	$	(7,449	)		-9.1	%	$	170,175	$	182,204	$	(12,029	)		-6.6	%

(a) Includes $3.6 million and $3.6 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $4.0 million and $4.0 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related toCalvin Kleinretail swimwear.

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

The $6.5 million decrease in net revenues forSpeedowholesale is due primarily to decreases of $5.4 million in the U.S., $0.5 million in Canada and $0.6 million in Mexico, Central and South America. The decrease in the U.S. primarily reflects a decrease in sales to membership clubs and specialty stores (primarily due to the timing of shipments, which occurred late in the first quarter of Fiscal 2009 when comparable shipments occurred in the second quarter of Fiscal 2008), decreases in sales to department stores and the mass merchandise channel (which the Company believes is related primarily to the downturn in the economy) and decreases in sales to the chain store and off- price channels of distribution. The decrease in Mexico, Central and South America primarily reflects a decline in sales to specialty stores, partially offset by an increase in sales to membership clubs. The decrease in Canada reflects a decline in sales to department stores.

The $0.8 million decrease in Swimwear retail net revenues primarily reflects a $0.9 million decrease in the U.S., partially offset by an increase of $0.1 million in Asia. Net revenues in Europe were unchanged. The decrease in net revenues in the U.S. primarily reflects volume and price decreases at the onlineSpeedostore. In Europe, the increase in sales was offset by a decrease due to fluctuations in foreign currency.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

The $4.6 million decrease in net revenues forSpeedowholesale is due primarily to decreases of $1.8 million in the U.S., $1.7 million in Canada and $1.1 million in Mexico, Central and South America. The decrease in the U.S. primarily reflects a decrease in sales to specialty stores and the mass merchandise and department store channels (which the Company believes is due to the downturn in the economy), and a decrease in sales to the chain store and off- price channels of distribution. Those decreases were partially offset by an increase in sales to membership clubs due to new programs and the timing of shipments into the first quarter of Fiscal 2009, when comparable shipments occurred in the fourth quarter of Fiscal 2007. The decrease in Mexico, Central and South America primarily reflects a decline in sales to specialty stores, partially offset by an increase in sales to membership clubs and the unfavorable effect of foreign currency fluctuations.

The $5.7 million decrease inCalvin Kleinswimwear wholesale net revenues primarily reflects decreases of $4.7 million in Europe, and $1.3 million in the U.S., partially offset by an increase of $0.3 million in Mexico, Central and South America. The decrease in Europe primarily relates to the negative effect of foreign currency fluctuations and a decline in sales volume related to late deliveries in 2009. The decrease in the U.S. is primarily due to a decrease in sales to department stores, partially offset by an increase in sales to the off-price channel. The increase in Mexico, Central and South America primarily reflects an increase in sales to membership clubs, partially offset by a decline in sales to specialty stores.

The $1.6 million decrease in Swimwear retail net revenues primarily reflects decreases of $1.6 million in the U.S. and $0.2 million in Europe, partially offset by an increase of $0.2 million in Asia. The decrease in net revenues in the U.S. primarily reflects volume and price decreases at the onlineSpeedostore. The decrease in net revenues in Europe primarily reflects volume decreases at concession and outlet stores (related toCalvin Kleinswimwear) and the negative impact of foreign currency fluctuations.

45

Gross Profit

Gross profit was as follows:

	Three Months					Three Months					Six Months					Six Months
	Ended July 4,		% of Brand			Ended July 5,		% of Brand			Ended July 4,		% of Brand			Ended July 5,		% of Brand
	2009		Net Revenues			2008		Net Revenues			2009		Net Revenues			2008		Net Revenues
	(in thousands of dollars)
Sportswear Group (a)	$	91,582		41.0	%	$	111,045		44.5	%	$	210,966		41.9	%	$	247,037		45.0	%
Intimate Apparel Group		71,242		45.1	%		83,958		48.8	%		145,098		45.3	%		164,983		48.6	%
Swimwear Group		26,312		35.4	%		29,828		36.5	%		58,632		34.5	%		66,932		36.7	%
Total gross profit	$	189,136		41.5	%	$	224,831		44.7	%	$	414,696		41.7	%	$	478,952		44.7	%

(a) Sportswear Group gross profit includes approximately $7.4 million and $8.7 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $14.3 million and $18.3 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to certain sales ofCalvin Kleinunderwear in regions managed by the Sportswear Group.

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Gross profit was $189.1 million, or 41.5% of net revenues, for the Three Months Ended July 4, 2009 compared to $224.8 million, or 44.7% of net revenues, for the Three Months Ended July 5, 2008. The $35.7 million decrease in gross profit was due to decreases in the Sportswear Group ($19.5 million), the Intimate Apparel Group ($12.7 million) and the Swimwear Group ($3.5 million). The 320 basis point reduction in gross margin is primarily reflective of an increase in the ratio of customer allowances and discounts to net revenues (which the Company believes is due to an increase in promotional activity in response to recent weakness in the global economy), an unfavorable sales mix as the Company experienced an increase in off-price (and other less profitable channels) net revenues as a proportion of total net revenues and the negative effects of fluctuations in foreign currency exchange rates. The U.S. dollar strengthened significantly during the Three Months Ended July 4, 2009 relative to the functional currencies where the Company conducts certain of its operations (primarily the Euro, Korean won, Canadian dollar and Mexican peso) compared to the Three Months Ended July 5, 2008. Consequently, gross profit for the Three Months Ended July 4, 2009 includes a decrease of $23.2 million due to foreign currency fluctuations.

Sportswear Group gross profit decreased $19.5 million, and gross margin decreased 350 basis points, for the Three Months Ended July 4, 2009 compared to the Three Months Ended July 5, 2008 reflecting a $15.5 million decline in the international business (primarily related to the negative effect of fluctuations in exchange rates of foreign currencies, a decrease in net sales and an unfavorable sales mix in Europe and Asia), and a $4.0 million decrease in the domestic business (primarily reflecting a decrease in net revenues and an unfavorable sales mix).

Intimate Apparel Group gross profit decreased $12.7 million and gross margin decreased 370 basis points for the Three Months Ended July 4, 2009 compared to the Three Months Ended July 5, 2008 reflecting a $10.6 million decline in the international business (primarily related to the negative effect of fluctuations in exchange rates of foreign currencies, an unfavorable sales mix, and lower net sales), and a $2.1 million decrease in the domestic business. The decrease in the domestic business primarily reflects decreased net revenues, partially offset by a favorable sales mix in the Calvin Klein underwear business, and an increase in the Core Intimate business as a result of increased net revenues coupled with a favorable sales mix.

Swimwear Group gross profit decreased $3.5 million and gross margin decreased 110 basis points for the Three Months Ended July 4, 2009 compared to the Three Months Ended July 5, 2008. The decrease in gross profit primarily reflects a $1.2 million decrease inSpeedo(primarily related to decreased sales and unfavorable sales mix, partially offset by decreased inventory markdown costs) and a $2.3 million decline inCalvin Kleingross profit (due primarily to unfavorable sales mix in the U.S. and Europe).

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Gross profit was $414.7 million, or 41.7% of net revenues, for the Six Months Ended July 4, 2009 compared to $479.0 million, or 44.7% of net revenues, for the Six Months Ended July 5, 2008. The $64.3 million decrease in gross profit was due to decreases in the Sportswear Group ($36.1 million), the Intimate Apparel Group ($19.9 million) and the Swimwear Group ($8.3 million). The 300 basis point reduction in gross margin is primarily reflective of an increase in the ratio of customer allowances and discounts to net revenues (which the Company believes is due to an increase in promotional activity in response to recent weakness in the global economy), an unfavorable sales mix as the Company experienced an increase in off-price (and other less profitable channels) net revenues as a proportion of total net revenues and the negative effects of fluctuations in foreign currency exchange rates. The U.S. dollar strengthened significantly during the Six Months Ended July 4, 2009 relative to the functional currencies where the Company conducts certain of its operations (primarily the Euro, Korean won, Canadian dollar and Mexican peso) compared to the Six Months Ended July 5, 2008. Consequently, gross profit for the Three Months Ended July 4, 2009 includes a decrease of $60.6 million due to foreign currency fluctuations. In addition, gross profit for the Six Months Ended July 5, 2008 benefitted by an extra week of operations when compared to the Six Months Ended July 4, 2009. Included in gross profit for the Six Months Ended July 4, 2009 is $0.2 million, $0.8 million and $0.7 million of restructuring expenses related to the Sportswear, Intimate Apparel and Swimwear Groups, respectively, primarily related to the reduction in the Company’s workforce in January 2009. Included in gross profit for the Six Months Ended July 5, 2008 is $0.8 million of restructuring expenses related to the Swimwear Group (seeNote 5 of Notes to Consolidated Financial Statements).

46

Sportswear Group gross profit decreased $36.1 million and gross margin decreased 310 basis points for the Six Months Ended July 4, 2009 compared to the Six Months Ended July 5, 2008 reflecting a $36.2 million decline in the international business (primarily related to the negative effect of fluctuations in exchange rates of foreign currencies, an unfavorable sales mix in Europe and Asia and the effect of an extra week of operations during the Six Months Ended April 5, 2008), partially offset by a $0.1 million increase in the domestic business.

Intimate Apparel Group gross profit decreased $19.9 million and gross margin decreased 330 basis points for the Six Months Ended July 4, 2009 compared to the Six Months Ended July 5, 2008 reflecting a $20.7 million decline in the international business (primarily related to the negative effect of fluctuations in exchange rates of foreign currencies, an unfavorable sales mix, lower net sales and the effect of an extra week of operations during the Six Months Ended July 5, 2008), partially offset by a $0.8 million increase in the domestic business. The increase in the domestic business primarily reflects increased net revenues and favorable sales mix in the Calvin Klein underwear business, partially offset by declines in the Core Intimate business as a result of reduced net revenues coupled with an unfavorable sales mix and restructuring expense increase in that business.

