WARNACO GROUP INC /DE/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 5, 2003
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
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THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

(212) 287-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: GENERAL COUNSEL

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

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

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [x] Yes [ ] No

The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of August 8, 2003 is as follows: 45,025,183.

________________________________________________________________________________

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

SUCCESSOR PREDECESSOR
------------------------ -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---------- ------------ -----------

ASSETS
Current assets:
Cash................................................................. $ 65,925 $ 20,706 $ 114,025
Restricted cash...................................................... -- 6,200 6,100
Accounts receivable, less reserves of $71,643 as of July 5, 2003,
$79,705 as of February 4, 2003 and $87,512 as of January 4, 2003.... 204,860 213,048 199,817
Inventories, net..................................................... 288,703 348,033 345,268
Prepaid expenses and other current assets............................ 29,808 30,890 31,438
Assets held for sale................................................. 1,050 1,485 1,458
Deferred income taxes................................................ 7,399 7,399 2,972
---------- ---------- -----------
Total current assets.............................................. 597,745 627,761 701,078
---------- ---------- -----------
Property, plant and equipment -- net.................................... 111,452 129,357 156,712
Other assets:
Licenses, trademarks and other intangible assets, at cost, less
accumulated amortization of $11,179 as of July 5, 2003, $0 as of
February 4, 2003 and $19,069 as of January 4, 2003.................. 321,266 364,700 86,827
Deferred financing costs............................................. 12,921 5,286 463
Other assets......................................................... 4,197 2,703 2,800
Goodwill............................................................. 89,963 34,142 --
---------- ---------- -----------
Total other assets................................................ 428,347 406,831 90,090
---------- ---------- -----------
$1,137,544 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt.................................... $ 1,512 $ 5,050 $ 5,765
Revolving credit facility............................................ -- 39,200 --
Accounts payable..................................................... 86,391 122,376 103,630
Accrued liabilities.................................................. 115,565 105,302 102,026
Accrued income tax payable........................................... 22,315 28,140 28,420
---------- ---------- -----------
Total current liabilities......................................... 225,783 300,068 239,841
---------- ---------- -----------
Long-term debt......................................................... 211,274 202,202 1,252
Deferred income taxes.................................................. 99,798 86,975 4,964
Other long-term liabilities............................................ 71,899 71,156 71,837
Liabilities subject to compromise....................................... -- -- 2,486,082
Commitments and contingencies
Stockholders' equity (deficiency):
Successor preferred stock: $0.01 par value, 20,000,000 shares
authorized Series A preferred stock, $0.01 par value, 112,500 shares
authorized as of July 5, 2003 and February 4, 2003.................. -- -- --
Successor common stock: $.01 par value, 112,500,000 shares
authorized, 45,023,513 and 44,999,973 issued and outstanding as of
July 5, 2003 and February 4, 2003, respectively..................... 450 450 --
Predecessor Class A common stock: $.01 par value, 130,000,000 shares
authorized, 65,232,594 issued as of January 4, 2003................. -- -- 654
Additional paid-in capital........................................... 505,742 503,098 908,939
Accumulated other comprehensive income (loss)........................ 8,423 -- (93,223)
Retained earnings (deficit).......................................... 14,175 -- (2,358,537)
Predecessor treasury stock, at cost 12,242,629 shares as of January
4, 2003............................................................. -- -- (313,889)
Unearned stock compensation.......................................... -- -- (40)
---------- ---------- -----------
Total stockholders' equity (deficiency)........................... 528,790 503,548 (1,856,096)
---------- ---------- -----------
$1,137,544 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------

See Notes to Consolidated Condensed Financial Statements.

1

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)

SUCCESSOR PREDECESSOR
----------------- --------------
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 5, 2003 JULY 6, 2002
----------------- --------------

Net revenues............................................. $ 335,844 $ 381,767
Cost of goods sold....................................... 239,440 265,919
--------- ----------
Gross profit............................................. 96,404 115,848
Selling, general and administrative expenses............. 94,829 100,579
Amortization of sales order backlog...................... 6,300 --
Restructuring items...................................... 6,071 --
Reorganization items..................................... -- 42,554
--------- ----------
Operating loss........................................... (10,796) (27,285)
Other income............................................. (1,363) --
Interest expense......................................... 5,423 3,095
--------- ----------
Loss before provision (benefit) for income taxes......... (14,856) (30,380)
Provision (benefit) for income taxes..................... (6,392) 1,609
--------- ----------
Net loss................................................. $ (8,464) $ (31,989)
--------- ----------
--------- ----------
Basic and diluted loss per common share.................. $ (0.19) $ (0.60)
--------- ----------
--------- ----------
Weighted average number of shares outstanding used in
computing basic and diluted loss per common share...... 45,010 52,936
--------- ----------
--------- ----------

See Notes to Consolidated Condensed Financial Statements.

2

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)

SUCCESSOR PREDECESSOR
----------------- ----------------------------
PERIOD SIX MONTHS
PERIOD JANUARY 5, 2003 ENDED
FEBRUARY 5, 2003 TO FEBRUARY 4, JULY 6,
TO JULY 5, 2003 2003 2002
----------------- --------------- -----------

Net revenues................................ $ 662,168 $ 115,960 $ 791,819
Cost of goods sold.......................... 444,358 70,214 557,559
--------- ----------- ---------
Gross profit................................ 217,810 45,746 234,260
Selling, general and administrative
expenses.................................. 168,680 35,313 202,697
Amortization of sales order backlog......... 10,500 -- --
Restructuring items......................... 6,140 -- --
Reorganization items........................ -- 29,922 58,085
--------- ----------- ---------
Operating income (loss)..................... 32,490 (19,489) (26,522)
Gain on cancellation of pre-petition
indebtedness.............................. -- (1,692,696) --
Fresh start adjustments..................... -- (765,726) --
Other (income) loss......................... (1,328) 359 --
Interest expense............................ 9,851 1,887 10,059
--------- ----------- ---------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle...................... 23,967 2,436,687 (36,581)
Provision for income taxes.................. 9,792 78,150 51,538
--------- ----------- ---------
Income (loss) before cumulative effect of a
change in accounting principle............ 14,175 2,358,537 (88,119)
Cumulative effect of change in accounting
principle (net of income tax benefit of
$53,513 -- six months ended July 6,
2002)..................................... -- -- (801,622)
--------- ----------- ---------
Net income (loss)........................... $ 14,175 $ 2,358,537 $(889,741)
--------- ----------- ---------
--------- ----------- ---------
Basic and diluted income (loss) per common
share:
Income (loss) before accounting
change................................ $ 0.31 $ 44.51 $ (1.66)
Cumulative effect of accounting
change................................ -- -- (15.14)
--------- ----------- ---------
Net income (loss)....................... $ 0.31 $ 44.51 $ (16.81)
--------- ----------- ---------
--------- ----------- ---------
Weighted average number of shares
outstanding used in computing income
(loss) per common share:
Basic................................... 45,006 52,990 52,936
--------- ----------- ---------
--------- ----------- ---------
Diluted................................. 45,154 52,990 52,936
--------- ----------- ---------
--------- ----------- ---------

See Notes to Consolidated Condensed Financial Statements.

3

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

SUCCESSOR PREDECESSOR
----------------- -----------------------------
PERIOD
PERIOD JANUARY 5, 2003 SIX MONTHS
FEBRUARY 5, 2003 TO FEBRUARY 4, ENDED
TO JULY 5, 2003 2003 JULY 6, 2002
----------------- --------------- ------------

Net income (loss)...................................... $ 14,175 $ 2,358,537 $ (889,741)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on cancellation of pre-petition
indebtedness..................................... -- (1,692,696) --
Fresh start adjustments............................ -- (765,726) --
Provision for receivable allowances................ 70,546 15,206 95,443
Provision for inventory reserves................... 11,748 3,484 27,474
Net loss on sale of GJM, Penhaligon's and
Ubertech......................................... -- -- 2,100
Gain on sale of property, plant and equipment...... (105)
Cumulative effect of change in accounting principle,
net of taxes..................................... -- -- 801,622
Provision for deferred income tax.................. -- 77,584 46,058
Depreciation and amortization...................... 26,326 4,511 29,011
Stock compensation................................. 2,523 8 217
Amortization of deferred financing costs........... 686 463 4,731
Non-cash restructuring items....................... 166 -- --
Non-cash reorganization items...................... -- 15,561 31,994
Change in operating assets and liabilities:
Accounts receivable................................ (62,358) (28,437) (28,826)
Inventories........................................ 47,582 (28,520) 56,703
Prepaid expenses and other assets.................. 5,909 (142) 18,570
Accounts payable, accrued expenses and other
liabilities...................................... (24,417) 14,948 19,359
Accrued income taxes............................... (3,690) 293 3,835
--------- ----------- ----------
Net cash provided by (used in) operating activities.... 89,196 (24,926) 218,445
--------- ----------- ----------
Cash flows from investing activities:
Disposals of property, plant and equipment......... 142 -- 7,564
Purchase of property, plant and equipment.......... (6,351) (745) (5,214)
Proceeds from sale of business units, net of cash
balances......................................... -- -- 20,459
--------- ----------- ----------
Net cash provided by (used in) investing activities.... (6,209) (745) 22,809
--------- ----------- ----------
Cash flows from financing activities:
Repayments of GECC debt............................ (3,430) (715) (490)
Repayments of capital lease obligations............ (94) -- --
Repayments of pre-petition debt.................... -- (106,112) (10,054)
Repayments under Amended DIP....................... -- -- (155,915)
Repayments of Second Lien Notes.................... (200,942)
Payment of deferred financing costs................ (8,321)
Proceeds from the issuance of Senior Notes due
2013............................................. 210,000
Borrowings (repayments) under revolving credit
facility......................................... (39,200) 39,200 --
Other.............................................. -- -- --
--------- ----------- ----------
Net cash used in financing activities.................. (41,987) (67,627) (166,459)
--------- ----------- ----------
Translation adjustments................................ 4,219 (21) 1,811
--------- ----------- ----------
Increase (decrease) in cash............................ 45,219 (93,319) 76,606
Cash, excluding restricted cash, at beginning of
period............................................... 20,706 114,025 39,558
--------- ----------- ----------
Cash at end of period.................................. $ 65,925 $ 20,706 $ 116,164
--------- ----------- ----------
--------- ----------- ----------

See Notes to Consolidated Condensed Financial Statements.

4

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization: The Warnaco Group, Inc. ('Warnaco Group') 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. Warnaco Group, Warnaco and certain of
Warnaco's subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy
Code, 11 U.S.C. 'SS'SS'101-1330, as amended (the 'Bankruptcy Code') effective
February 4, 2003 (the 'Effective Date').

Nature of Operations: Warnaco Group and its subsidiaries (collectively, the
'Company') design, manufacture, source and market a broad line of (i) intimate
apparel (including bras, panties, sleepwear, loungewear, shapewear and daywear
for women and underwear and sleepwear for men); (ii) sportswear for men, women
and juniors (including jeanswear, knit and woven shirts, tops and outerwear);
and (iii) swimwear for men, women, juniors and children (including swim
accessories and fitness and active apparel). The Company's products are sold
under a number of internationally known owned and licensed brand names. The
Company offers a diversified portfolio of brands across multiple distribution
channels to a wide range of customers. The Company distributes its products to
customers, both domestically and internationally, through a variety of channels,
including department and specialty stores, Company-owned retail stores,
independent retailers, chain stores, membership clubs and mass merchandisers.

Chapter 11 Cases: On June 11, 2001 (the 'Petition Date'), Warnaco Group, 36
of its 37 U.S. subsidiaries and one of its Canadian subsidiaries, Warnaco of
Canada Company (each a 'Debtor' and, collectively, the 'Debtors'), each filed a
voluntary petition for relief under the Bankruptcy Code, in the United States
Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court')
(collectively, the 'Chapter 11 Cases'). The remainder of Warnaco Group's foreign
subsidiaries were not debtors in the Chapter 11 Cases, nor were they subject to
foreign bankruptcy or insolvency proceedings.

On November 9, 2002, the Debtors filed the First Amended Joint Plan of
Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of the Bankruptcy Code (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered (i) its Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order').

In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on the Effective Date, and the Company entered into
the $275,000 Senior Secured Revolving Credit Facility (the 'Exit Financing
Facility'). The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. See Note 15. In accordance with the Plan, on the
Effective Date, the Company issued $200,942 of New Warnaco Second Lien Notes due
2008 (the 'Second Lien Notes') to certain pre-petition creditors and others in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the 'Securities Act'), pursuant to Section 1145(a) of the
Bankruptcy Code. The Second Lien Notes were secured by a second priority
security interest in substantially all of the Debtors' domestic assets and
guaranteed by Warnaco Group and Warnaco's domestic subsidiaries. The Second Lien
Notes and the accrued interest thereon were repaid in full on June 12, 2003 with
the proceeds of the offering of the 8 7/8% Senior Notes due 2013 (the 'Senior
Notes'). See Note 15.

5

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
Warnaco Group's Class A Common Stock, par value $0.01 per share (the 'Old Common
Stock'), issued prior to the Petition Date. The holders of Old Common Stock did
not receive any distribution on account of the Old Common Stock under the Plan.
The Company, as reorganized under the Plan, issued 44,999,973 shares of common
stock, par value $0.01 per share (the 'New Common Stock'), in reliance on the
exemption from registration afforded by Section 1145 of the Bankruptcy Code,
which were distributed to pre-petition creditors as described below. In
addition, 5,000,000 shares of New Common Stock were reserved for issuance
pursuant to management incentive stock grants. On March 12, 2003, subject to
approval by the stockholders of the Company's proposed 2003 Stock Incentive Plan
(the 'Stock Incentive Plan'), the Company authorized the grant of 750,000 shares
of restricted stock and options to purchase 3,000,000 shares of New Common Stock
at the fair market value of the New Common Stock on the date of grant. On May
28, 2003, the stockholders of the Company approved the Stock Incentive
Plan. The Company received no proceeds from the issuance of the New Common Stock
and the Second Lien Notes; however, approximately $2,499,385 of indebtedness was
extinguished in connection with such issuances.

The following is a summary of distributions made pursuant to the Plan:

(a) the Old Common Stock, including all stock options and restricted shares,
was extinguished and holders of the Old Common Stock received no
distribution on account of the Old Common Stock;

(b) general unsecured claimants received 2.55% (1,147,023 shares) of the New
Common Stock;

(c) the Company's pre-petition secured lenders received their pro-rata share
of $106,112 in cash, Second Lien Notes in the principal amount of
$200,000 and 96.26% of the New Common Stock (43,318,350 shares);

(d) holders of claims arising from or related to certain preferred
securities received 0.60% of the New Common Stock (268,200 shares);

(e) pursuant to the terms of his employment agreement, as modified by the
Plan, Antonio C. Alvarez II, the former President and Chief Executive
Officer of the Company, received an incentive bonus consisting of $1,950
in cash, Second Lien Notes in the principal amount of $942 and 0.59% of
the New Common Stock (266,400 shares); and

(f) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.

Basis of Consolidation and Presentation: References in these consolidated
condensed financial statements to the 'Predecessor' refer to the Company prior
to February 4, 2003. References to the 'Successor' refer to the Company on and
after February 4, 2003 after giving effect to the implementation of fresh start
reporting.

All inter-company accounts have been eliminated in consolidation.

The accompanying consolidated condensed financial statements of the
Predecessor for the periods April 7, 2002 to July 6, 2002 (the 'Second Quarter
of Fiscal 2002'), January 6, 2002 to July 6, 2002 (the 'Six Months Ended July 6,
2002') and January 5, 2003 to February 4, 2003 have been presented in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ('SOP 90-7'). In the Chapter 11 Cases, substantially all unsecured
liabilities and under-secured liabilities as of the Petition Date were subject
to compromise or other treatment under the Plan. For financial reporting
purposes, those liabilities and obligations whose treatment and satisfaction
were dependent on the outcome of the Chapter 11 Cases have been segregated and
classified as

6

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

liabilities subject to compromise in the accompanying consolidated condensed
balance sheet as of January 4, 2003.

Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were being expensed as incurred and reported as reorganization
items. Interest expense was reported only to the extent that it was to be paid
during the Chapter 11 Cases.

Upon its emergence from bankruptcy on February 4, 2003, the Company
implemented fresh start reporting under the provisions of SOP 90-7. Pursuant to
the provisions of SOP 90-7, (i) the Company's reorganization value of $750,000
was allocated to the fair value of the Company's assets; (ii) the Company's
accumulated deficit was eliminated; and (iii) the Old Common Stock was
cancelled. In addition, approximately $2,499,385 of the Company's outstanding
pre-petition debt and liabilities were discharged.

The accompanying unaudited consolidated condensed financial statements
include all adjustments (all of which were of a normal, recurring nature except
for (i) the adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ('SFAS 142'); (ii) adjustments related to
the Chapter 11 Cases; and (iii) adjustments related to the forgiveness of
indebtedness and adoption of fresh start reporting pursuant to the provisions of
SOP 90-7) which are, in the opinion of management, necessary for fair
presentation of the results of operations and financial position of the Company.

Periods Covered: The Second Quarter of Fiscal 2002 contained 13 weeks of
operations of the Predecessor and the Six Months Ended July 6, 2002 contained 26
weeks of operations of the Predecessor. The period January 5, 2003 to
February 4, 2003 contained four weeks of operations of the Predecessor. The
period April 6, 2003 to July 5, 2003 (the 'Second Quarter of Fiscal 2003')
contained 13 weeks of operations of the Successor and the period February 5,
2003 to July 5, 2003 contained 22 weeks of operations of the Successor.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated condensed
financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Actual results could materially differ from
these estimates. The estimates the Company makes are based upon historical
factors, current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an ongoing
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.

Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed to the customers, net of
reserves for returns, allowances and other discounts. The Company recognizes
revenue from its retail stores when goods are sold to customers.

Accounts Receivable: The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include amounts the Company expects its customers to deduct
for trade discounts, amounts for accounts that go out of business or seek the
protection of the Bankruptcy Code and amounts related to charges in dispute with
customers. The Company's estimate of the allowance amounts that are necessary
includes amounts for specific deductions the Company has authorized and an
amount for

7

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

other estimated losses. The provision for accounts receivable allowances is
affected by general economic conditions, the financial condition of the
Company's customers, the inventory position of the Company's customers,
sell-through of the Company's products by these customers and many other
factors. As of July 5, 2003 the Company had approximately $263,103 of open trade
invoices and other receivables and $13,400 of open debit memos. Based upon the
Company's analysis of estimated recoveries and collections associated with the
related invoices and debit memos, the Company had $71,643 of accounts receivable
reserves at July 5, 2003. As of February 4, 2003, the Company had approximately
$281,917 of open trade invoices and other receivables and $10,836 of open debit
memos. Based upon the Company's analysis of estimated recoveries and collections
associated with the related invoices and debit memos, the Company had $79,705 of
accounts receivable reserves at February 4, 2003. As of January 4, 2003, the
Company had approximately $276,889 of open trade accounts receivable and $10,440
of open debit memos. Based upon the Company's analysis of estimated recoveries
and collections associated with the related invoices and debit memos, the
Company had $87,512 of accounts receivable reserves at January 4, 2003. The net
accounts receivable balance of $213,048 at February 4, 2003 was estimated to be
the fair value of the Company's accounts receivable at February 4, 2003. The
determination of accounts receivable reserves is subject to significant levels
of judgment and estimation by the Company's management. If circumstances change
or economic conditions deteriorate, the Company may need to increase the
reserves significantly. The Company has purchased credit insurance to help
mitigate the potential losses it may incur from the bankruptcy, reorganization
or liquidation of some of its customers.

Inventories: The Company values its inventories at the lower of cost,
determined on a first-in, first-out basis, or market. The Company evaluates its
inventories to determine excess units or slow-moving styles based upon
quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors
that are obsolete, the Company estimates the net amount that the Company expects
to realize from the sale of such items. The Company's objective is to recognize
projected inventory losses at the time the loss is evident rather than when the
goods are ultimately sold. At July 5, 2003, the Company had identified inventory
with a carrying value of approximately $64,600 as potentially excess and/or
obsolete. Based upon the estimated recoveries related to such inventory, as of
July 5, 2003, the Company had approximately $29,155 of inventory reserves for
excess, obsolete and other inventory adjustments. At February 4, 2003, the
Company had identified inventory with a carrying value of approximately $57,200
as potentially excess and/or obsolete. Based upon the estimated recoveries
related to such inventory, as of February 4, 2003, the Company had approximately
$32,785 of inventory reserves for excess, obsolete and other inventory
adjustments. At January 4, 2003, the Company had identified inventory with a
carrying value of approximately $61,500 as potentially excess and/or obsolete.
Based upon the estimated recoveries related to such inventory, as of January 4,
2003, the Company had approximately $33,816 of inventory reserves for excess,
obsolete and other inventory adjustments. The Company believes that the carrying
value of its inventory, net of the reserves noted, was equal to its fair value
at February 4, 2003. As of February 4, 2003, the Company expenses certain
design, receiving, and other product related costs as incurred. These costs were
previously capitalized.

Long-lived Assets: As of February 4, 2003, property, plant and equipment was
recorded at its fair value based upon the preliminary appraised values of such
assets. See Notes 3 and 4. Intangible assets consist primarily of licenses and
trademarks. The fair value of such licenses and trademarks owned by the Company
is based upon the preliminary appraised value of such assets as determined by an
independent third party appraiser and the Company. Identifiable intangible
assets with finite useful lives are amortized on a straight-line basis over the
estimated useful lives of the assets. Adjustments to the preliminary fair values
of fixed and intangible assets are recorded

8

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

as an adjustment to the fair value of such assets at February 4, 2003 and as a
corresponding adjustment to goodwill. See Note 12.

The Company reviews its long-lived assets for possible impairment when
events or circumstances indicate that the carrying value of the assets may not
be recoverable. Assumptions and estimates used in the evaluation of impairment
may affect the carrying value of long-lived assets, which could result in
impairment charges in future periods. In addition, depreciation and amortization
expense is affected by the Company's determination of the estimated useful lives
of the related assets. For periods beginning after February 4, 2003, the
estimated remaining useful lives of the Company's fixed assets and finite lived
intangible assets are based upon the remaining useful lives of such assets as
determined by independent third party appraisers and the Company.

Income Taxes: Deferred income taxes are determined using the liability
method. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured by applying enacted tax rates and laws to taxable years in which such
differences are expected to reverse. A valuation allowance is provided when the
Company determines that it is more likely than not that a portion of the
deferred tax asset balance will not be realized.

Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full-time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The Pension
Plan's third party actuary has determined the total liability attributable to
benefits owed to participants covered by the Pension Plan using assumptions
provided by the Company. The assumptions used can have a significant effect on
the amount of pension expense and pension liability recorded by the Company. The
Pension Plan actuary also determines the annual cash contribution to the Pension
Plan using the assumptions set forth by the Pension Benefit Guaranty
Corporation. The Pension Plan was under-funded as of January 4, 2003,
February 4, 2003 and July 5, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to fund its minimum
required contributions and any other premiums due under the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') and the United States Internal
Revenue Code of 1986, as amended (the 'Code'). Effective January 1, 2003, the
Pension Plan was amended and, as a result, no future benefits will accrue to
participants in the Pension Plan. As of February 4, 2003 and July 5, 2003, the
Company had recorded a Pension Plan liability equal to the amount that the
present value of accumulated benefit obligations (discounted using an interest
rate of approximately 5.3%) exceeded the fair value of Pension Plan assets as
determined by the Pension Plan trustee. The Company's cash contributions to the
Pension Plan for fiscal 2003 will be approximately $9,380 and will be
approximately $46,293 in the aggregate from fiscal 2004 through fiscal 2008. The
amount of estimated cash contributions that the Company will be required to make
to the Pension Plan could increase or decrease depending on the actual return
earned by the assets of the Pension Plan compared to the estimated rate of
return on Pension Plan assets. The accrued long-term Pension Plan liability and
accruals for other post retirement benefits are classified as other long-term
liabilities in the consolidated condensed balance sheet at July 5, 2003. Cash
contributions to the Pension Plan were $1,720 for the period February 5, 2003 to
July 5, 2003. The remaining contributions to the Pension Plan to be paid in
fiscal 2003 of $7,600 are classified with accrued liabilities at July 5, 2003.