Swimwear Group gross profit decreased $8.3 million and gross margin decreased 220 basis points for the Six Months Ended July 4, 2009 compared to the Six Months Ended July 5, 2008. The decrease in gross profit primarily reflects a $2.8 million decrease inSpeedo(primarily related to decreased sales and unfavorable sales mix, partially offset by decreased inventory markdown costs) and a $5.5 million decline inCalvin Kleingross profit (due primarily to a decrease in net sales in Europe and the U.S. and the unfavorable effect of foreign currency fluctuation in Europe). The decrease in gross profit also reflects the effect of an extra week of operations during the Six Months Ended July 5, 2008.

Selling, General and Administrative Expenses

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Selling, general & administrative (“SG&A”) expenses decreased $28.0 million to $145.6 million (31.9% of net revenues) for the Three Months Ended July 4, 2009 compared to $173.6 million (34.5% of net revenues) for the Three Months Ended July 5, 2008. The decrease in SG&A expenses reflects the Company’s cost cutting initiative, which includes, among other things, reductions in its workforce, discretionary marketing costs, professional fees and travel costs. The decrease in SG&A expenses also reflects a net decrease of $15.3 million associated with the foreign currency exchange fluctuations since the U.S. dollar strengthened during the Three Months Ended July 4, 2009 relative to the functional currencies where the Company conducts certain of its operations (primarily the Euro, Korean won, Canadian dollar and Mexican peso) compared to the Three Months Ended July 5, 2008. The decrease in SG&A expenses also reflects a $4.6 million decrease in restructuring expenses (charges for the Three Months Ended July 4, 2009 primarily related to the reduction in the Company’s workforce in January 2009 and consolidation of the Company’s European operations, while charges for the Three Months Ended July 5, 2008 related primarily to contract termination and employee termination costs and other costs). Administrative expenses decreased $15.3 million (primarily related to reductions in professional fees, travel and personnel costs mainly as a result of the Company’s cost cutting initiatives). Marketing expenses decreased $7.0 million (primarily in the Company’sCalvin Kleinbusinesses in Europe, Asia and the U.S. as well as in theSpeedobusiness in the U.S.), selling expenses increased $0.6 million and distribution expenses decreased $1.7 million (both primarily reflecting decreases related to the effects of foreign currency fluctuations and the effects of the Company’s workforce reductions and reduced sales commissions partially offset by increases associated with the opening of additional retail stores for theCalvin Kleinbusinesses in Europe, Asia and Canada).

47

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Selling, general & administrative (“SG&A”) expenses decreased $65.4 million to $304.4 million (30.6% of net revenues) for the Six Months Ended July 4, 2009 compared to $369.8 million (34.5% of net revenues) for the Six Months Ended July 5, 2008. The decrease in SG&A expenses reflects the Company’s cost cutting initiative, which includes, among other things, reductions in its workforce, discretionary marketing costs, professional fees and travel costs. The decrease in SG&A expenses also reflects a net decrease of $36.1 million associated with the foreign currency exchange fluctuations since the U.S. dollar strengthened during the Six Months Ended July 4, 2009 relative to the functional currencies where the Company conducts certain of its operations (primarily the Euro, Korean won, Canadian dollar and Mexican peso) compared to the Six Months Ended July 5, 2008. The decrease in SG&A expenses also reflects the twenty-seventh week of operations in the Six Months Ended July 5, 2008 as well as a $17.1 million decrease in restructuring expenses (charges for the Six Months Ended July 4, 2009 primarily related to the reduction in the Company’s workforce in January 2009 and consolidation of the Company’s European operations, while charges for the Six Months Ended July 5, 2008 related primarily to the Collection License Company Charge of $18.5 million, discussed previously, as well as activities to increase productivity and profitability in the Swimwear segment). Administrative expenses decreased $22.6 million (primarily related to reductions in professional fees, travel and personnel costs mainly as a result of the Company’s cost cutting initiatives). Marketing expenses decreased $13.2 million (primarily in the Company’sCalvin Kleinbusinesses in Europe, Asia and the U.S. as well as in theSpeedobusiness in the U.S.), selling expenses decreased $8.9 million and distribution expenses decreased $3.6 million (both primarily reflecting decreases related to the effects of foreign currency fluctuations and the effects of the Company’s workforce reductions and reduced sales commissions, partially offset by increases associated with the opening of additional retail stores for theCalvin Kleinbusinesses in Europe, Asia and Canada).

Amortization of Intangible Assets

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Amortization of intangible assets was $2.2 million for the Three Months Ended July 4, 2009 compared to $2.6 million for the Three Months Ended July 5, 2008. The decrease primarily relates to the unfavorable effect of foreign currency fluctuations on the Euro-denominated carrying amounts ofCalvin Kleinlicenses acquired in January 2006 and January 2008.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Amortization of intangible assets was $4.4 million for the Three Months Ended July 4, 2009 compared to $5.1 million for the Three Months Ended July 5, 2008. The decrease primarily relates to the unfavorable effect of foreign currency fluctuations on the Euro-denominated carrying amounts ofCalvin Kleinlicenses acquired in January 2006 and January 2008.

Pension Income / Expense

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Pension expense was $0.6 million in the Three Months Ended July 4, 2009 compared to pension income of $0.3 million in the Three Months Ended July 5, 2008. The increase in pension expense is primarily related to the lower asset base in 2009 due to negative returns earned on the Plan’s assets, especially in the fourth quarter of Fiscal 2008. SeeNote 8 of Notes to the Consolidated Condensed Financial Statements.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Pension expense was $1.1 million in the Six Months Ended July 4, 2009 compared to pension income of $0.6 million in the Six Months Ended July 5, 2008. The increase in pension expense is primarily related to the lower asset base in 2009 due to negative returns earned on the Plan’s assets, especially in the fourth quarter of Fiscal 2008. SeeNote 8 of Notes to the Consolidated Condensed Financial Statements.

Operating Income

The following table presents operating income by group:

	Three Months			Three Months			Six Months			Six Months
	Ended July 4,			Ended July 5,			Ended July 4,			Ended July 5,
	2009			2008			2009			2008
	(in thousands of dollars)
Sportswear Group	$	13,591		$	23,040		$	51,912		$	45,119
Intimate Apparel Group		27,021			31,799			56,423			64,084
Swimwear Group		8,172			7,658			20,727			22,476
Unallocated corporate expenses (b)		(8,082	)		(13,592	)		(24,220	)		(27,031	)
Operating income (a)	$	40,702		$	48,905		$	104,842		$	104,648
Operating income as a percentage of net revenue		8.9	%		9.7	%		10.5	%		9.8	%

(a)

Includes approximately $1.5 million and $6.0 million for the Three Months Ended July 4, 2009 and July 5, 2008, respectively, and $10.0 million and $26.3 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to restructuring expenses. See Note 5 ofNotes to Consolidated Condensed Financial Statements.

(b)

Includes $0.6 million, $(0.3) million, $1.1 million and $(0.6) million of pension expense (income), $0.1 million, $1.4 million, $1.3 million, and $1.4 million of restructuring expenses and $0.4 million, nil, $2.2 million, and $(0.2) million of foreign currency losses (gains) for the Three Months Ended July 4, 2009, the Three Months Ended July 5, 2008, the Six Months Ended July 4, 2009 and the Six Months Ended July 5, 2008, respectively.

48

The following table summarizes key measures of the Company’s operating income for the Three and Six Months Ended July 4, 2009 and the Three and Six Months Ended July 5, 2008:

	Three Months			Three Months									Six Months			Six Months
	Ended July 4,			Ended July 5,			Increase /			%			Ended July 4,			Ended July 5,			Increase /			%
	2009			2008			(Decrease)			Change			2009			2008			(Decrease)			Change
	(In thousands of dollars)												(In thousands of dollars)
By Region:
Domestic	$	34,664		$	33,453		$	1,211			3.6	%	$	79,235		$	61,822		$	17,413			28.2	%
International		14,120			29,044			(14,924	)		-51.4	%		49,827			69,857			(20,030	)		-28.7	%
Unallocated corporate expenses		(8,082	)		(13,592	)		5,510			-40.5	%		(24,220	)		(27,031	)		2,811			-10.4	%
Total	$	40,702		$	48,905		$	(8,203	)		-16.8	%	$	104,842		$	104,648		$	194			0.2	%
By Channnel:
Wholesale	$	37,031		$	47,599		$	(10,568	)		-22.2	%	$	111,883		$	102,614		$	9,269			9.0	%
Retail		11,753			14,898			(3,145	)		-21.1	%		17,179			29,065			(11,886	)		-40.9	%
Unallocated corporate expenses		(8,082	)		(13,592	)		5,510			-40.5	%		(24,220	)		(27,031	)		2,811			-10.4	%
Total	$	40,702		$	48,905		$	(8,203	)		-16.8	%	$	104,842		$	104,648		$	194			0.2	%
TotalCalvin Kleinproducts	$	28,639		$	45,305		$	(16,666	)		-36.8	%	$	90,062		$	96,142		$	(6,080	)		-6.3	%

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Operating income was $40.7 million (8.9% of net revenues) for the Three Months Ended July 4, 2009 compared to $48.9 million (9.7% of net revenues) for the Three Months Ended July 5, 2008. Included in operating income for the Three Months Ended July 4, 2009 are pension expense of $0.6 million and restructuring charges of $1.5 million, primarily related to employee severance costs. Included in operating income for the Three Months Ended July 5, 2008 are pension income of $0.3 million and restructuring charges of $6.0 million, primarily related to contract termination, employee severance and other costs. Operating income for the Three Months Ended July 4, 2009 includes a decrease of $7.7 million related to the adverse effects of fluctuations in exchange rates of foreign currencies.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Operating income was $104.8 million (10.5% of net revenues) for the Six Months Ended July 4, 2009 compared to $104.6 million (9.8% of net revenues) for the Six Months Ended July 5, 2008. Included in operating income for the Six Months Ended July 4, 2009 are pension expense of $1.1 million and restructuring charges of $10.0 million. Included in operating income for the Six Months Ended July 5, 2008 are pension income of $0.6 million and restructuring charges of $26.3 million, of which $18.5 million relates to the Collection License Company Charge and the remainder relates to contract termination, employee severance and other costs. Operating income for the Six Months Ended July 4, 2009 includes a decrease of $24.4 million related to the adverse effects of fluctuations in exchange rates of foreign currencies. In addition, operating income for the Six Months Ended July 5, 2008 was favorably affected by the additional week of operations.