Stock-Based Compensation: Effective February 5, 2003, the Successor adopted
the fair value method of accounting for stock options for all options granted by
the Successor after February 4, 2003 pursuant to the prospective method
provisions of SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure ('SFAS 148'). The Company uses the Black-Scholes model to
calculate the fair value of stock option awards. The Black-Scholes model
requires the

9

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Company to make significant judgments regarding the assumptions used within the
Black-Scholes model, the most significant of which are the stock price
volatility assumption, the expected life of the option award and the risk-free
rate of return. The Company emerged from bankruptcy on February 4, 2003, and as
a result, the Company does not have sufficient stock price history upon which to
base its volatility assumption. In determining the volatility used in its model,
the Company considered the volatility of the stock prices of selected companies
in the apparel industry, the nature of those companies, the Company's emergence
from bankruptcy and other factors in determining its stock price volatility
assumption of 35%. The Company based its estimate of the average life of a stock
option of five years upon the vesting period of 40 months and the option term of
ten years. The Company's risk-free rate of return assumption of 2.55% for
options granted in fiscal 2003 is equal to the quoted yield for five-year U.S.
treasury bonds as of March 12, 2003. The Company will re-evaluate its risk free
rate of return assumptions and volatility assumptions annually in the first
quarter of the fiscal year for options granted during that fiscal year.

Prior to February 5, 2003, the Company followed the disclosure-only
provisions of Statement of Financial Accounting Standards ('SFAS') No. 123,
Accounting for Stock-Based Compensation ('SFAS 123'). SFAS 123 encourages, but
does not require, companies to adopt a fair value based method for determining
expense related to stock option compensation. The Company accounted for
stock-based compensation for employees using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ('APB 25') and related interpretations. Under APB 25, no
compensation expense was recognized for employee share option grants because the
exercise price of the options granted equaled the market price of the underlying
shares on the date of grant (the 'intrinsic value method'). Compensation expense
related to restricted stock grants is recognized over the vesting period of the
grants.

The following table illustrates the effect that stock-based compensation
would have had on net income (loss) and earnings per share of the Predecessor
had such compensation been included in its net income (loss) and earnings per
share for the period January 5, 2003 to February 4, 2003, for the Second Quarter
of Fiscal 2002 and for the Six Months Ended July 6, 2002, respectively:

10

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Stock-based compensation expense included in the consolidated condensed
statement of operations for the Second Quarter of Fiscal 2003 was $765 (net of
income tax benefit of $510) related to stock options and $527 (net of income tax
benefit of $352) related to restricted stock grants. For the period February 5,
2003 to July 5, 2003, stock compensation expense related to stock options was
$843 (net of income tax benefit of $562) and $581 (net of income tax benefit of
$387) related to restricted stock grants. Included in stock-based compensation
expense, for the period February 5, 2003 to July 5, 2003, is $150 related to the
issue of shares of common stock to the directors for serving as members on the
Board of Directors of the Company. The Company expects that total stock-based
compensation expense for fiscal 2003 will be approximately $3,720 (net of income
tax benefit of $2,480). See Note 18.

The fair value of the stock options was determined at the date of grant
using a Black-Scholes option pricing model with the following assumptions:

- ---------

(a) the Company is restricted from paying dividends under the terms of the Exit
Financing Facility and the terms of the indenture governing the Senior
Notes.

The Predecessor did not grant any stock-based compensation or stock options
during the Six Months Ended July 6, 2002 or during the period January 5, 2003 to
February 4, 2003.

11

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale.

Assets Held for Sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the estimated fair value
less selling costs. Assets held for sale include certain property and equipment
of closed facilities which the Company has identified for disposition.

Property, Plant and Equipment: Property, plant and equipment as of July 5,
2003 is stated at estimated fair value, net of accumulated depreciation, for the
assets in existence at February 4, 2003 and at historical costs, net of
accumulated depreciation, for additions during the period February 5, 2003 to
July 5, 2003. As of January 4, 2003, property, plant and equipment is stated at
historical costs net of accumulated depreciation. The estimated useful lives of
such assets are summarized below:

Buildings.............................................. 20 - 40 years
Building improvements.................................. 2 - 20 years
Machinery and equipment................................ 3 - 10 years
Furniture and fixtures................................. 7 - 10 years
Computer hardware...................................... 3 - 5 years
Computer software...................................... 3 - 7 years

Computer Software Costs: Internal and external costs incurred in developing
or obtaining computer software for internal use are capitalized in property,
plant and equipment in accordance with SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use and related guidance
and are amortized on a straight-line basis over the estimated useful life of the
software (three to seven years). General and administrative costs related to
developing or obtaining such software are expensed as incurred.

Intangible Assets: Intangible assets primarily consist of licenses and
trademarks. The fair value of such licenses and trademarks owned by the Company
at February 4, 2003 was based upon the preliminary appraised values of such
assets as determined by an independent third party appraiser and the Company.
Adjustments to the preliminary appraised amounts are recorded as adjustments to
goodwill. Identifiable intangible assets with finite lives are amoritzed on a
straight-line basis over the estimated useful lives of the assets. Pursuant to
the provisions of SFAS 142 intangible assets with indefinite lives are not
amortized. See Note 12.

Goodwill: Goodwill represents the amount by which the Company's
reorganization value exceeded the preliminary fair value of its tangible assets
and identified intangible assets minus its liabilities allocated in accordance
with the provisions of SFAS 141 as of February 4, 2003. Pursuant to the
provisions of SFAS 142, goodwill is not amortized and is subject to an annual
impairment test.

Deferred Financing Costs: Deferred financing costs represent legal, other
professional and bank underwriting fees incurred in connection with the
Company's Exit Financing Facility and the issuance of the Senior Notes. Such
fees are amortized over the life of the related debt using the interest method.
Amortization of deferred financing costs is included in interest expense.

Other Assets: Other assets include certain barter credits and long-term rent
receivable related to certain subleases. Barter assets are recognized when
realized and deferred rent charges are recognized over the life of the related
lease.

Financial Instruments: The Company does not use derivative financial
instruments for speculation or for trading purposes and has not done so since
the Petition Date. The Company had no hedging financial instruments outstanding
at July 5, 2003.

12

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

A number of major international financial institutions are counterparties to
the Company's outstanding letters of credit. The Company monitors its positions
with, and the credit quality of, these counterparty financial institutions and
does not anticipate nonperformance of these counterparties. Management believes
that the Company would not suffer a material loss in the event of nonperformance
by these counterparties.

Start-Up Costs: Pre-operating costs relating to the start-up of new
manufacturing facilities, product lines and businesses are expensed as incurred.

Other Liabilities: Other long-term liabilities consist primarily of
long-term accrued pension and post retirement benefit obligations.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income (loss), unrealized gain/(loss) on marketable securities (net of tax),
unfunded pension liability (net of tax) and cumulative translation adjustments.
Because such cumulative translation adjustments are considered a component of
permanently invested earnings of foreign subsidiaries, no income taxes are
provided on such amounts.

Translation of Foreign Currencies: Cumulative translation adjustments arise
primarily from consolidating the net assets and liabilities of the Company's
foreign operations at current rates of exchange. Assets and liabilities of the
Company's foreign operations are recorded at current rates of exchange at the
balance sheet date and translation adjustments are applied directly to
stockholders' equity (deficiency) and are included as part of other
comprehensive income (loss). Gains and losses related to the translation of
current amounts due from foreign subsidiaries are included in other income and
expense in the period incurred. Translation gains and losses related to
long-term and permanently invested inter-company balances are recorded in
cumulative translation adjustments. The consolidated condensed balance sheet at
February 4, 2003 represents the fair value of the Company's assets at that date
and, as a result, there is no cumulative translation adjustment on that date.
Income and expense items for the Company's foreign operations are translated
using monthly average exchange rates.

Reclassifications: Certain items have been reclassified to conform to the
current period presentation.

Recent Accounting Pronouncements: In November 2002, the Financial Accounting
Standards Board (the 'FASB') issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ('FIN 45'). This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual periods beginning after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have an effect on the Company's consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities
('SFAS 133') and No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, establish accounting and reporting standards for
derivative instruments including derivatives embedded in other contracts
(collectively referred to as 'derivatives') and for hedging activities.
SFAS 149 amends SFAS 133 for certain decisions made by the Board as part of the
Derivatives Implementation Group process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information

13

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

and Present Value in Accounting Measurements, and FASB Statements No. 65,
Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and No. 126,
Exemption from Certain Required Disclosures about Financial Instruments for
Certain Nonpublic Entities. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003. The adoption of
SFAS 149 is not expected to have a material effect on the Company's consolidated
financial statements.

During May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ('SFAS
150'). SFAS 150 clarifies the accounting for certain financial instruments that
could previously be accounted for as equity. SFAS 150 requires those instruments
be classified as liabilities in statements of financial position and is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
SFAS 150 to have a material effect on the Company's consolidated financial
statements.

NOTE 3 -- BUSINESS ENTERPRISE VALUE

In conjunction with the preparation of the Plan, the Company engaged an
independent third party appraisal and consulting firm (the 'BEV Appraiser') to
prepare a valuation analysis of the reorganized Company. In preparing its
analysis, the BEV Appraiser received certain publicly available historical
information and financial statements of the Company, reviewed and discussed with
management the Company's overall business plan, including long-term risks and
opportunities, evaluated the Company's projections and the assumptions
underlying the projections, considered the market value of publicly traded
companies that are reasonably comparable to the Company, considered the purchase
price paid in acquisitions of comparable companies and made such other analyses
as the BEV Appraiser deemed necessary or appropriate for the purposes of the
valuation. Based upon its analysis, the BEV Appraiser determined that the
business enterprise value ('BEV') of the reorganized Company was between
$730,000 and $770,000. Based upon the timing of the Debtors' emergence from
bankruptcy, market conditions at the time of emergence and the net assets of the
Company at the Effective Date, the Company determined its reorganization equity
value of $503,548 by subtracting the Company's debt of $246,452 on the Effective
Date from the mid-point ($750,000) of the BEV valuation range provided by the
BEV Appraiser.

NOTE 4 -- FAIR VALUE OF CERTAIN LONG-TERM TANGIBLE AND INTANGIBLE ASSETS

In order to implement the provisions of SFAS 141, the Company engaged an
independent third party to appraise its various business units and long-term
tangible and intangible assets and to assist the Company in allocating the
reorganization value of the Company to its various assets and liabilities at
February 4, 2003. The Company engaged an independent third party appraisal and
consulting firm (the 'Asset Appraiser') separate from the BEV Appraiser to
assist the Company in determining the fair value of the Company's long-term
tangible assets and identifiable intangible assets. Based upon the
reorganization value of the Company as determined by the BEV Appraiser, the
Asset Appraiser provided detailed analysis of certain of the Company's long-term
tangible and intangible assets. See Note 12.

NOTE 5 -- FRESH START REPORTING

The Debtors' emergence from bankruptcy proceedings on February 4, 2003
resulted in a new reporting entity and adoption of fresh start reporting as of
that date in accordance with SOP 90-7. The consolidated condensed balance sheet
as of February 4, 2003 gives effect to adjustments in the

14

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

carrying value of assets and liabilities to fair value in accordance with the
provisions of SOP 90-7 and SFAS 141.

The following table reflects the implementation of the Plan and the
adjustments recorded to the Company's assets and liabilities to reflect the
implementation of the Plan and the adjustments of such assets and liabilities to
fair value at February 4, 2003, based upon the Company's reorganization value of
$750,000 (as included in the Plan and as approved by the Bankruptcy Court).

Reorganization adjustments resulted primarily from the:

(a) distribution of cash of $106,112 (including accrued interest of $14,844)
to the Company's pre-petition secured lenders;

(b) forgiveness of the Debtors' pre-petition debt;

(c) issuance of New Common Stock and Second Lien Notes pursuant to the Plan;

(d) payment of various administrative and other claims associated with the
Company's emergence from bankruptcy;

(e) adjustment of property, plant and equipment carrying values to fair
value; and

(f) adjustment of the carrying value of the Company's various trademarks and
license agreements to fair value.

These adjustments were based upon the work of the BEV Appraiser, Asset
Appraiser and the Company, as well as other valuation estimates to determine the
preliminary fair values of the Company's assets and liabilities. The table below
reflects reorganization adjustments for the discharge of indebtedness, issuance
of New Common Stock, issuance of Second Lien Notes, and the fresh start
adjustments and the resulting fresh start consolidated balance sheet.

15

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(footnotes on next page)

16

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(footnotes from previous page)

(a) Utilized excess cash of $75,533 and borrowed $30,579 under
the Exit Financing Facility to pay $106,112 (including
accrued interest of $14,844) to the Company's pre-petition
secured creditors; such amounts were included in liabilities
subject to compromise.
(b) Reflects the discharge of pre-petition indebtedness of
$2,393,273 (not including $106,112 in cash paid to
pre-petition secured lenders) and cancellation of all
outstanding shares of Old Common Stock ($654), including all
options and restricted stock, additional paid-in capital
($908,939), treasury stock ($313,889), unearned stock
compensation ($32) and elimination of accumulated other
comprehensive loss ($92,671) and deficit ($2,380,615). A
corresponding amount of $515,659 was recorded as a decrease in
goodwill.
(c) Reflects the issuance of 44,999,973 shares of New Common
Stock and recognition of reorganization equity value of
$503,548 as determined by the BEV Appraiser pursuant to the
provisions of the Plan. A corresponding amount of $503,548
was recorded as an increase in goodwill.
(d) Reflects the issuance of $200,942 principal amount of Second
Lien Notes pursuant to the terms of the Plan. The Company
paid a bonus of $5,873 in cash and securities to the
Company's former Chief Executive Officer pursuant to the
terms of the Plan and paid $4,427 of deferred financing
costs. The cash portion of these payments was funded by
borrowing $6,377 under the Exit Financing Facility. A
corresponding amount of $197,019 was recorded as an increase
in goodwill.
(e) Reflects $24,037 adjustment to fixed assets to their fair
value of $129,357 as determined by the Asset Appraiser,
$277,796 to intangible assets to reflect their fair value of
$364,700 as determined by the Asset Appraiser, the
recognition of deferred income tax liability of $82,011 and
the recognition of deferred tax assets of $4,427 related to
the preliminary fair value adjustments noted above. A
corresponding amount of $176,175 was recorded as a decrease
in goodwill.
(f) Borrowed $2,244 under the Exit Financing Facility to pay
certain administrative and priority claims aggregating $859
and $1,156, unaccrued tax claims of $114, the translation
escrow account (subsequently released to the Company) of
$100 and provide additional cash funds at closing of $15. A
corresponding amount of $114 was recorded as an increase in
goodwill.
(g) Reflects the recording of an unfavorable contract commitment
of $2,801 related to one of the Company's distribution
facilities. A corresponding amount of $2,801 was recorded as
an increase in goodwill.
(h) Reflects adjustments of $22,494 to adjust inventory to its
fair value of $348,033. A corresponding amount of $22,494
was recorded as an increase in goodwill.

NOTE 6 -- REORGANIZATION ITEMS

In connection with the Chapter 11 Cases, the Company initiated strategic and
organizational changes to streamline the Company's operations, focus on its core
businesses and return the Company to profitability. Many of the strategic
actions are long-term in nature and, though initiated in fiscal 2001 and fiscal
2002 will not be completed until the end of fiscal 2003. The Company has
recorded reductions to the net realizable value for assets the Company believes
will not be fully realized when they are sold or abandoned.

Certain reorganization-related accruals were classified as liabilities
subject to compromise. The Plan summarized the amount of distribution that each
class of impaired creditors received. See Note 1.

As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities,

17

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

incurred certain legal and professional fees and written-down certain assets.
The transactions recorded were consistent with the provisions of SOP 90-7. The
components of reorganization items are as follows:

NOTE 7 -- RESTRUCTURING ITEMS

In the Second Quarter of Fiscal 2003, the Company continued the process of
consolidating its manufacturing and distribution operations in accordance with
the Plan. Included in restructuring charges are accruals for closing and or
consolidating two sewing plants located in Puerto Cortes, Honduras and Los
Angeles, CA, one cutting and warehousing facility in Thomasville, GA and a
distribution facility in Secaucus, NJ, of $6,071 and $6,140 for the Second
Quarter of Fiscal 2003 and the period February 5, 2003 to July 5, 2003,
respectively. Facility shutdown costs primarily relate to severance and other
benefits payable to approximately 670 terminated employees. The Company expects
that substantially all payments to terminated employees will be completed by the
end of fiscal 2003. A summary of restructuring items is as follows:

NOTE 8 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

The Company operates in three business segments or groups: (i) Intimate
Apparel Group; (ii) Sportswear Group; and (iii) Swimwear Group. During fiscal
2002, the Company operated in

18

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

four business segments or groups (i) Intimate Apparel Group; (ii) Sportswear
Group; (iii) Swimwear Group; and (iv) Retail Stores Group. Because the Company
has closed over 200 retail stores since January 1999, the retail stores no
longer represent a material portion of the Company's net revenues (retail stores
accounted for 2.56% of consolidated net revenue in the period February 5, 2003
to July 5, 2003). In addition, the operations of the remaining retail stores
have been combined both on a functional and on a reporting basis with the
operations of the Company's three wholesale business groups. Beginning in fiscal
2003, the operations of the Retail Stores Group are being included with the
Company's three wholesale groups according to the type of product sold. Certain
financial information contained in this Quarterly Report on Form 10-Q has been
restated to correspond to the Company's current segment presentation.

The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and loungewear under the Warner's'r',
Olga'r', Body Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r', Lejaby'r' and
Rasurel'r' brand names. The Intimate Apparel Group also operates 29 retail
stores, including 11 full price Calvin Klein underwear retail stores in Asia,
five full price Calvin Klein underwear retail stores in Europe, two Warnaco
outlet stores in Canada and 11 Warnaco outlet retail stores in Europe.

The Sportswear Group designs, sources and markets mass market to premium
priced men's and women's sportswear under the Calvin Klein'r', Chaps Ralph
Lauren'r', A.B.S. by Allen Schwartz'r', Catalina'r' and White Stag'r' brand
names. The Sportswear Group also operates four full price A.B.S. by Allen
Schwartz retail stores.

The Swimwear Group designs, manufactures, sources and markets mass market to
premium priced swimwear, fitness apparel, swim accessories and related products
under the Speedo'r'/Speedo Authentic Fitness'r', Anne Cole'r', Cole of
California'r', Sunset Beach'r', Sandcastle'r', Catalina'r', White Stag'r',
Lifeguard'r', Nautica'r' and Calvin Klein'r' brand names. The Swimwear Group
also operates 45 full price Speedo Authentic Fitness retail stores (including
one online store).

The accounting policies of the segments are the same as those described in
Note 2 -- Significant Accounting Policies.

During the Company's bankruptcy, the Company sold assets, wrote down
impaired assets, recorded an impairment charge related to the adoption of
SFAS 142 and stopped amortizing goodwill and certain intangible assets that were
previously amortized. In addition, on February 4, 2003, the Company emerged from
bankruptcy and adopted fresh start reporting in accordance with the provisions
of SOP 90-7. The adoption of fresh start reporting resulted in adjustments of
the Company's assets and liabilities to fair value. As a result of these changes
and adjustments, depreciation and amortization expense has decreased by in
excess of $20,000 annually from the amounts reported in previous years. For
informational purposes, the Company has separately identified the depreciation
and amortization components of operating income (loss) in the following table.
The presentation of segment information for prior periods has been restated to
reflect the current classification of the Company's business groups. Information
by business group is set forth below:

19

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

A reconciliation of total group operating income (loss) to total
consolidated income (loss) before the provision for income taxes and the
cumulative effect of a change in accounting principle for the Second Quarter of
Fiscal 2003, the Second Quarter of Fiscal 2002, the period February 5, 2003 to

20

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

July 5, 2003, the period January 5, 2003 to February 4, 2003 and the Six Months
Ended July 6, 2002 is as follows:

SUCCESSOR PREDECESSOR
------------- -------------
THREE MONTHS THREE MONTHS
ENDED JULY 5, ENDED JULY 6,
2003 2002
------------- -------------

Operating loss............................................. $(10,796) $(27,285)
Other (income) loss........................................ (1,363) --
Interest expense........................................... 5,423 3,095
-------- --------
Loss before provision (benefit) for income taxes........... $(14,856) $(30,380)
-------- --------
-------- --------

GEOGRAPHIC INFORMATION

21

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

INFORMATION ABOUT MAJOR CUSTOMERS

In the First Half of Fiscal 2003 one customer, Wal-Mart, accounted for
approximately 11.8% of the Company's net revenues. In the First Half of Fiscal
2002 two customers, Wal-Mart and Federated Department Stores, Inc., accounted
for approximately 11.74% and 10.24%, respectively, of the Company's net
revenues.

NOTE 9 -- COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) are as follows:

22

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The components of accumulated other comprehensive loss are as follows:

NOTE 10 -- INCOME TAXES

PREDECESSOR COMPANY

The provision for income taxes of $78,150 for the period January 5, 2003 to
February 4, 2003 consists of a deferred income tax provision of $77,584 related
to the increase in the carrying value of certain assets to fair value recorded
in connection with the Company's adoption of fresh start reporting and accrued
income taxes on foreign earnings of $566.

As of February 4, 2003, the Company had recorded a valuation allowance
against deferred tax assets to reduce the amount of deferred tax assets created
as a result of the adoption of fresh start reporting to an amount that the
Company believes, based upon objectively verifiable evidence, is realizable. The
future recognition of such amount will first reduce goodwill. Should the
recognition of net deferred tax assets result in the elimination of goodwill,
any additional deferred tax asset recognition will reduce other intangible
assets. Deferred tax assets recognized in excess of the carrying value of
intangible assets will be treated as an increase to additional paid-in capital.

The Company has also established a valuation allowance against certain
foreign net operating loss carry-forwards to reduce them to the amount that will
more likely than not be realized.

SUCCESSOR COMPANY

The income tax benefit of $6,392 for the Second Quarter of Fiscal 2003
consists of an income tax benefit of $9,654 on domestic losses offset by an
income tax expense of $3,262 on foreign earnings. The provision for income taxes
of $9,792 for the period February 5, 2003 to July 5, 2003 consists of income
taxes of $2,800 on domestic earnings and income taxes of $6,992 on foreign
earnings.

23

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

During the Second Quarter of Fiscal 2003, the Company increased its
valuation allowance by $33,448 to $156,800 and reduced its deferred tax asset by
$5,717 to an amount that will, more likely than not, be realized. Both the
increase in the Company's valuation allowance and the decrease in the deferred
tax asset have been recorded against goodwill. See Note 12. Additionally the
Company has not provided any tax benefit for certain foreign losses incurred in
the Second Quarter of Fiscal 2003.