Sportswear Group

Sportswear Group operating income was as follows:

	Three Months		% of			Three Months		% of			Six Months		% of			Six Months		% of
	Ended July 4,		Brand Net			Ended July 5,		Brand Net			Ended July 4,		Brand Net			Ended July 5,		Brand Net
	2009 (c)		Revenues			2008 (c)		Revenues			2009 (c)		Revenues			2008 (c)		Revenues
	(in thousands of dollars)
Calvin KleinJeans	$	5,527		4.7	%	$	13,134		9.3	%	$	37,207		12.4	%	$	27,848		8.3	%
Chaps		4,672		10.9	%		5,790		13.6	%		9,292		11.6	%		8,588		10.5	%
Sportswear wholesale		10,199		6.4	%		18,924		10.3	%		46,499		12.2	%		36,436		8.7	%
Sportswear retail		3,392		5.3	%		4,116		6.3	%		5,413		4.4	%		8,683		6.6	%
Sportswear Group (a) (b)	$	13,591		6.1	%	$	23,040		9.2	%	$	51,912		10.3	%	$	45,119		8.2	%

(a)	Includes restructuring charges of $0.3 million for the Three Months Ended July 4, 2009, primarily related to the reduction in the Company’s workforce, $4.4 million for the Three Months Ended July 5, 2008, primarily related to contract termination and employee termination costs and other costs, $3.4 million for the Six Months Ended July 4, 2009, primarily related to the reduction in workforce and consolidation of the Company’s European operations and $23.1 million for the Six Months Ended July 5, 2008 primarily related to the Collection License Company Charge of $18.5 million related to the transfer of the Collection License Company to PVH as well as contract termination and employee termination costs.
(b)	Includes approximately $1.0 million and $0.6 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $2.0 million and $2.2 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related to certain sales ofCalvin Kleinunderwear in regions managed by the Sportswear Group.
(c)	Includes an allocation of shared services expenses by brand in the following table:

49

	Three Months		Three Months		Six Months		Six Months
	Ended July 4,		Ended July 5,		Ended July 4,		Ended July 5,
	2009		2008		2009		2008
	(in thousands of dollars)
Calvin KleinJeans	$	3,077	$	3,250	$	6,300	$	6,497
Chaps		1,815		2,116		3,621		4,231
Sportswear wholesale		4,892		5,366		9,921		10,728
Sportswear retail		185		87		187		182
Sportswear Group	$	5,077	$	5,453	$	10,108	$	10,910

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Sportswear Group operating income decreased $9.4 million, or 41.0%, primarily reflecting decreases of $7.6 million, $1.1 million and $0.7 million in theCalvin KleinJeans wholesale,Chaps andCalvin KleinJeans retail businesses, respectively. The decrease in Sportswear operating income primarily reflects a $19.5 million decrease in gross profit, partially offset by a $10.1 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 0.4%. The decrease in SG&A expenses primarily reflects a $4.1 million decrease in restructuring charges (seeNote 5 of Notes to Consolidated Condensed Financial Statements), the effects of foreign currency fluctuations, savings as a result of cost cutting initiatives, partially offset by increases in Europe and Asia due to store openings.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Sportswear Group operating income increased $6.8 million, or 15.1%, primarily reflecting increases of $9.4 million and $0.7 million in theCalvin KleinJeans wholesale andChaps businesses, partially offset by a decrease of $3.3 million in theCalvin KleinJeans retail business. The increase in Sportswear operating income primarily reflects a $36.1 million decrease in gross profit, more than offset by a $42.9 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 5.1%. The decrease in SG&A expenses primarily reflects a $19.9 million decrease in restructuring charges (seeNote 5 of Notes to Consolidated Condensed Financial Statements), the effects of foreign currency fluctuations, savings as a result of cost cutting initiatives, partially offset by increases in Europe and Asia due to store openings and the benefit of an extra twenty-seventh week in 2008.

Intimate Apparel Group

Intimate Apparel Group operating income was as follows:

	Three Months		% of			Three Months		% of			Six Months		% of			Six Months		% of
	Ended July 4,		Brand Net			Ended July 5,		Brand Net			Ended July 4,		Brand Net			Ended July 5,		Brand Net
	2009 (a)		Revenues			2008 (a)		Revenues			2009 (a)		Revenues			2008 (a)		Revenues
	(in thousands of dollars)
Calvin KleinUnderwear	$	13,864		17.6	%	$	18,556		19.8	%	$	37,770		21.5	%	$	37,522		20.5	%
Core Intimates		6,189		14.2	%		4,513		10.2	%		8,413		10.9	%		9,238		10.7	%
Intimate Apparel wholesale		20,053		16.4	%		23,069		16.7	%		46,183		18.3	%		46,760		17.3	%
Calvin KleinUnderwear retail		6,968		19.4	%		8,730		25.5	%		10,240		15.1	%		17,324		24.9	%
Intimate Apparel Group	$	27,021		17.1	%	$	31,799		18.5	%	$	56,423		17.6	%	$	64,084		18.9	%

(a) Includes an allocation of shared services/other expenses by brand in the following table:

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	Three Months		Three Months		Six Months		Six Months
	Ended July 4,		Ended July 5,		Ended July 4,		Ended July 5,
	2009		2008		2009		2008
	(in thousands of dollars)
Calvin KleinUnderwear	$	2,323	$	2,655	$	4,615	$	5,307
Core Intimates		1,398		1,776		2,759		3,554
Intimate Apparel wholesale		3,721		4,431		7,374		8,861
Calvin KleinUnderwear retail		88		—		174		—
Intimate Apparel Group	$	3,809	$	4,431	$	7,548	$	8,861

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Intimate Apparel Group operating income for the Three Months Ended July 4, 2009 decreased $4.8 million, or 15.0%, over the prior year reflecting a $4.7 million decrease inCalvin KleinUnderwear wholesale and a $1.8 million decrease inCalvin KleinUnderwear retail, partially offset by an increase of $1.7 million in Core Intimates. The decrease in Intimate Apparel operating income primarily reflects a $12.7 million decrease in gross profit, partially offset by a $7.9 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 2.4%. The decrease in SG&A expense primarily reflects the Company’s initiative to reduce costs and the effects of fluctuations in foreign currencies.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Intimate Apparel Group operating income for the Six Months Ended July 4, 2009 decreased $7.7 million, or 12.0%, over the prior year reflecting a $7.1 million decrease inCalvin KleinUnderwear retail and a $0.8 million decrease in Core Intimates, partially offset by a $0.2 million increase inCalvin KleinUnderwear wholesale. The decrease in Intimate Apparel operating income primarily reflects a $19.9 million decrease in gross profit, partially offset by a $12.2 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 2.0%. The decrease in SG&A expense primarily reflects the Company’s initiative to reduce costs, the benefit of an extra twenty-seventh week in 2008 and the effects of fluctuations in foreign currencies.

Swimwear Group

Swimwear Group operating income (loss) was as follows:

	Three Months			% of			Three Months			% of			Six Months			% of			Six Months		% of
	Ended July 4,			Brand Net			Ended July 5,			Brand Net			Ended July 4,			Brand Net			Ended July 5,		Brand Net
	2009 (a)			Revenues			2008 (a)			Revenues			2009 (a)			Revenues			2008 (a)		Revenues
	(in thousands of dollars)
Speedo	$	8,923			14.5	%	$	5,645			8.3	%	$	20,690			14.2	%	$	15,450		10.3	%
Calvin Klein		(2,144	)		-34.5	%		(39	)		-0.6	%		(1,489	)		-9.3	%		3,968		18.2	%
Swimwear wholesale		6,779			10.0	%		5,606			7.5	%		19,201			11.9	%		19,418		11.3	%
Swimwear retail (b)		1,393			22.2	%		2,052			29.1	%		1,526			17.7	%		3,058		29.9	%
Swimwear Group	$	8,172			11.0	%	$	7,658			9.4	%	$	20,727			12.2	%	$	22,476		12.3	%

(a)	Includes $3.3 million and $0.8 million for the Three Months Ended July 4, 2009 and July 5, 2008 and $0.9 million and $0.8 million for the Six Months Ended July 4, 2009 and July 5, 2008, respectively, related toCalvin Kleinretail swimwear.
(b)	Includes an allocation of shared services expenses by brand in the following table:

	Three Months		Three Months		Six Months		Six Months
	Ended July 4,		Ended July 5,		Ended July 4,		Ended July 5,
	2009		2008		2009		2008
	(in thousands of dollars)
Speedo	$	2,439	$	3,711	$	4,848	$	7,421
Calvin Klein		60		113		116		227
Swimwear wholesale		2,499		3,824		4,964		7,648
Swimwear retail		150		—		300		—
Swimwear Group	$	2,649	$	3,824	$	5,264	$	7,648

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Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Swimwear Group operating income for the Three Months Ended July 4, 2009 increased $0.5 million, or 6.7%, reflecting a $3.3 million increase inSpeedowholesale, a $2.1 million decrease inCalvin Kleinwholesale and a decline of $0.7 million in Swimwear retail. Operating income for the Three Months Ended July 4, 2009 and the Three Months ended July 5, 2008 includes restructuring expenses of $0.8 million and $0.1 million, respectively, primarily related to the reduction in the Company’s workforce in January 2009 as well as the rationalization of the Swimwear Group warehouse and distribution function in California. The increase in Swimwear operating income primarily reflects a $3.5 million decrease in gross profit, more than offset by a $4.0 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 2.7%. The decrease in SG&A expense primarily relates to the Company’s initiative to reduce costs.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Swimwear Group operating income for the Six Months Ended July 4, 2009 decreased $1.7 million, or 7.8%, reflecting a $5.4 million decrease inCalvin Kleinwholesale and a decline of $1.5 million in Swimwear retail, partially offset by a $5.2 million increase inSpeedowholesale. Operating income for the Six Months Ended July 4, 2009 and the Six Months ended July 5, 2008 includes restructuring expenses of $2.4 million and $1.1 million, respectively, primarily related to the reduction in the Company’s workforce in January 2009 as well as the rationalization of the Swimwear Group warehouse and distribution function in California. The decrease in Swimwear operating income primarily reflects an $8.3 million decrease in gross profit, partially offset by a $6.6 million decrease in SG&A (including amortization of intangible assets) expenses. SG&A expenses as a percentage of net sales decreased 2.1%. The decrease in SG&A expense primarily relates to the Company’s initiative to reduce costs and the benefit of the twenty-seventh week of operations in the Six Months Ended July 5, 2008.

Other Loss (Income)

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Loss of $2.8 million for the Three Months Ended July 4, 2009 primarily reflects $3.6 million of net losses related to foreign currency exchange contracts designed as economic hedges (seeNote 11 to Notes to Consolidated Condensed Financial Statements) and net gains of $0.8 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency. Income of $1.2 million for the Three Months Ended July 5, 2008 primarily reflects net income of $0.2 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency and a $1.0 million gain related to foreign currency exchange contracts designed as economic hedges.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Loss of $2.4 million for the Six Months Ended July 4, 2009 primarily reflects $4.4 million of net losses related to foreign currency exchange contracts designed as economic hedges (seeNote 11 to Notes to Consolidated Condensed Financial Statements) and net gains of $2.0 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency. Loss of $4.3 million for the Six Months Ended July 5, 2008 primarily reflects net losses of $0.9 million on the current portion of inter-company loans denominated in currency other than that of the foreign subsidiaries’ functional currency, a $0.2 million loss related to foreign currency exchange contracts designed as economic hedges, and a premium paid of $3.2 million (which includes the write-off of approximately $1.1 million of deferred financing costs) related to the repurchase of $44.1 million aggregate principal amount of Senior Notes (defined below) for a total consideration of $46.2 million.

Interest Expense

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Interest expense decreased $1.3 million to $5.8 million for the Three Months Ended July 4, 2009 from $7.1 million for the Three Months Ended July 5, 2008. The decrease primarily relates to a decline in interest associated with the Term B Note, which was fully repaid in the third quarter of Fiscal 2008, with the Senior Notes in the U.S., which were partially repaid in the first quarter of Fiscal 2008, and to the decrease in the outstanding balance and interest rates related to the CKJEA short term notes payable. Those decreases were partially offset by an increase in interest on balances of the New Credit Agreements, which were entered into in August 2008. In addition, income on the Company’s interest rate swaps decreased $1.6 million.

52

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Interest expense decreased $4.6 million to $11.9 million for the Six Months Ended July 4, 2009 from $16.5 million for the Six Months Ended July 5, 2008. The decrease primarily relates to a decline in interest associated with the Term B Note, which was fully repaid in the third quarter of Fiscal 2008, with the Senior Notes in the U.S., which were partially repaid in the first quarter of Fiscal 2008, and to the decrease in the outstanding balance and interest rates related to the CKJEA short term notes payable. Those decreases were partially offset by an increase in interest on balances of the New Credit Agreements, which were entered into in August 2008. In addition, income on the Company’s interest rate swaps decreased $1.4 million.

Interest Income

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Interest income decreased $0.3 million to $0.4 million for the Three Months Ended July 4, 2009 from $0.7 million for the Three Months Ended July 5, 2008. The decrease in interest income was due primarily to a decrease in interest earned on higher outstanding cash balances at lower interest rates.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Interest income decreased $0.8 million to $0.8 million for the Six Months Ended July 4, 2009 from $1.6 million for the Six Months Ended July 5, 2008. The decrease in interest income was due primarily to a decrease in interest earned on higher outstanding cash balances at lower interest rates.

Income Taxes

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

The effective tax rates for the Three Months Ended July 4, 2009 and July 5, 2008 were 40.6% and 39.1% respectively. The higher effective tax rate for the Three Months Ended July 4, 2009 primarily relates to a non-cash tax charge in the U.S., recorded during the Three Months Ended July 4, 2009, of approximately $2.5 million in order to correct an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income in connection with the Company’s bankruptcy proceedings in 2003 (seeNote 6 to the Consolidated Financial Statementsin the Company’s Annual Report on Form 10-K for Fiscal 2008). In addition, there was a shift in earnings from lower to higher tax jurisdictions included in the effective tax rate for the Three Months Ended July 4, 2009.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

The effective tax rates for the Six Months Ended July 4, 2009 and July 5, 2008 were 36.5% and 60.5% respectively. The lower effective tax rate for the Six Months Ended July 4, 2009 primarily relates to a non-cash tax charge of approximately $19.0 million associated with the repatriation of theLejabysale proceeds (seeNote 3 to the Consolidated Financial Statementsin the Company’s Annual Report on Form 10-K for Fiscal 2008) recorded during the Six Months Ended July 5, 2008, partially offset, during the Six Months Ended July 4, 2009, by a shift in earnings from lower to higher tax jurisdictions and a non-cash tax charge of approximately $2.5 million in the U.S. associated with the correction of an error in the 2006 income tax provision related to the recapture of cancellation of indebtedness income in connection with the Company’s bankruptcy proceedings in 2003.

Discontinued Operations

Three Months Ended July 4, 2009 compared to Three Months Ended July 5, 2008

Loss from discontinued operations, net of taxes, was $0.6 million for the Three Months Ended July 4, 2009 compared to a loss of $7.1 million for the Three Months Ended July 5, 2008. SeeNote 4ofNotes to Consolidated Condensed Financial Statements.

Six Months Ended July 4, 2009 compared to Six Months Ended July 5, 2008

Loss from discontinued operations, net of taxes, was $1.6 million for the Six Months Ended July 4, 2009 compared to income of $3.6 million for the Six Months Ended July 5, 2008. SeeNote 4 ofNotes to Consolidated Condensed Financial Statements.

53

Capital Resources and Liquidity

Financing Arrangements

Senior Notes

On June 12, 2003, Warnaco Inc., the principal operating subsidiary of Warnaco Group, completed the sale of $210.0 million aggregate principal amount of Senior Notes at par value, which notes mature on June 15, 2013 and bear interest at 8⁷/₈% payable semi-annually on December 15 and June 15 of each year. No principal payments prior to the maturity date are required. The Senior Notes are unconditionally guaranteed, jointly and severally, by Warnaco Group and substantially all of Warnaco Inc.’s domestic subsidiaries (all of which are 100% owned, either directly or indirectly, by Warnaco Inc.). In June 2006, the Company purchased $5.0 million aggregate principal amount of the outstanding $210.0 million Senior Notes for total consideration of $5.2 million in the open market. During March, 2008, the Company purchased $44.1 million aggregate principal amount of the outstanding Senior Notes for a total consideration of $46.2 million in the open market. The aggregate principal amount outstanding under the Senior Notes was $160.9 million as of July 4, 2009, January 3, 2009 and July 5, 2008.

The indenture pursuant to which the Senior Notes were issued contains covenants which, among other things, restrict the Company’s ability to incur additional debt, pay dividends and make restricted payments, create or permit certain liens, use the proceeds of sales of assets and subsidiaries’ stock, create or permit restrictions on the ability of certain of Warnaco Inc.’s subsidiaries to pay dividends or make other distributions to Warnaco Group or to Warnaco Inc., enter into transactions with affiliates, engage in certain business activities, engage in sale and leaseback transactions and consolidate or merge or sell all or substantially all of its assets. The Company was in compliance with the financial covenants of the Senior Notes as of July 4, 2009, January 3, 2009 and July 5, 2008.

Interest Rate Swap Agreements

On September 18, 2003, the Company entered into an Interest Rate Swap Agreement (the “2003 Swap Agreement”) with respect to the Senior Notes for a total notional amount of $50 million. The 2003 Swap Agreement provided that the Company would receive interest at 8⁷/₈% and pay a variable rate of interest based upon six month LIBOR plus 4.11% (5.33% at July 4, 2009). On July 15, 2009, the 2003 Swap Agreement was called by the issuer and the Company received a premium of $1.479 million, which will be amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature).