BANKRUPTCY EFFECT

In connection with the Debtors' emergence from bankruptcy, the Company
realized a gain on the extinguishment of debt of $1,692,696. This gain will not
be taxable since the gain resulted from the Company's reorganization under the
Bankruptcy Code. However, for U.S. income tax reporting purposes, as of the
beginning of its 2004 taxable year, the Company will be required to reduce
certain tax attributes, including (a) net operating loss carryforwards,
(b) certain tax credit carryforwards, and (c) tax bases in assets in an amount
equal to the gain on the extinguishment of debt. The reorganization of the
Company on the Effective Date constituted an ownership change under Section 382
of the Code, and the use of any of the Company's net operating loss
carryforwards and tax credit carryforwards generated prior to the ownership
change that are not reduced pursuant to these provisions will be subject to an
overall annual limitation. The actual amount of reduction in tax attributes for
U.S. income tax reporting purposes will not be determined until 2004 and is
therefore not reflected in this note to the consolidated condensed financial
statements.

NOTE 11 -- INVENTORIES

- ---------

(a) Inventory reserves are based upon the estimated recoveries the Company
expects to receive from the disposition of excess and obsolete inventory.
As of July 5, 2003, February 4, 2003 and January 4, 2003 the Company had
identified inventory with a carrying value of $64,600, $57,200 and $61,500,
respectively, as potentially excess and/or obsolete.

24

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 12 -- GOODWILL AND INTANGIBLE ASSETS

Accumulated amortization related to finite lived licenses for a term at
July 5, 2003, February 4, 2003 and January 4, 2003 was $679, $0 and $2,494,
respectively. Accumulated amortization of sales order backlog was $10,500 at
July 5, 2003. Amortization expense for the Second Quarter of Fiscal 2003 and
Second Quarter of Fiscal 2002 was $6,709 and $226, respectively. Amortization
expense for the period February 5, 2003 to July 5, 2003 was $11,179 and
amortization expense for the Six Months Ended July 6, 2002 was $452.
Amortization expense is expected to be $14,102 for fiscal 2003 and $1,639 in
each of fiscal 2004 through fiscal 2008. The following table summarizes
intangible assets since February 4, 2003:

The following table summarizes the changes in the carrying amount of
goodwill for the period February 5, 2003 to July 5, 2003:

Goodwill balance at February 4, 2003....................... $34,142
Adjustments:
Fixed assets -- fair value............................. 9,722
Trademarks -- fair value............................... 34,500
Deferred income taxes.................................. 9,999
Other.................................................. 1,600
-------
Goodwill balance at July 5, 2003........................... $89,963
-------
-------

25

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

In June 2001, the FASB issued SFAS 142. SFAS 142 eliminated the amortization
of goodwill and certain other intangible assets with indefinite lives effective
for the Company's 2002 fiscal year. SFAS 142 addresses financial accounting and
reporting for intangible assets and acquired goodwill. SFAS 142 requires that
indefinite lived intangible assets be tested for impairment at least annually.
Intangible assets with finite useful lives are to be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets.

Under the provisions of SFAS No. 142, goodwill is deemed potentially
impaired if the net book value of a business reporting unit exceeds the fair
value of that business reporting unit. As of January 5, 2002, the Company had
incurred losses in each of its two previous fiscal years and had filed for
bankruptcy. As a result the Company's BEV had decreased. Intangible assets are
deemed impaired if the carrying amount exceeds the fair value of the assets. The
Company obtained an independent appraisal of its BEV in connection with the
preparation of the Plan. The Company allocated the appraised BEV to its various
reporting units and determined that the value of certain of the Company's
intangible assets and goodwill were impaired. As a result, the Company recorded
a charge of $801,622 (net of income tax benefit of $53,513) as a cumulative
effect of a change in accounting from the adoption of SFAS 142 on January 6,
2002. The remaining value of intangible assets with indefinite useful lives
after the adoption of SFAS No. 142 was $81,305 and the remaining value of other
intangible assets with finite lives was $6,316.

Goodwill at July 5, 2003 reflects adjustments of $55,821 to the preliminary
estimates of the fair value of fixed and intangible assets, and accrued
liabilities and the related deferred income taxes and valuation allowance as a
result of changes in the preliminary fair values of fixed assets, trademarks and
accrued liabilities. The reductions in fixed and intangible assets resulted in a
corresponding increase in the valuation allowance related to deferred taxes
which increased goodwill.

NOTE 13 -- PROPERTY, PLANT AND EQUIPMENT

26

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 14 -- LIABILITIES SUBJECT TO COMPROMISE

The following table summarizes liabilities subject to compromise at
January 4, 2003, all of which were discharged upon the Company's emergence from
bankruptcy on February 4, 2003:

- ---------

(a) Accounts payable includes $349,737 of trade drafts payable
at January 4, 2003. As a result of the Chapter 11 Cases, no
principal or interest payments were made on unsecured pre-
petition debt.
(b) See Note 15.
(c) Due to the settlement of final claims in connection with the
consummation of the Plan, the total amount of liabilities
subject to compromise discharged on February 4, 2003 was
$2,499,385. See Note 5.

NOTE 15 -- DEBT

27

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

SENIOR NOTES

On June 12, 2003 Warnaco completed the sale of $210,000 Senior Notes at par.
The Senior Notes mature on June 15, 2013. The Senior Notes bear interest at
8 7/8% payable semi-annually beginning December 15, 2003. The Senior Notes are
unconditionally guaranteed, jointly and severally, by Warnaco Group and
substantially all of Warnaco's domestic subsidiaries. The Senior Notes are
effectively subordinate in right of payment to existing and future secured debt
(including the Exit Financing Facility) and to the obligations (including trade
accounts payable) of the subsidiaries that are not guarantors of the Senior
Notes. The guarantees of each guarantor are effectively subordinate to that
guarantor's existing and future secured debt (including guarantees of the Exit
Financing Facility) to the extent of the value of the assets securing that debt.
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's subsidiaries to pay
dividends or make other distributions to Warnaco or to Warnaco Group, 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
covenants of the Senior Notes at July 5, 2003. Redemption of the Senior Notes
prior to their maturity is subject to premiums as set forth in the indenture.
Proceeds from the sale of the Senior Notes were used to repay the outstanding
principal balance on the Second Lien Notes of $200,942 and accrued interest
thereon of $1,987. The proceeds were also used to pay underwriting fees, legal
and professional fees and other expenses associated with the offering of
approximately $7,071. In connection with the offering of the Senior Notes, the
Company entered into a registration rights agreement with the initial purchasers
of the Senior Notes. The registration rights agreement grants the holders of the
Senior Notes certain exchange and registration rights that required the Company
to file a registration statement with the SEC within 60 days after the issuance
of the Senior Notes. If, within the time periods specified in the registration
rights agreement, the Company is unable to complete a registration and exchange
of the Senior Notes or, alternatively, cause to be declared effective a shelf
registration statement for the resale of the Senior Notes, the Company will be
required to pay special interest to the holders of the Senior Notes. Special
interest will accrue at a rate of 0.25% per annum during the 90 day period
immediately following the occurrence of a registration default and will increase
by 0.25% per annum at the end of each subsequent 90 day period, but in no event
shall exceed 1.0% per annum. The Company filed the required registration
statement on August 8, 2003. No principal payments prior to the maturity date
are required.

EXIT FINANCING FACILITY

On the Effective Date the Company entered into the $275,000 Exit Financing
Facility. The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. The Exit Financing Facility includes provisions that
allow the Company to increase the maximum available borrowing from $275,000 to
$325,000, subject to certain conditions (including obtaining the agreement of
existing or new lenders to commit to lend the additional amount). Borrowings
under the Exit Financing Facility bear interest at Citibank N.A.'s base rate
plus 1.50% (5.50% at July 5, 2003) or at the London Interbank Offered Rate
('LIBOR') plus 2.50% (approximately 3.6% at July 5, 2003). Pursuant to the terms
of the Exit Financing Facility, the interest rate the Company will pay on its
outstanding loans will decrease by as much as 0.5% in the event the Company
achieves certain defined ratios. The Exit Financing Facility contains financial
covenants that, among other things, require the Company to maintain a fixed
charge coverage ratio above a minimum

28

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

level, a leverage ratio below a maximum level and to limit the amount of the
Company's capital expenditures. In addition, the Exit Financing Facility
contains certain covenants that, among other things, limit investments and asset
sales, prohibit the payment of dividends (subject to limited exceptions) and
prohibit the Company from incurring material additional indebtedness. As of
July 5, 2003, the Company was in compliance with the covenants of the Exit
Financing Facility. Initial borrowings under the Exit Financing Facility on the
Effective Date were $39,200. The Exit Financing Facility is guaranteed by
Warnaco Group and substantially all of Warnaco's domestic subsidiaries and the
obligations under such guarantee, together with the Company's obligations under
the Exit Financing Facility, are secured by a lien on substantially all of the
domestic assets of the Company and its domestic subsidiaries. As of July 5,
2003, the Company had repaid all amounts owing under the Exit Financing Facility
and had approximately $51,108 of cash available as collateral against
outstanding letters of credit of $56,211. At July 5, 2003, the Company had
$150,788 of credit available under the Exit Financing Facility.

SECOND LIEN NOTES

In accordance with the Plan, on the Effective Date, the Company issued
$200,942 Second Lien Notes to certain pre-petition creditors and others in a
transaction exempt from the registration requirements of the Securities Act,
pursuant to Section 1145(a) of the Bankruptcy Code. The Second Lien Notes were
scheduled to mature on February 4, 2008, subject to, in certain instances,
earlier repayment in whole or in part. The Second Lien Notes bore an annual
interest rate (9.5% at July 5, 2003) which was the greater of (i) 9.5% plus a
margin (initially 0%, and beginning on August 4, 2003, 0.5% would have been
added to the margin every six months); and (ii) LIBOR plus 5.0% plus a margin
(initially 0%, and beginning on August 4, 2003, 0.5% would have been added to
the margin every six months). The indenture pursuant to which the Second Lien
Notes were issued contained certain covenants that, among other things, limited
investments and asset sales, and prohibited the Company from paying dividends
(subject to limited exceptions) and incurring material additional indebtedness.
The Second Lien Notes were guaranteed by most of the Company's domestic
subsidiaries and the obligations under such guarantee, together with the
Company's obligations under the Second Lien Notes, were secured by a second
priority lien on substantially the same assets which secured the Exit Financing
Facility. The Second Lien Notes were payable in equal annual installments of
$40,188 beginning in April 2004 through April 2008. Second Lien Note principal
payments could only be made if the Company achieved a defined fixed charge
coverage ratio and had additional borrowing availability, after the principal
payment, of $75,000 or more under the Exit Financing Facility.

All outstanding principal and accrued interest on the Second Lien Notes of
$202,929 was repaid with the proceeds of the Company's offering, on June 12,
2003, of the $210,000 Senior Notes.

GECC

On June 12, 2002, the Bankruptcy Court approved the Predecessor's settlement
of certain operating lease agreements with General Electric Capital Corporation
('GECC'). The leases had original terms from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
The terms of the settlement agreement require the Company to make payments to
GECC totaling $15,200. The net present value of the remaining GECC payments of
$1,460 is classified with the current portion of long-term debt at July 5, 2003.
Remaining amounts payable to GECC will be paid in monthly installments of $750
including

29

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

interest through November 2003. Obligations to GECC are secured by first
priority liens on the applicable assets.

OTHER DEBT

Certain of the Company's foreign subsidiaries are parties to capital lease
obligations related to certain facilities and equipment. The total amount of
capital lease obligations outstanding at July 5, 2003, February 4, 2003 and
January 4, 2003 related to these leases were approximately $1,326, $1,420 and
$2,679, of which $52, $160 and $162 are included with the current portion of
long-term debt, respectively.