On November 5, 2004, the Company entered into a second Interest Rate Swap Agreement (the “2004 Swap Agreement”) with respect to the Company’s Senior Notes for a total notional amount of $25 million. The 2004 Swap Agreement provided that the Company would receive interest of 8⁷/₈% and pay a variable rate of interest based upon six months LIBOR plus 4.34%. In June 2009, the 2004 Swap Agreement was called by the issuer and the Company received a premium of $739,500, which will be amortized as a reduction to interest expense through June 15, 2013 (the date on which the Senior Notes mature).

As a result of the 2003 and 2004 Swap Agreements, the weighted average effective interest rate of the Senior Notes was 7.77% as of July 4, 2009, 7.77% as of January 3, 2009 and 8.15% as of July 5, 2008.

The fair value of the Company’s outstanding interest rate swap agreements reflect the termination premium (unrealized loss) or termination discount (unrealized gain) that the Company would realize if such swaps were terminated on the valuation date. Since the provisions of the Company’s 2003 Swap Agreement and the 2004 Swap Agreement match the provisions of the Company’s outstanding Senior Notes (the “Hedged Debt”), changes in the fair value of the outstanding swaps do not have any effect on the Company’s results of operations but are recorded in the Company’s consolidated balance sheets. Unrealized gains on the outstanding interest rate swap agreements are included in other assets with a corresponding increase in the Hedged Debt. Unrealized losses on the outstanding interest rate swap agreements are included as a component of long-term debt with a corresponding decrease in the Hedged Debt. The table below summarizes the fair value (unrealized gains (losses)) of the Company’s outstanding swap agreements:

	July 4,		January 3,		July 5,
	2009		2009		2008
	(in thousands of dollars)
Unrealized gain:
2003 Swap Agreement	$	1,508	$	1,972	$	301
2004 Swap Agreement		—		932		(50	)
Net unrealized gain	$	1,508	$	2,904	$	251

New Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “New Credit Agreement”) and Warnaco of Canada Company (“Warnaco Canada”), an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “New Canadian Credit Agreement” and, together with the New Credit Agreement, the “New Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit.

54

The New Credit Agreement provides for a five-year asset-based revolving credit facility under which up to $270.0 million initially will be available. In addition, during the term of the New Credit Agreement, Warnaco may make up to three requests for additional credit commitments in an aggregate amount not to exceed $200.0 million. The New Canadian Credit Agreement provides for a five-year asset-based revolving credit facility in an aggregate amount up to U.S. $30.0 million. The New Credit Agreements mature on August 26, 2013.

The New Credit Agreement has interest rate options that are based on (i) a Base Rate (as defined in the New Credit Agreement) plus 0.75% (4.00% at July 4, 2009) or (ii) a LIBOR (as defined in the New Credit Agreement) plus 1.75% (2.31% at July 4, 2009) in each case, on aper annumbasis. The interest rate payable on outstanding borrowing is subject to adjustments based on changes in the Company’s leverage ratio. The New Canadian Credit Agreement has interest rate options that are based on (i) the prime rate announced by Bank of America (acting through its Canada branch) plus 0.75% (3.00% at July 4, 2009), or (ii) a BA Rate (as defined in the New Canadian Credit Agreement) plus 1.75% (2.06% at July 4, 2009), in each case, on aper annumbasis and subject to adjustments based on changes in the Company’s leverage ratio. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) as its rate of interest for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

The New Credit Agreement contains events of default, such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change of control, or the failure to observe the negative covenants and other covenants related to the operation and conduct of the Company’s business. Upon an event of default, the lenders and issuers will not be obligated to make loans or other extensions of credit and may, among other things, terminate their commitments and declare any then outstanding loans due and payable immediately. As of July 4, 2009 and January 3, 2009, the Company was in compliance with all financial covenants contained in the New Credit Agreements.

As of July 4, 2009, the Company had approximately $0.1 million in loans and approximately $62.1 million in letters of credit outstanding under the New Credit Agreement, leaving approximately $186.2 million of availability (including $42.0 million of available cash) under the New Credit Agreement. As of July 4, 2009, there was $8.6 million in loans and no letters of credit outstanding under the New Canadian Credit Agreement and the available line of credit was approximately $17.9 million.

Revolving Credit Facility; Amended and Restated Credit AgreementandForeign Revolving Credit Facility

On August 26, 2008, the Company terminated the Amended and Restated Credit Agreement, including the Term B Note, in connection with the closing of the New Credit Agreements (see above). In addition, during the third quarter of Fiscal 2008, the Company terminated the Foreign Revolving Credit Facility under which no amounts were outstanding. All guarantees, mortgages, liens and security interests related to both of those agreements were terminated at that time.

Euro-Denominated CKJEA Notes Payable and Other

The total CKJEA notes payable of $48.4 million at July 4, 2009 consists of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). As of July 4, 2009, January 3, 2009 and July 5, 2008, the weighted average interest rate for the CKJEA notes payable outstanding was approximately 2.39%, 4.50% and 5.67%, respectively. All of the CKJEA notes payable are short-term and were renewed during the Six Months Ended July 4, 2009 for additional terms of no more than 12 months. In addition, one of the Company’s Korean subsidiaries had an outstanding note payable of $1.6 million with an interest rate of 4.7% per annum and $3.8 million with an interest rate of 8.84% per annum at July 4, 2009 and January 3, 2009, respectively.

Liquidity

The Company’s principal source of cash is from sales of its merchandise to both wholesale and retail customers. During the Six Months Ended July 4, 2009, there was a decrease in net revenues of 7.2 % compared to the Six Months Ended July 5, 2008 (seeResults of Operations — Net Revenues, above). The decline in net revenues was primarily due to the negative effect of fluctuations in foreign currency exchange rates of certain currencies where the Company conducts its business (principally the Euro, Korean Won, Canadian Dollar and Mexican Peso). A decline in future net revenue could have a material negative impact on the ability of the Company to conduct its operations at current levels.

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The Company believes that, at July 4, 2009, cash on hand, cash available under its New Credit Agreements (seeCapital Resources and Liquidity — Financing Arrangements,above) and cash to be generated from future operating activities will be sufficient to fund its operations, including contractual obligations (seeNote 20 to Notes to Consolidated Condensed Financial Statements, above) and capital expenditures, for the next 12 months.

In connection with the consolidation of its European operations during the Six Months Ended July 4, 2009, the Company entered into a 15-year lease for a distribution center in the Netherlands. The Company expects to occupy the distribution center by February 2010 and to make capital improvements of approximately $10 million from November 2009 through the first quarter of 2010. The Company has also committed to leasing over 100,000 square feet of new retail store space worldwide, which the Company expects will result in capital expenditures of up to $20 million during Fiscal 2009.

During the Six Months Ended July 4, 2009, the Company reduced its workforce in order to align its cost structure to match the downturn in the global economy and turmoil in the financial markets. The Company made $5.8 million in cash severance payments to employees and expects to pay an additional $1.8 million during the remainder of Fiscal 2009. The Company also paid $1.2 million related to restructuring and other exit activities, including consolidation of its European operations and contract termination costs. The Company expects to incur further restructuring expenses of approximately $1.4 million in connection with the consolidation of its European operations through 2010.

During the Six Months Ended July 4, 2009, some of the Company’s foreign subsidiaries, with functional currencies other than the U.S. dollar (primarily the Euro, Korean Won, Canadian Dollar or Mexican Peso), made purchases of inventory, paid minimum royalty and advertising costs and /or had intercompany loans and payables denominated in U.S. dollars. The cash flows of those subsidiaries were, therefore, negatively impacted by the strengthening of the U.S. dollar in relation to those foreign currencies. In order to minimize foreign currency exchange risk of those transactions, the Company uses derivative financial instruments, including foreign currency exchange forward contracts and zero cost collars (option contracts). The Company also uses interest rate swaps to convert a portion of the interest obligation related to its long-term debt from a fixed rate to floating rates in order to reduce cash outflows (seeItem 3. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange RiskandNote 11 to Notes to Consolidated Financial Statements).

The Company carries its derivative financial instruments at fair value, in accordance with SFAS 157, on the Consolidated Condensed Balance Sheets. The Company utilizes the market approach to measure fair value for financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. At July 4, 2009, the Company’s hedging programs included $41.3 million of future inventory purchases, $19.7 million of future minimum royalty and advertising payments and $69.7 million of intercompany loans and amounts denominated in non-functional currencies, primarily the U.S. dollar.

SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 —	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 —	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 —	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The fair value of interest rate swaps was estimated based on the amount that the Company would receive or pay to terminate the swaps on the valuation date. Those amounts are based on receipt of interest at a fixed interest rate of 8⁷/₈% and a payment of a variable rate based on a fixed interest rate above the six month LIBOR rate. As such, the fair value of the interest rate swaps is classified as level 2, as defined above.

The fair value of foreign currency exchange contracts was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The fair value of these foreign currency exchange contracts is based on exchange-quoted prices which are adjusted by a forward yield curve and, therefore, meets the definition of level 2 fair value, as defined above.

The fair value of zero-cost collars was determined as the net unrealized gains or losses on the option contracts comprising each collar, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current spot exchange rate. The fair value of these foreign currency exchange contracts is based on exchange-quoted prices and, therefore, meets the definition of level 2 fair value, as defined above.

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As of July 4, 2009, the Company had working capital of $559.0 million, cash and cash equivalents of $177.6 million, and short-term debt of $58.8 million. The Company’s total debt was $221.9 million, consisting of $163.1 million of the Senior Notes (including unrealized gain on the interest rate swap of $1.5 million and premium of $0.7 million on the 2004 swap), $0.1 million under the New Credit Agreement, $8.6 million under the New Canadian Credit Agreement, $48.4 million of the CKJEA short-term notes payable and $1.7 million of other outstanding debt. The Company repaid $44.1 million of the Senior Notes in March 2008 from the proceeds of the sale of the Lejaby business during the Six Months Ended July 5, 2008. As of July 4, 2009, under the New Credit Agreement, the Company had approximately $0.1 million in loans and approximately $62.1 million in letters of credit outstanding, leaving approximately $186.2 million of availability (including $42.0 million of available cash), and, under the New Canadian Credit Agreement, approximately $8.6 million of loans and no letters of credit, leaving approximately $17.9 million of availability. With the exception of the Company’s foreign short-term notes payable, the Company is not required to make any principal payments under its debt facilities prior to June 15, 2013.

The revolving credit facilities under the New Credit Agreements reflect funding commitments by a syndicate of 14 U.S. and Canadian banks, including Bank of America N.A., JPMorgan Chase, N.A., Deutsche Bank, HSBC, Royal Bank of Scotland and The Bank of Nova Scotia. The ability of any one or more of those banks to meet its commitment to provide the Company with funding up to the maximum of available credit is dependent on the fair value of the bank’s assets and its legal lending ratio relative to those assets (amount the bank is allowed to lend). The turmoil in the credit markets has resulted in a decrease in the ability of banks to lend. The Company continues to monitor the creditworthiness of the syndicated banks.

During the Three Months Ended April 4, 2009, the Company was able to borrow funds under the New Credit Agreement, net of repayments, of $52.8 million for seasonal cash flow requirements. The Company repaid those borrowings by the end of the second quarter of Fiscal 2009. As of July 4, 2009, the Company expects that it will continue to be able to obtain needed funds under the New Credit Agreements when requested. However, in the event that such funds are not available, the Company may have to delay certain capital expenditures or plans to expand its business, to scale back operations and/or raise capital through the sale of its equity or debt securities. There can be no assurance that the Company would be able to sell its equity or debt securities on terms that are satisfactory.

The Pension Protection Act of 2006 (the “PPA”) revised the basis and methodology for determining defined benefit plan minimum funding requirements as well as maximum contributions to and benefits paid from tax-qualified plans. Most of these provisions were first applicable to the Company’s domestic defined benefit pension plan in Fiscal 2008. The PPA may ultimately require the Company to make additional contributions to its domestic plans. During the Six Months Ended July 4, 2009, the Company contributed $9.5 million to the domestic pension plan. Fiscal 2009 domestic plan contributions of $11.4 million are currently expected and annual contributions for the following four years are expected to be similar. Actual Fiscal 2009 and later year contributions could exceed the Company’s current projections, and may be influenced by future changes in government requirements. Additionally, the Company’s projections concerning timing of the PPA funding requirements are subject to change and may be influenced by factors such as general market conditions affecting trust asset performance, interest rates, and the Company’s future decisions regarding certain elective provisions of the PPA.

Accounts receivable increased $29.5 million to $281.4 million at July 4, 2009 from $251.9 million at January 3, 2009, reflecting a $0.6 million increase in the Sportswear Group (due primarily to seasonality of sales in the domestic and overseasCalvin KleinJeans business offset by a reduction in reserves), an $11.6 million increase in the Intimate Apparel Group (due primarily to increased collection time despite decreased sales in the domestic and overseas businesses) and a $17.3 million increase in the Swimwear Group (reflecting the seasonal shipment of swimwear products and increased collection time). The balance of accounts receivable at July 4, 2009 includes a decrease of $24.5 million due to the adverse effects of foreign currency fluctuations relative to the U.S. dollar in connection with transactions in countries where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian dollar and Mexican peso).

Accounts receivable decreased $29.5 million to $281.4 million at July 4, 2009 from $310.9 million at July 5, 2008. The balance at July 5, 2008 includes approximately $0.3 million related to operations discontinued during the year ended July 4, 2009. Excluding these discontinued operations, accounts receivable decreased $29.2 million primarily reflecting the effects of fluctuations in foreign currency exchange rates.

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Inventories decreased $34.7 million to $291.6 million at July 4, 2009 from $326.3 million at January 3, 2009, reflecting an $11.4 million decrease in the Sportswear Group (due primarily to the Company’s initiative to reduce inventory in light of the downturn in the economy), a $4.4 million increase in the Intimate Apparel Group (due to increased customer demand) and an $18.9 million decrease in the Swimwear Group (due to the seasonality of sales of the swimwear products and the Company’s initiative to reduce inventory). The balance of inventories at July 4, 2009 includes a decrease of $27.2 million due to the adverse effects of foreign currency fluctuations relative to the U.S. dollar in connection with transactions in countries where the Company conducts certain of its operations (principally the Euro, Korean won, Canadian dollar and Mexican peso).

Inventories decreased $24.8 million to $291.6 million at July 4, 2009 from $316.4 million at July 5, 2008. The balance at July 5, 2008 includes approximately $0.9 million related to operations discontinued during the year ended July 4, 2009. Excluding these discontinued operations, inventory decreased $23.9 million primarily related to fluctuations in foreign currency exchange rates.

Share Repurchase Program

In May 2007, the Company’s Board of Directors authorized a share repurchase program (the “2007 Share Repurchase Program”) for the repurchase of up to 3,000,000 shares of the Company’s common stock. The Company expects that, in order to comply with the terms of applicable debt instruments, purchases under this newly authorized program will be made from time to time over a period of up to four years beginning from the date the program was approved. During the Six Months Ended July 4, 2009, the Company did not repurchase any shares of common stock under the 2007 Share Repurchase Program. The share repurchase program may be modified or terminated by the Company’s Board of Directors at any time.

Repurchased shares are held in treasury pending use for general corporate purposes.

Cash Flows

The following table summarizes the cash flows from the Company’s operating, investing and financing activities for the Six Months Ended July 4, 2009 and July 5, 2008:

	Six Months Ended
	July 4, 2009			July 5, 2008
	(in thousands of dollars)
Net cash provided by (used in) operating activities:
Continuing operations	$	70,439		$	56,421
Discontinued operations		3,624			(17,881	)
Net cash (used in) investing activities:
Continuing operations		(20,672	)		(20,613	)
Discontinued operations		—			—
Net cash (used in) financing activities:
Continuing operations		(23,598	)		(57,931	)
Discontinued operations		—			—
Translation adjustments		213			2,602
Increase (decrease) in cash and cash equivalents	$	30,006		$	(37,402	)

For the Six Months Ended July 4, 2009, cash provided by operating activities from continuing operations was $70.4 million compared to $56.4 million in the Six Months Ended July 5, 2008. The $14.0 million increase in cash provided was due to a $19.1 million increase in net income offset by the changes to non-cash charges and working capital. Working capital changes for the Six Months Ended July 4, 2009 included cash outflows of $25.3 million related to accounts receivable (due to timing of sales and payments) and $52.9 million related to accounts payable, accrued expenses and other liabilities (due to the timing of payments for purchases of inventory), partially offset by cash inflows of $32.1 million related to inventory (due to the Company’s initiative to reduce inventory balances in light of the downturn in the economy), $18.7 million related to accrued income taxes and $2.0 million related to prepaid expenses and other assets. Working capital changes for the Six Months Ended July 5, 2008 included cash outflows of $40.0 million related to accounts receivable, $17.6 million related to prepaid expenses and other assets, and $0.3 million related to accounts payable and accrued expenses, which were partially offset by cash inflows of $3.5 million related to inventory and $32.4 million related to accrued income taxes (including an accrual during the Six Months Ended July 5, 2008 of approximately $19.0 million associated with the repatriation, to the U.S., of the proceeds related to the sale of theLejabybusiness, net of adjustments for working capital). The Company experienced a $1.7 million decrease in non-cash charges in the Six Months Ended July 4, 2009 compared to the Six Months Ended July 5, 2008 primarily reflecting decreases in foreign exchange gains, depreciation and amortization, inventory write-downs (primarily related to the Company’s Swimwear group), amortization of deferred charges and loss on repurchase of Senior Notes and refinancing of revolving credit facility in 2008 and an increase in loss from discontinued operations in 2009.

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For the Six Months Ended July 4, 2009, cash used in investing activities from continuing operations was $20.7 million, mainly attributable to purchases of property, plant and equipment. For the Six Months Ended July 5, 2008, cash used in investing activities from continuing operations was $20.6 million, mainly attributable to purchases of property, plant and equipment of $19.6 million and cash used for business acquisitions of $29.1 million, mainly related to acquisition of intangible assets related to new licenses acquired from PVH on January 30, 2008 and the acquisition of a business which operates 11 retail stores in China (seeNote 3 to Notes to the Consolidated Condensed Financial Statements). Those amounts were partially offset by a net amount of $27.9 million received from the sale of the Lejaby business, which closed on March 10, 2008 (seeNote 4 of Notes to the Consolidated Condensed Financial Statements).

Net cash used in financing activities for the Six Months Ended July 4, 2009 was $23.6 million, which primarily reflects a decrease of $18.7 million related to short-term notes payable, a decrease of $4.1 million due to repayment of amounts borrowed under the New Credit Agreements and a decrease of $1.4 million related to the repurchase of treasury stock (in connection with the surrender of shares for the payment of minimum income tax due upon vesting of certain restricted stock awarded by the Company to its employees), partially offset by an increase of $0.7 million of cash received upon the cancellation of the 2004 Swap (seeNote 14 to notes to Consolidated Condensed Financial Statements). For the Six Months Ended July 5, 2008, net cash used in financing activities was $57.9 million, attributable mainly to the repurchase of $46.2 million of Senior Notes, decrease in short-term notes payable of $25.1 million, repurchase of treasury stock of $4.3 million and repayments of the Term B note of $1.4 million. Those amounts were partially offset by $19.1 million from the exercise of employee stock options.