NOTE 16 -- RELATED PARTY TRANSACTIONS

In anticipation of the Company's emergence from bankruptcy protection, the
Company entered into a consulting agreement with Alvarez & Marsal, Inc. ('A&M')
on January 29, 2003 (as supplemented by a March 18, 2003 letter agreement,
collectively the 'A&M Agreement'). The A&M Agreement provides, among other
things, for certain executive services to be provided to the Company (including
but not limited to the services of Antonio C. Alvarez as President and Chief
Executive Officer of the Company through April 30, 2003, James P. Fogarty as
Chief Financial Officer of the Company and other personnel) as well as the
payment of additional fees upon the consummation of certain transactions
involving the Company and, upon certain conditions, the right to participate in
the Company's Incentive Compensation Plan for certain periods in fiscal 2003.
Pursuant to the A&M Agreement, during the Second Quarter of Fiscal 2003, the
Company paid A&M a total amount of $1,174, consisting of payments for executive
services in the amount of $514 and $660 of transaction bonuses. For the period
February 5, 2003 to July 5, 2003, total payments to A&M under the A&M Agreement
were $1,731, consisting of payments for executive services in the amount of
$1,071 and $660 of transaction bonuses. Pursuant to the terms of the Plan,
Mr. Alvarez received Second Lien Notes in the principal amount of $942 in
connection with the Company's emergence from bankruptcy on February 4, 2003.
Such notes, with accrued interest thereon, were repaid with proceeds from the
sale of the Senior Notes on June 12, 2003.

NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION

- ---------

(a) Represents debt incurred and assets purchased under the GECC lease
settlement. See Note 15.

NOTE 18 -- STOCKHOLDERS' EQUITY (DEFICIENCY)

The Successor 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 are no shares of
preferred stock issued and outstanding. The Successor has authorized an
aggregate of 112,500,000 shares of New Common Stock of which the Successor

30

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

issued 44,999,973 shares pursuant to the terms of the Plan. A further 23,540
shares were issued to the Company's directors on May 28, 2003 as partial
compensation for serving as members on the Board of Directors of the Company.
The total number of shares of New Common Stock issued and outstanding at July 5,
2003 was 45,023,513. On March 12, 2003, pursuant to the terms of the 2003 Stock
Incentive Plan (the 'Stock Incentive Plan'), the Company issued 498,500 shares
of restricted stock to certain of its employees. A further 153,500 shares of
restricted stock, net of cancellations, were issued during the Second Quarter of
Fiscal 2003. The Stock Incentive Plan was approved by shareholders on May 28,
2003. The fair market value of the New Common Stock at the date of the grants
ranged from $10.12 to $10.45 per share. The restricted shares vest with respect
to 25% of the shares on September 12, 2003 and with respect to an additional 25%
of such shares each September 12 thereafter through 2006. In addition, the
Company also granted options for the purchase of 2,608,000 shares, net of
cancellations, of New Common Stock at exercise prices between of $8.78 and
$12.54 per share, which represents the price per share of the New Common Stock
at the date of grant. The options vest with respect to 25% of the shares on
September 12, 2003 and with respect to an additional 25% of such shares each
September 12 thereafter through 2006. The options have a ten-year term.
Compensation expense related to the restricted share and option grants was
$2,154 for the Second Quarter of Fiscal 2003 and $2,523 for the period
February 5, 2003 to July 5, 2003. The total fair value of the options and
restricted share grants was $16,482. Stock-based compensation expense for the
period February 5, 2003 to July 5, 2003 includes $150 of compensation expense
for shares issued to the members of the Company's Board of Directors as
compensation for their service.

A summary of the options outstanding under the Stock Incentive Plan is
presented below:

The Company had no exercisable options outstanding at July 5, 2003.

Summary information related to options outstanding at July 5, 2003 is as
follows:

The Company has reserved 5,000,000 shares of New Common Stock for
stock-based compensation awards.

31

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The Predecessor had various stock-based incentive plans in place prior to
February 4, 2003 including options outstanding for the purchase of 3,692,363
shares of Old Common Stock at weighted average exercise prices from $0.67 to
$42.00 per share. All options to purchase shares of Old Common Stock and
restricted shares related to the Old Common Stock were cancelled on February 4,
2003 pursuant to the terms of the Plan.

NOTE 19 -- INCOME (LOSS) PER SHARE

- ---------

(a) Stock options to purchase 2,608,000 shares of New Common Stock have been
excluded from the computation of income per share for the period February 5,
2003 to July 5, 2003 because the effect, under the treasury method, would
have been anti-dilutive. The denominator for the weighted average diluted
shares outstanding at July 5, 2003 includes the effect of 652,000 shares of
unvested restricted stock. The effect of potentially dilutive securities has
been excluded from the computation of loss per share for the Six Months
Ended July 6, 2002 because the effect would have been anti-dilutive.
Dilutive securities at July 6, 2002 included options to purchase 5,293,342
shares of Old Common Stock, unvested restricted stock of 19,424 shares and
5,200,000 shares issuable pursuant to the Equity Agreements.

Options to purchase shares of New Common Stock outstanding were not included
in the computation of diluted earnings per share because the number of assumed
shares that would be repurchased, using the treasury method, was greater than
the weighted average in-the-money options outstanding at July 5, 2003. Options
to purchase shares of common stock outstanding at July 6, 2002 were not included
in the computation of diluted earnings per share because the option exercise
price was greater than the average market price of the common shares. In

32

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

addition, at July 6, 2002 incremental shares issuable on the assumed conversion
of the Preferred Securities amounting to 1,653,177 shares were not included in
the computation of diluted earnings per share for any of the periods presented,
as the impact would have been anti-dilutive.

NOTE 20 -- LEGAL MATTERS

SHAREHOLDER CLASS ACTIONS

Between August 22, 2000 and October 26, 2000, seven putative class action
complaints were filed in the U.S. District Court for the Southern District of
New York (the 'District Court') against the Company and certain of its officers
and directors (the 'Shareholder I Class Action'). The complaints, on behalf of a
putative class of the Company's shareholders who purchased the Old Common Stock
between September 17, 1997 and July 19, 2000 (the 'Class Period'), allege, among
other things, that the defendants violated the Securities Exchange Act of 1934,
as amended (the 'Exchange Act') by artificially inflating the price of the Old
Common Stock and failing to disclose certain information during the Class
Period.

On November 17, 2000, the District Court consolidated the complaints into a
single action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on May
31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the District Court granted the motion to
dismiss this action based on the statute of limitations. On May 10, 2002, the
plaintiffs filed a motion for reconsideration in the District Court. On May 24,
2002, the plaintiffs filed a notice of appeal with respect to such dismissal. On
July 23, 2002, plaintiffs' motion for reconsideration was denied. On July 30,
2002, the plaintiffs voluntarily dismissed, without prejudice, their claims
against the Company. On October 2, 2002, the plaintiffs filed a notice of appeal
with respect to the District Court's entry of a final judgment in favor of the
individual defendants. On July 7, 2003, the United States Court of Appeals for
the Second Circuit reversed and remanded the District Court's entry of a final
judgment in favor of the individual defendants.

Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of 64 shareholders who purchased the Old Common
Stock between September 29, 2000 and April 18, 2001 (the 'Second Class Period'),
allege, among other things, that defendants violated the Exchange Act by
artificially inflating the price of the Old Common Stock and failing to disclose
negative information during the Second Class Period.

On August 3, 2001, the District Court consolidated the actions into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01
CIV 3346 (MCG), and appointed a lead plaintiff and approved a lead counsel for
the putative class. A consolidated amended complaint was filed against certain
of the Company's current and former officers and directors, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18, 2002, the District Court dismissed the
amended complaint, but granted plaintiffs leave to replead. On June 7, 2002, the
plaintiffs filed a second amended complaint, which again expanded the Second
Class Period to encompass August 15, 2000 to June 8, 2001. On June 24, 2002, the
defendants filed motions to dismiss the second amended complaint. On August 21,
2002, the plaintiffs filed a third amended complaint adding the Company's
current

33

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

independent auditors as a defendant. On June 2, 2003, the District Court granted
the outside directors' motion to dismiss and dismissed the motion to dismiss of
the other individual defendants.

Neither the Shareholder I Class Action nor Shareholder II Class Action has
had, or will have, a material adverse effect on the Company's financial
condition, results of operations or business.

SEC INVESTIGATION

The staff of the Division of Enforcement of the Securities and Exchange
Commission ('SEC') has been conducting an investigation to determine whether
there have been any violations of the Exchange Act, in connection with, among
other things, the preparation and publication by the Company of (i) the
financial statements included in the Company's Annual Report on Form 10-K for
fiscal 1998 and Quarterly Report on Form 10-Q for the third quarter of fiscal
2000 and (ii) the Company's press release announcing its results for fiscal
1998. In July 2002, the SEC staff informed the Company that it intends to
recommend that the SEC bring a civil injunctive action against the Company,
alleging violations of the federal securities laws, including Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20,
13a-1 and 13a-13 promulgated thereunder. The SEC staff invited the Company to
make a Wells Submission describing the reasons why no action should be brought.
In September 2002, the Company filed its Wells Submission and is continuing
discussions with the SEC staff as to a settlement of this investigation. The
Company does not expect the resolution of this matter to have a material effect
on the Company's business, financial condition or results of operations.

The Company is also aware that the SEC staff has informed certain persons
who were employed by the Company at the time of the preparation of the documents
referred to above (including one current member of management) that it intends
to recommend that the SEC bring a civil injunctive action against such persons
alleging violations of the securities laws. The Company is advised that such
persons also have filed Wells Submissions.

CHAPTER 11 CASES

For a discussion of bankruptcy proceedings under the Bankruptcy Code, see
the discussion of 'Chapter 11 Cases' in Note 1.

OTHER

In addition to the above, 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 arbitration and/or
legal proceeding that it expects to have a material effect on its financial
condition, results of operations or business.

NOTE 21 -- SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION

The following tables set forth supplemental consolidating condensed
financial information as of July 5, 2003, February 4, 2003 and January 4, 2003,
for the periods January 5, 2003 to February 4, 2003, February 5, 2003 to July 5,
2003 and for the Six Months Ended July 6, 2002 for (i) Warnaco Group (the
'Parent Guarantor'), (ii) Warnaco (the 'Issuer'), (iii) the subsidiaries of
Warnaco that guarantee the Senior Notes (the 'Guarantor Subsidiaries'),
(iv) the subsidiaries of Warnaco other than the Guarantor Subsidiaries (the
'Non-Guarantor Subsidiaries') and (v) the Company on a consolidated basis.

34

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

35

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

36

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

37

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

38

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

The Warnaco Group, Inc. ('Warnaco Group', and together 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 those expected in the future. The Company
generally is subject to certain risks that could affect the value of the
Company's New Common Stock. Except for the historical information contained in
this Quarterly Report, this Quarterly Report, including the following
discussion, contains forward-looking statements that involve risks and
uncertainties. See 'Statement Regarding Forward-Looking Disclosure.'

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND REORGANIZATION

On June 11, 2001 (the 'Petition Date'), Warnaco Group, 36 of its 37 U.S.
subsidiaries and Warnaco of Canada Company (each a 'Debtor' and, collectively,
the 'Debtors') each filed a voluntary petition for relief under Chapter 11 of
the U.S. Bankruptcy Code, 11 U.S.C. 'SS'SS'101-1330, as amended (the 'Bankruptcy
Code'), in the United States Bankruptcy Court for the Southern District of New
York (the 'Bankruptcy Court') (collectively, the 'Chapter 11 Cases'). The
remainder of Warnaco Group's foreign subsidiaries were not debtors in the
Chapter 11 Cases, nor were they subject to foreign bankruptcy or insolvency
proceedings.

On November 9, 2002, the Debtors filed the First Amended Joint Plan of
Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of the Bankruptcy Code (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered (i) its Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order'). On February 4, 2003 (the 'Effective Date'), the Plan
became effective and the Debtors successfully emerged from their bankruptcy
proceedings.

Pursuant to the Plan, the following distributions were made:

(a) Warnaco Group's Class A Common Stock, par value $0.01 per
share ('Old Common Stock'), including all stock options and
restricted shares, was extinguished and holders of the Old
Common Stock received no distribution on account of the Old
Common Stock;
(b) general unsecured claimants received 2.55% (1,147,023
shares) of the reorganized Company's common stock, par value
$0.01 per share (the 'New Common Stock');
(c) the Company's pre-petition secured lenders received their
pro-rata share of $106.1 million in cash, New Warnaco Second
Lien Notes due 2008 (the 'Second Lien Notes') in the
principal amount of $200.0 million and approximately 96.26%
of the New Common Stock (43,318,350 shares);
(d) holders of claims arising from or related to certain
preferred securities received 0.60% of the New Common Stock
(268,200 shares);
(e) pursuant to the terms of his employment agreement, as
modified by the Plan, Antonio C. Alvarez II, the former
President and Chief Executive Officer of the Company,
received an incentive bonus consisting of $1.95 million in
cash, Second Lien Notes in the principal amount of
approximately $0.9 million and 0.59% of the New Common Stock
(266,400 shares); and
(f) in addition to the foregoing, allowed administrative and
certain priority claims were paid in full in cash.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to use judgment in making

39

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 the Company's consolidated
financial statements and accompanying notes. The following critical accounting
policies are based on, among other things, judgments and assumptions made by
management that involve inherent risks and uncertainties.

Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated condensed
financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Actual results could materially differ from
these estimates. The estimates the Company makes are based upon historical
factors, current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an ongoing
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.

During the fourth quarter of fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate certain manufacturing facilities, restructure other manufacturing
operations and consolidate certain sales and back office operations in Europe.
The Company will incur severance, outplacement, legal, accounting and other
expenses associated with the consolidation covering approximately 350 employees.
Portions of the consolidation plan involve the consolidation of certain
operations in France. Consolidating operations in France requires the Company to
comply with certain procedures and processes that are defined in French law and
French labor regulations. The Company recorded a restructuring charge of $8.7
million in the fourth quarter of fiscal 2002 reflecting the statutory and
regulatory defined severance and other obligations that the Company will incur
related to the consolidation. Included in the restructuring charge are $0.1
million of legal and other professional fees incurred in fiscal 2002 related to
the consolidation. During the first quarter of fiscal 2003, the Company
established a minimum level of benefits to be paid to terminated employees and
recorded $6.5 million of additional costs in connection with the European
consolidation. In the third quarter of fiscal 2003, the Company closed the four
manufacturing facilities and terminated the related employees. Payments to
terminated employees for severance and other benefits will be paid beginning in
August 2003. The Company expects that all obligations with respect to these
terminated employees will be paid by the end of the first quarter of fiscal
2004. The determination of the amount of liabilities that the Company will
ultimately incur in connection with the consolidation and its other
restructuring initiatives involves the use of estimates and judgments by the
Company and its professional and legal advisors. The amount and timing of the
final settlement of such liabilities could differ from those estimates.

Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed to the customers, net of
reserves for returns, allowances and other discounts. The Company recognizes
revenue from its retail stores when goods are sold to customers.

Accounts Receivable: The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include amounts the Company expects its customers to deduct
for trade discounts, amounts for accounts that go out of business or seek the
protection of the Bankruptcy Code and amounts related to charges in dispute with
customers. The Company's estimate of the allowance amounts that are necessary
includes amounts for specific deductions the Company has authorized and an
amount for other estimated losses. The provision for accounts receivable
allowances is affected by general economic conditions, the financial condition
of the Company's customers, the inventory position of the Company's customers,
sell-through of the Company's products by these customers and many other
factors. As of July 5, 2003, the Company had approximately $263.1 million of
open trade invoices and other receivables and $13.4 million of open debit memos.
Based upon the Company's

40

analysis of estimated recoveries and collections associated with the related
invoices and debit memos, the Company had $71.6 million of accounts receivable
reserves at July 5, 2003. As of February 4, 2003 and January 4, 2003, the
Company had approximately $281.9 million and $276.9 million of open trade
invoices and other receivables, respectively, and $10.8 million and $10.4
million of open debit memos, respectively. Based upon the Company's analysis of
estimated recoveries and collections associated with the related invoices and
debit memos, the Company had $79.7 million and $87.5 million of accounts
receivable reserves at February 4, 2003 and January 4, 2003, respectively. The
determination of the amount of accounts receivable reserves is subject to
significant levels of judgment and estimation by the Company's management. If
circumstances change or economic conditions deteriorate, the Company may need to
increase the reserves significantly. The Company has purchased credit insurance
to help mitigate the potential losses it may incur from the bankruptcy,
reorganization or liquidation of some of its customers.

Inventories: The Company values its inventories at the lower of cost,
determined on a first-in, first-out basis, or market. The Company evaluates its
inventories to determine excess units or slow-moving styles based upon
quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors
that are obsolete, the Company estimates the net amount that the Company expects
to realize from the sale of such items. The Company's objective is to recognize
projected inventory losses at the time the loss is evident rather than when the
goods are ultimately sold. At July 5, 2003, the Company had identified inventory
with a carrying value of approximately $64.6 million as potentially excess
and/or obsolete. Based upon the estimated recoveries related to such inventory,
as of July 5, 2003, the Company had approximately $29.2 million of inventory
reserves for excess, obsolete and other inventory adjustments. At February 4,
2003 and January 4, 2003, the Company had identified inventory with carrying
values of approximately $57.2 million and $61.5 million, respectively, as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of February 4, 2003 and January 4, 2003, the Company had
approximately $32.8 million and $33.8 million, respectively, of inventory
reserves for excess, obsolete and other inventory adjustments. The Company
believes that the carrying value of its inventory, net of the reserves noted,
was equal to its fair value at February 4, 2003. As of February 4, 2003, the
Company adopted the fresh start reporting provisions of SOP 90-7 and changed its
inventory accounting policies. As a result, the Company expenses certain design,
receiving, and other product related costs as incurred. These costs were
previously capitalized.

Long-lived Assets: Property, plant and equipment at February 4, 2003 was
recorded in the consolidated condensed balance sheet at its fair value based
upon the preliminary appraised values of such assets. See Notes 3 and 4 of Notes
to Consolidated Condensed Financial Statements. Intangible assets consist
primarily of licenses and trademarks. The Company engaged a third party
appraisal firm to assist it in its determination of the fair value of its
long-lived assets. Intangible assets were recorded at their preliminary
appraised values as of February 4, 2003. Identifiable intangible assets with
finite useful lives are amortized on a straight-line basis over the estimated
useful lives of the asset. During the three months ended July 5, 2003 (the
'Second Quarter of Fiscal 2003'), the Company recorded certain adjustments to
the preliminary fair values of certain fixed and intangible assets. Adjustments
to the preliminary fair values of fixed and intangible assets are recorded as
an adjustment to the fair value of such assets at February 4, 2003 and as a
corresponding adjustment to goodwill. See Note 12 of Notes to Consolidated
Condensed Financial Statements.

The Company reviews its long-lived assets for possible impairment when
events or circumstances indicate that the carrying value of the assets may not
be recoverable. Assumptions and estimates used in the evaluation of impairment
may affect the carrying value of long-lived assets, which could result in
impairment charges in future periods. In addition, depreciation and amortization
expense is affected by the Company's determination of the estimated useful lives
of the related assets. The estimated remaining useful lives of the Company's
fixed assets and finite lived intangible assets that existed at February 4, 2003
were based upon the remaining useful lives as determined by independent third
party appraisers and the Company. Estimated useful lives of

41

assets acquired by the Company after February 4, 2003, are based upon the
Company's established guidelines per asset class.

Income Taxes: Deferred income taxes are determined using the liability
method. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured by applying enacted tax rates and laws to taxable years in which such
differences are expected to reverse. A valuation allowance is provided when the
Company determines that it is more likely than not that a portion of the
deferred tax asset balance will not be realized.

Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The Pension
Plan's third party actuary has determined the total liability attributable to
benefits owed to participants covered by the Pension Plan using assumptions
provided by the Company. The assumptions used can have a significant effect on
the amount of pension expense and pension liability recorded by the Company. The
Pension Plan actuary also determines the annual cash contribution to the Pension
Plan using the assumptions set forth by the Pension Benefit Guaranty
Corporation. The Pension Plan was under-funded as of July 5, 2003, February 4,
2003 and January 4, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to fund its minimum
required contributions and any other premiums due under the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') and the United States Internal
Revenue Code of 1986, as amended (the 'Code'). Effective January 1, 2003, the
Pension Plan was amended and, as a result, no future benefits will accrue to
participants in the Pension Plan. The Company recorded a Pension Plan liability
equal to the amount that the present value of accumulated benefit obligations
(discounted using an interest rate of approximately 5.3%) exceeded the fair
value of Pension Plan assets at February 4, 2003. The Company's cash
contributions to the Pension Plan for fiscal 2003 will be approximately $9.4
million. The Company estimates that its cash contributions to the Pension Plan
will be $46.3 million in the aggregate from fiscal 2004 through fiscal 2008. The
amount of estimated cash contributions that the Company will be required to make
to the Pension Plan could increase or decrease depending on the actual return
earned by the assets of the Pension Plan compared to the estimated rate of
return on Pension Plan assets. The accrued long-term Pension Plan liability and
accruals for other post retirement benefits are classified as other long-term
liabilities in the consolidated condensed balance sheets. Cash contributions to
the Pension Plan were $1.7 million for the period February 5, 2003 to July 5,
2003. The remaining contributions to the Pension Plan to be paid in fiscal 2003
of $7.6 million are classified with accrued liabilities at July 5, 2003.

Stock-Based Compensation: Effective February 5, 2003, the Company adopted
the fair value method of accounting for stock options for all options granted by
the Company after February 4, 2003 pursuant to the prospective method provisions
of Statement of Financial Accounting Standards ('SFAS') No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure ('SFAS 148'). The Company
uses the Black-Scholes model to calculate the fair value of stock option awards.
The Black-Scholes model requires the Company to make significant judgments
regarding the assumptions used within the Black-Scholes model, the most
significant of which are the stock price volatility assumption, the expected
life of the option award and the risk free rate of return. The Company emerged
from bankruptcy on February 4, 2003, and as a result, the Company does not have
sufficient stock price history upon which to base its volatility assumption. In
determining the volatility used in its model, the Company considered the
volatility of the stock prices of selected companies in the apparel industry,
the nature of those companies, the Company's emergence from bankruptcy and
other factors in determining its stock price volatility assumption of 35%. The
Company based its estimate of the average life of a stock option of five years
upon the vesting period of 40 months and the option term of ten years. The
Company's risk-free rate of return assumption of 2.55% is equal to the quoted
yield for five-year U.S. treasury bonds at the valuation date. Stock-based
compensation amounted to $2.3 million and $2.5 million in the Second Quarter
of Fiscal 2003 and period February 5, 2003 to July 5, 2003.

42

Prior to February 5, 2003, the Company followed the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123
encourages, but does not require, companies to adopt a fair value based method
for determining expense related to stock option compensation. The Company
accounted for stock-based compensation for employees using the intrinsic value
method as prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ('APB 25') and related interpretations. Under APB
25, no compensation expense was recognized for employee share option grants
because the exercise price of the options granted equaled the market price of
the underlying shares on the date of grant. Compensation expense related to
restricted stock grants was recognized over the vesting period of the grants.

Reorganization Value: In connection with its emergence from bankruptcy on
February 4, 2003, the Company engaged a third party appraisal firm to assist it
in its determination of its reorganization value. Reorganization value in excess
of the fair value of net assets represents the amount by which the Company's
reorganization value exceeded the fair value of its tangible assets, identified
intangible assets minus its liabilities as of February 4, 2003. The Company
allocated reorganization value to its various assets in accordance with the
provisions of SFAS No. 141, Business Combinations ('SFAS 141'). Reorganization
value, which is classified as goodwill in the consolidated condensed balance
sheet, is not amortized.