Significant Contractual Obligations and Commitments

Contractual obligations and commitments as of July 4, 2009 were not materially different from those disclosed in the Company’s Annual Report on Form 10-K for Fiscal 2008, with the exception of certain operating leases and other contractual obligations pursuant to agreements entered into during the Six Months Ended July 4, 2009 (seeNote 20 of Notes to Consolidated Condensed Financial Statements). Please refer to the Company’s Annual Report on Form 10-K for Fiscal 2008 for a description of those obligations and commitments outstanding as of January 3, 2009.

Off-Balance Sheet Arrangements

None.

Statement Regarding Forward-Looking Disclosure

This Quarterly Report on Form 10-Q, as well as certain other written, electronic and oral disclosures made by the Company from time to time, contains “forward-looking statements” that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and reflect, when made, the Company’s estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions, opportunities and expectations. Actual results may differ materially from anticipated results, targets or expectations and investors are cautioned not to place undue reliance on any forward-looking statements. Statements other than statements of historical fact, including, without limitation, future financial targets, are forward-looking statements. These forward-looking statements may be identified by, among other things, the use of forward-looking language, such as the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “project,” “scheduled to,” “seek,” “should,” “will be,” “will continue,” “will likely result”, “targeted”, or the negative of those terms, or other similar words and phrases or by discussions of intentions or strategies.

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The following factors, among others, including those described in this Quarterly Report on Form 10-Q under the headingItem 1A. Risk Factors(as such disclosure may be modified or supplemented from time to time), could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by it: the Company’s ability to execute its repositioning and sale initiatives (including achieving enhanced productivity and profitability) previously announced; economic conditions that affect the apparel industry, including the recent turmoil in the financial and credit markets; the Company’s failure to anticipate, identify or promptly react to changing trends, styles, or brand preferences; further declines in prices in the apparel industry; declining sales resulting from increased competition in the Company’s markets; increases in the prices of raw materials; events which result in difficulty in procuring or producing the Company’s products on a cost-effective basis; the effect of laws and regulations, including those relating to labor, workplace and the environment; changing international trade regulation, including as it relates to the imposition or elimination of quotas on imports of textiles and apparel; the Company’s ability to protect its intellectual property or the costs incurred by the Company related thereto; the risk of product safety issues, defects or other production problems associated with our products; the Company’s dependence on a limited number of customers; the effects of consolidation in the retail sector; the Company’s dependence on license agreements with third parties; the Company’s dependence on the reputation of its brand names, including, in particular,Calvin Klein; the Company’s exposure to conditions in overseas markets in connection with the Company’s foreign operations and the sourcing of products from foreign third-party vendors; the Company’s foreign currency exposure; the Company’s history of insufficient disclosure controls and procedures and internal controls and restated financial statements; unanticipated future internal control deficiencies or weaknesses or ineffective disclosure controls and procedures; the effects of fluctuations in the value of investments of the Company’s pension plan; the sufficiency of cash to fund operations, including capital expenditures; the Company’s ability to service its indebtedness, the effect of changes in interest rates on the Company’s indebtedness that is subject to floating interest rates and the limitations imposed on the Company’s operating and financial flexibility by the agreements governing the Company’s indebtedness; the Company’s dependence on its senior management team and other key personnel; the Company’s reliance on information technology; the limitations on purchases under the Company’s share repurchase program contained in the Company’s debt instruments, the number of shares that the Company purchases under such program and the prices paid for such shares; the Company’s inability to achieve its financial targets and strategic objectives, as a result of one or more of the factors described above, changes in the assumptions underlying the targets or goals, or otherwise; the failure of acquired businesses to generate expected levels of revenues; the failure of the Company to successfully integrate such businesses with its existing businesses (and as a result, not achieving all or a substantial portion of the anticipated benefits of such acquisitions); and such acquired businesses being adversely affected, including by one or more of the factors described above, and thereby failing to achieve anticipated revenues and earnings growth.

The Company encourages investors to read the section entitledItem 1A. Risk Factorsand the discussion of the Company’s critical accounting policies inDiscussion of Critical Accounting Policiesincluded in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009, as such discussions may be modified or supplemented by subsequent reports that the Company files with the SEC. This discussion of forward-looking statements is not exhaustive but is designed to highlight important factors that may affect actual results. Forward-looking statements speak only as of the date on which they are made, and, except for the Company’s ongoing obligation under the U.S. federal securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk primarily related to changes in hypothetical investment values under certain of the Company’s employee benefit plans, interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculation or for trading purposes.

Market Risk

The Company’s pension plan invests in marketable equity and debt securities, mutual funds, common collective trusts, limited partnerships and cash accounts. These investments are subject to changes in the market value of individual securities and interest rates as well as changes in the overall economy. Investments are stated at fair value, except as disclosed below, based upon quoted market prices. Investments in limited partnerships are valued based on estimated fair value by the management of the limited partnerships in the absence of readily ascertainable market values. These estimated fair values are based upon the underlying investments of the limited partnerships. Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. The limited partnerships utilize a “fund of funds” approach resulting in diversified multi-strategy, multi-manager investments. The limited partnerships invest capital in a diversified group of investment entities, generally hedge funds, private investment companies, portfolio funds and pooled investment vehicles which engage in a variety of investment strategies, managed by investment managers. Fair value is determined by the administrators of each underlying investment, in consultation with the investment managers. Investments in common collective trusts are valued at the net asset value, as determined by the trust manager, of the shares held by the pension plan at year end, which is based on the fair value of the underlying assets. The common collective trusts are not traded on a public exchange and maintains a net asset value of $1 per share.

During the first quarter of Fiscal 2009, the turmoil in the credit markets caused a decline in the fair value of the debt and equity securities and other investments held by the pension plan’s investment portfolio. During the second quarter of Fiscal 2009, the fair value of those investments has begun to increase. Changes in the value of the pension plan’s investment portfolio are directly reflected in the Company’s Consolidated Condensed Statement of Operations through pension expense and in the Company’s Consolidated Condensed Balance Sheet as a component of accrued pension liability. The Company records the effect of any changes in actuarial assumptions (including changes in the discount rate) and the difference between the assumed rate of return on plan assets and the actual return on plan assets in the fourth quarter of its fiscal year. The total value of the pension plan’s investment portfolio was $100.6 million at January 3, 2009. A hypothetical 10% increase/decrease in the value of the Company’s pension plan investment portfolio would have resulted in a decrease/increase in pension expense of $10.1 million for Fiscal 2008. Based on historical appreciation in the Company’s pension plan investment portfolio, the Company, during the first half of Fiscal 2009, estimated pension expense on an interim basis assuming a long-term rate of return on pension plan investments of 8%, net of pension plan expenses. A 1% decrease/increase in the actual return earned on pension plan assets (a decrease in the return on plan assets from 8% to 7% or an increase in the return on plan assets from 8% to 9%) would result in an increase/decrease of approximately $1.0 million in pension expense (decrease/increase in pension income) for Fiscal 2009.

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Interest Rate Risk

The Company has market risk from exposure to changes in interest rates, at July 4, 2009, on its 2003 Swap Agreement with notional amount totaling $50.0 million, on $0.1 million under the New Credit Agreement and $8.6 million under the New Canadian Credit Agreement and, at July 5, 2008, on its 2003 and 2004 Swap Agreements with notional amounts totaling $75.0 million, on $106.0 million of loans outstanding under the Term B Note. There was no exposure on the revolving credit facility under the Amended and Restated Credit Agreement since the balance at July 5, 2008 was zero. The Company is not exposed to interest rate risk on its Senior Notes because the interest rate on the Senior Notes is fixed at 8⁷/₈% per annum. With respect to the 2003 and 2004 Swap Agreements (the 2004 Swap Agreement was called by the issuer in June 2009), a hypothetical 10% increase in interest rates would have had an unfavorable impact of $0.1 million for the Six Months ended July 4, 2009 and $0.3 million for the Six Months Ended July 5, 2008 on the Company’s income from continuing operations before provision for income taxes. A hypothetical 10% increase in interest rates for the loans outstanding under the Term B Note would have had an unfavorable effect of $0.2 million and a negligible effect under the revolving credit facility in the Six Months Ended July 5, 2008 on the Company’s income from continuing operations before provision for income taxes. A hypothetical 10% increase in interest rates for the loans outstanding under the New Credit Agreement and New Canadian Credit Agreement would each have had negligible unfavorable effects in the Six Months Ended July 4, 2009 on the Company’s income from continuing operations before provision for income taxes. SeeManagement’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Financing ArrangementsandNote 14 of Notes to Consolidated Condensed Financial Statements.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk related to its U.S. dollar-denominated purchases of inventory, payment of minimum royalty and advertising costs and intercompany loans and payables where the functional currencies of the subsidiaries that are party to these transactions are the Euro, Canadian Dollar, Korean Won, Mexican Peso or British Pound. The foreign currency derivative instruments that the Company uses to offset its foreign exchange risk are forward purchase contracts and zero-cost collars. SeeNote11 of Notes to the Consolidated Condensed Financial Statementsfor further details on the derivative instruments and hedged transactions. These exposures have created significant foreign currency fluctuation risk and have had a significant negative impact on the Company’s earnings during the first half of Fiscal 2009 compared to the same period in Fiscal 2008. The negative impact during the first half of Fiscal 2009 is due to strengthening of the U.S. dollar against foreign currencies of the Company’s Canadian, Mexican, Central and South American, European and Asian operations. These operations accounted for approximately 49.5% of the Company’s total net revenues for the Six Months Ended July 4, 2009. These foreign operations of the Company purchase products from suppliers denominated in U.S. dollars. Total purchases of products made by foreign subsidiaries denominated in U.S. dollars amounted to approximately $105.1 million for Six Months Ended July 4, 2009. A hypothetical decrease of 10% in the value of these foreign currencies relative to the U.S. dollar would have increased cost of goods sold (which would decrease operating income) by $10.5 million for Six Months Ended July 4, 2009.

The fair value of foreign currency exchange contracts and zero cost collars was determined as the net unrealized gains or losses on those contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the contracts’ settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or purchased at the current forward or spot (for zero cost collars) exchange rate.

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The following table summarizes the effect on earnings for the Six Months Ended July 4, 2009 of a hypothetical 10% increase in the contractual exchange rate or strike price of the Company’s foreign currency exchange contracts and zero-cost collar option contracts:

					Weighted		Effect of Hypothetical
					Average		10% Increase in Contractual
		Foreign			Contractual		Exchange Rate or Strike Price
		Currency (a)	Amount		Exchange Rate		on Earnings
Derivative Instrument	Hedged Transaction	Sell/Buy	Hedged		or Strike Price		Gain (loss) (b)
			USD (thousands)				USD (thousands)
Foreign exchange contracts	Minimum royalty and adverising costs	Euro/USD	$	10,000		1.340	$	(1,000	)
Foreign exchange contracts	Minimum royalty and adverising costs	Euro/USD		9,652		1.369		(965	)
Foreign exchange contracts	Purchases of inventory	Euro/USD		6,125		1.522		(612	)
Foreign exchange contracts	Purchases of inventory	Euro/USD		2,285		1.348		(229	)
Foreign exchange contracts	Purchases of inventory	KRW/USD		7,717		1,309		(772	)
Foreign exchange contracts	Purchases of inventory	CAD/USD		19,124		1.2239		(1,912	)
Foreign exchange contracts	Purchases of inventory	MXN/USD		2,226		16.1710		(223	)
Foreign exchange contracts	Intercompany sales of inventory	Euro/GBP		3,840		0.876		(630	)
Zero-cost collars	Intercompany loans	Euro/CAD		7,228		1.5783		1,058
Zero-cost collars	Intercompany loans	USD/CAD		7,500		1.2175		860
Zero-cost collars	Intercompany payables	Euro/USD		35,000		1.3471		2,624
Zero-cost collars	Intercompany payables	KRW/USD		20,000		1,361		(2,197	)

(a)	USD = U.S. dollar, KRW = Korean won, CAD = Canadian dollar, MXN = Mexican peso
(b)	The Company expects that these hypothetical gains and losses would be offset by gains and losses on the related underlying transactions.

Item 4.Controls and Procedures.

(a)Disclosure Controls and Procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

(b)Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Three Months Ended July 4, 2009 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1.Legal Proceedings.

The information required by this Item 1 of Part II is incorporated herein by reference to Part I, Item 1. Financial Statements,Note 18 Legal Matters.

Item 1A.Risk Factors.

Please refer toItem 1A. Risk Factorsin the Company’s Annual Report on Form 10-K for Fiscal 2008, filed with the SEC on March 2, 2009 for a description of certain significant risks and uncertainties to which the Company’s business, operations and financial condition are subject. There have been no material changes to these risk factors during the Six Months Ended July 4, 2009, except as noted below.

Our income tax obligations may increase due to recently proposed changes in U.S. tax law.

In May 2009, President Obama’s administration proposed significant changes to tax laws regarding U.S. companies with international operations, including changes that would reduce or eliminate the deferral of U.S. income tax on future un-repatriated earnings of foreign subsidiaries, the limitation on U.S. tax deductions for expenses related to un-repatriated earnings and modifications to the U.S. “check the box” rules. We consider the operating earnings of our foreign subsidiaries to be invested indefinitely outside of the U.S. and thus have not provided for U.S. federal and state income taxes or foreign withholdings taxes that may result on future remittances. There can be no assurance regarding the ultimate impact if the proposals are enacted into law or what, if any, changes may be made to such proposals prior to their enactment. However, future changes in U.S. tax laws and the interpretation or enforcement thereof could have a significant adverse impact on our effective tax rate and financial results.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

In May 2007, the Company’s Board of Directors authorized a share repurchase program (the “2007 Share Repurchase Program”) for the repurchase of up to 3,000,000 shares of the Company’s common stock. The Company expects that, in order to comply with the terms of applicable debt instruments, purchases under this newly authorized program will be made from time to time over a period of up to four years from the date the program was approved. During the Six Months Ended July 4, 2009, the Company did not repurchase any shares of common stock under the 2007 Share Repurchase Program. The share repurchase program may be modified or terminated by the Company’s Board of Directors at any time.

An aggregate of 71,637 shares included below as repurchased during the Six Months Ended July 4, 2009 reflect the surrender of shares in connection with the vesting of certain restricted stock awarded by the Company to its employees. At the election of an employee, shares having an aggregate value on the vesting date equal to the employee’s withholding tax obligation may be surrendered to the Company in satisfaction thereof. The repurchase of these shares is not a part of the 2007 Share Repurchase Program.

Repurchased shares are held in treasury pending use for general corporate purposes.

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The following table summarizes repurchases of the Company’s common stock during the Six Months Ended July 4, 2009.

					Total Number		Maximum
					of Shares		Number of Shares
	Total Number		Average		Purchased as		that May Yet Be
	of Shares		Price Paid		Part of Publicly		Repurchased Under
Period	Repurchased		per Share		Announced Plan		the Announced Plans
January 4, 2009 – January 31, 2009		—	$	—		—		1,490,131
February 1, 2009 – February 28, 2009		24,292	$	21.65		—		1,490,131
March 1, 2009 – April 4, 2009		43,963	$	17.42		—		1,490,131
April 5, 2009 – May 2, 2009		1,898	$	28.69		—		1,490,131
May 3, 2009 – May 30, 2009		897	$	26.99		—		1,490,131
June 1, 2009 – July 4, 2009		587	$	33.43		—		1,490,131

The New Credit Agreements and the indenture governing the Senior Notes place restrictions on the Company’s ability to pay dividends on the Common Stock, and the Company has not paid any dividends on the Common Stock.

Item 3.Defaults Upon Senior Securities.

None.

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

The Company’s Annual Meeting of Stockholders was held on May 13, 2009. There were present in person or by proxy, holders of 40,944,237 shares of Common Stock, or 89.43% of all votes eligible for the meeting.

The following directors were elected to serve for a term of one year:

	For		Against		Abstain
David A. Bell		40,774,101		168,208		1,930
Robert A. Bowman		40,488,018		454,290		1,930
Richard Karl Goeltz		34,544,610		6,397,697		1,930
Joseph R. Gromek		40,786,080		156,428		1,730
Sheila A. Hopkins		40,782,189		160,066		1,981
Charles R. Perrin		40,780,601		161,711		1,930
Nancy A. Reardon		40,782,079		160,236		1,923
Donald L. Seeley		40,790,103		152,203		1,930
Cheryl Nido Turpin		34,889,296		6,053,017		1,923

The proposal for the Amendment and Restatement of the Warnaco Group, Inc. 2005 Stock Incentive Plan was approved. The votes were 33,903,762 For; 4,996,955 Against; and 9,508 Abstentions.

The proposal for Deloitte & Touche LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending January 2, 2010 was ratified. The votes were 40,573,297 For; 366,759 Against; and 4,181 Abstentions.

Item 5.Other Information.

None.

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Item 6.Exhibits.

Exhibit No.		Description of Exhibit
	2.1	Stock and Asset Purchase Agreement, dated as of February 14, 2008, between Warnaco Netherlands BV and Palmers Textil AG (incorporated by reference to Exhibit 2.1 to The Warnaco Group, Inc.’s Form 8-K filed February 19, 2008).* **
	3.1	Amended and Restated Certificate of Incorporation of The Warnaco Group, Inc. (incorporated by reference to Exhibit 1 to the Form 8-A/A filed by The Warnaco Group, Inc. on February 4, 2003).*
	3.2	Second Amended and Restated Bylaws of The Warnaco Group, Inc. (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by The Warnaco Group, Inc. on January 11, 2008).*
	10.1	Amended and Restated Letter Agreement, dated as of May 11, 2009, by and between The Warnaco Group, Inc. and Lawrence R. Rutkowski.(incorporated by reference to Exhibit 10.1 to The Warnaco Group, Inc. Form 10-Q filed on May 12, 2009)*
	31.1	Certification of Chief Executive Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.†
	31.2	Certification of Chief Financial Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.†
	32	Certifications of Chief Executive Officer and Chief Financial Officer of The Warnaco Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)

*	Previously filed.
**	The schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any of the schedules to the Securities and Exchange Commission upon request.
##	Certain portions of this exhibit omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment, which request was granted.
†	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE WARNACO GROUP, INC.
Date: August 12, 2009	/s/ Joseph R. Gromek
	Joseph R. Gromek
	President and Chief Executive Officer
Date: August 12, 2009	/s/ Lawrence R. Rutkowski
	Lawrence R. Rutkowski
	Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

31.1	Certification of Chief Executive Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.†
31.2	Certification of Chief Financial Officer of The Warnaco Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.†
32	Certifications of Chief Executive Officer and Chief Financial Officer of The Warnaco Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)

67