Reorganization Items: Reorganization items included in the consolidated
condensed statement of operations for the periods January 5, 2003 to
February 4, 2003, three months ended July 6, 2002 (the 'Second Quarter of
Fiscal 2002') and six months ended July 6, 2002 (the 'First Half of Fiscal
2002') were $29.9 million, $42.6 million and $58.1 million, respectively.
Included in reorganization items are certain non-cash asset impairment
provisions and accruals for items that have been, or will be, paid in cash.
Certain accruals at January 4, 2003 were subject to compromise under the
provisions of the Bankruptcy Code. The Company had recorded these accruals at
the estimated amount the creditor would have been entitled to claim under the
provisions of the Bankruptcy Code. The ultimate amount of and settlement terms
for such liabilities are detailed in the Plan. See Note 6 of Notes to
Consolidated Condensed Financial Statements. Subsequent to February 4, 2003, to
the extent that the Company has incurred reorganization items in respect of the
Chapter 11 Cases, these have been recorded in selling, general and
administrative expenses. Included in selling, general and administrative
expenses for the Second Quarter of Fiscal 2003 and period February 5, 2003 to
July 5, 2003 are legal and professional fees and certain employee related costs
relating to the Chapter 11 Cases of $2,702 and $4,016, respectively.

Restructuring Items: Restructuring items included in the consolidated
condensed statements of operations for the Second Quarter of Fiscal 2003 and the
period February 5, 2003 to July 5, 2003 were $6.1 million. Included in
restructuring items are certain accruals for contract termination and employee
termination costs associated with the closing and consolidation of two sewing
facilities in Honduras and California, a warehousing and cutting facility in
Georgia and a distribution facility in New Jersey. The restructuring resulted in
the termination of approximately 670 employees.

43

RESULTS OF OPERATIONS

STATEMENT OF OPERATIONS (SELECTED DATA)

The following tables summarize the historical results of operations of the
Company for the Second Quarter of Fiscal 2003, the Second Quarter of Fiscal
2002, the period January 5, 2003 to February 4, 2003 (the 'Stub Period'), the
period February 5, 2003 to July 5, 2003 and for the six months ended July 6,
2002 (the 'First Half of Fiscal 2002'). The Stub Period combined with the period
February 5, 2003 to July 5, 2003 constitute a combined presentation of the
'First Half of Fiscal 2003.'

The Second Quarter of Fiscal 2003 and Second Quarter of Fiscal 2002 each
included 13 weeks of operations, the Stub Period included four weeks of
operations and the period February 5, 2003 to July 5, 2003 included 22 weeks of
operations. The six months ended July 5, 2003 and July 6, 2002 each included 26
weeks of operations. References in this Item 2 to the 'Predecessor' refer to the
Company prior to February 4, 2003. References to the 'Successor' refer to the
Company on and after February 4, 2003 after giving effect to the implementation
of fresh start reporting.

NET REVENUES

Net revenues are as follows:

(footnote on next page)

45

(footnote from previous page)

(a) Consolidated net revenues for the three months and six months ended July 6,
2002 included $13.7 million and $32.8 million, respectively, of revenues
from GJM, Penhaligon's, Fruit of the Loom, Weight Watchers, IZKA and
domestic outlet retail stores (the 'discontinued and sold units'). The
absence of net revenues from discontinued and sold units accounted for a
3.6% decrease in net revenues in the Second Quarter of Fiscal 2003 compared
to the Second Quarter of Fiscal 2002 and accounted for a 4.1% decrease in
net revenues for the First Half of Fiscal 2003 compared to the First Half of
Fiscal 2002.

The Company believes that one of its competitive strengths is that its
products are widely distributed through all major channels of trade. The
following table summarizes the Company's net revenues by channel of trade for
the First Half of Fiscal 2003 and for fiscal 2002:

Second Quarter

Net revenues decreased $45.9 million, or 12.0%, to $335.9 million for the
Second Quarter of Fiscal 2003 compared to $381.8 million for the Second Quarter
of Fiscal 2002. In the same period, the absence of net revenues from
discontinued and sold units accounted for a $13.7 million, or 3.6%, decrease in
net revenues for the Second Quarter of Fiscal 2003 compared to the Second
Quarter of Fiscal 2002. The remaining decrease in net revenues reflects strength
in Calvin Klein underwear and Lejaby offset by Warner's/Olga/Body
Nancy Ganz weakness. Sportswear Group net revenues decreased $16.2 million, or
15.1%, to $91.0 million with strength in Chaps offset by weakness in Calvin
Klein jeans. Swimwear Group net revenues decreased by $5.0 million, or 4.3%, to
$110.0 million.

First Half

Net revenues decreased $13.7 million, or 1.7%, to $778.1 million for the
First Half of Fiscal 2003 compared to $791.9 million for the First Half of
Fiscal 2002. In the same period, the absence of net revenues from discontinued
and sold units accounted for a $32.8 million, or 4.1%, decrease in net revenues
for the First Half of Fiscal 2003 compared to the First Half of Fiscal 2002. The
remaining change in net revenues reflects strength in Calvin Klein underwear and
Lejaby partially offset by Warner's/Olga/Body Nancy Ganz weakness. Sportswear
Group net revenues decreased $6.3 million, or 2.7%, to $230.1 million with
strong results from Chaps offset by weak results in Calvin Klein jeans. Swimwear
Group net revenues increased by $24.6 million, or 10.3%, to $262.1 million
reflecting strong Speedo results.

46

Intimate Apparel Group

Intimate Apparel Group net revenues are as follows:

Second Quarter

Intimate Apparel net revenues decreased $24.7 million, or 15.5%, to $134.8
million for the Second Quarter of Fiscal 2003, from $159.5 million for the
Second Quarter of Fiscal 2002. The absence of net revenues from discontinued and
sold units accounted for a $13.7 million, or 8.6%, decrease in net revenues for
the Second Quarter of Fiscal 2003 compared to the Second Quarter of Fiscal 2002.
Warner's/Olga/Body Nancy Ganz net revenues decreased $18.4 million, reflecting
slow sell through at retail, a less favorable reception of certain new products
at retail and the need to reduce an over-stock position at several key
retailers. Management is in the process of addressing product issues and
developing and repositioning the Warner's/Olga/Body Nancy Ganz brands. Net
revenues in Calvin Klein underwear increased 17.3% from $50.9 million for the
Second Quarter of Fiscal 2002 to $59.7 million for the Second Quarter of Fiscal
2003 primarily reflecting increased net revenues in Europe and Asia due to an
increased customer base and the positive effects of a stronger Euro. Lejaby'r'
net revenues decreased $1.1 million, or 4.3% primarily reflecting a soft retail
market in Germany partially offset by a stronger Euro. Revenues from sold or
discontinued business units decreased $13.7 million primarily as a result of the
decision to close all domestic outlet retail stores.

First Half

Intimate Apparel net revenues decreased $32.0 million, or 10.1%, to $285.9
million for the First Half of Fiscal 2003, from $317.9 million for the First
Half of Fiscal 2002. The absence of net revenues from discontinued and sold
units accounted for a $32.8 million, or 10.3%, decrease in net revenues for the
First Half of Fiscal 2003 compared to the First Half of Fiscal 2002.
Warner's/Olga/Body Nancy Ganz net revenues decreased $28.6 million, or 23.1%,
reflecting slow sell through at retail, a less favorable reception of certain
new products and the reduction of over-stock positions at several key retailers.
As noted above, management is in the process of addressing product issues and
developing and repositioning its Warner's/Olga/Body Nancy Ganz brands. Net
revenues in Calvin Klein underwear increased 23.4% from $103.7 million for the
First Half of Fiscal 2002 to $127.9 million for the First Half of Fiscal 2003
reflecting increases in the United States, Europe and Asia due to improved
sell-through at retail, particularly in the women's business and the effect of a
strong Euro. Lejaby'r' net revenues increased $6.3 million, or 12.4%, reflecting
good performance in a difficult market coupled with the positive effects of a
stronger Euro.

47

Sportswear Group

Sportswear Group net revenues are as follows:

Second Quarter

Sportswear net revenues decreased by $16.2 million, or 15.1%, to $91.0
million for the First Half of Fiscal 2003, from $107.2 million for the
First Half of Fiscal 2002 reflecting strength in the Chaps business offset
by softness in the Calvin Klein jeans and A.B.S. by Allen Schwartz businesses
and the wind down of the Calvin Klein accessories business. A portion of the
decrease relates to certain programs in Calvin Klein jeans that were shipped in
the first quarter of fiscal 2003 while the corresponding programs in fiscal 2002
were shipped in the second and third quarters. In addition, the soft retail
market has resulted in an increase in markdowns and allowances for the Calvin
Klein jeans business. The increase in Chaps'r' net revenues reflects better sell
through at retail, despite an overall softness in the men's sportswear business,
as well as the effect of a stronger Canadian dollar. Mass sportswear licensing
net revenues increased 10.2% due to better sell through at Wal-Mart during the
Second Quarter of Fiscal 2003.

First Half

Sportswear net revenues decreased by $6.3 million, or 2.7%, to $230.1
million for the First Half of Fiscal 2003, from $236.4 million for the
First Half of Fiscal 2002. The increase in Chaps'r' net revenues reflects
better sell through at retail, despite an overall softness in the men's
sportswear business, as well as the effect of a stronger Canadian dollar. The
decrease in Calvin Klein jeans net revenues reflects a weak status denim market,
particularly in the juniors category, and lower sell through of Calvin Klein
jeans at retail. The weak retail environment has also contributed to higher than
expected customer requests for markdowns and allowances which have negatively
affected Calvin Klein jeans net revenues in the First Half of Fiscal 2003.

Swimwear Group

Swimwear Group net revenues are as follows:

Second Quarter

Swimwear net revenues decreased $5.0 million, or 4.3%, to $110.0 million for
the Second Quarter of Fiscal 2003, from $115.0 million for the Second Quarter of
Fiscal 2002. The decrease in swimwear net revenues in the Second Quarter of
Fiscal 2003 reflects earlier shipment of orders in

48

fiscal 2003 compared to fiscal 2002 and the decrease in retail net revenues due
to the closing of 50 stores in fiscal 2002 and a decrease in same store sales of
10.1%.

First Half

Swimwear net revenues increased $24.6 million, or 10.3%, to $262.1 million
for the First Half of Fiscal 2003, from $237.5 million for the First Half of
Fiscal 2002. The increase in net revenues reflects a larger order of backlog
entering the Spring 2003 season, new product lines, an expanded customer base
and lower return levels. Speedo'r' net revenues increased $30.5 million, or
23.0%, to $163.0 million for the First Half of Fiscal 2003 compared to $132.5
million for the First Half of Fiscal 2002. The increase in Speedo'r' net
revenues primarily reflects increased sales of Speedo fitness swim products and
accessories to department stores, clubs and team dealers. In addition, Designer
swimwear net revenues increased $2.5 million, or 2.9%, to $87.2 million in the
First Half of Fiscal 2003 compared to $84.7 million in the First Half of Fiscal
2002 due to favorable reception at retail, primarily of the Anne Cole'r' line.
Speedo Authentic Fitness'r' retail net revenues decreased $8.4 million, or
41.3%, to $11.9 million for the First Half of Fiscal 2003 compared to $20.3
million for the First Half of Fiscal 2002 reflecting the closed stores noted
above and a decrease of 16.7% in same store sales due to poor weather conditions
and a depressed retail market during the First Half of Fiscal 2003.

GROSS PROFIT

Second Quarter

Gross profit decreased $19.4 million, or 16.8%, to $96.4 million (28.7% of
net revenues) for the Second Quarter of Fiscal 2003 from $115.9 million (30.3%
of net revenues) for the Second Quarter of Fiscal 2002. Gross profit for the
Second Quarter of Fiscal 2002 was reduced by $10.4 million (2.7% of net
revenues) of distribution and other product related expenses which items are
expensed in selling, general and administrative expenses commencing with the
adoption of fresh start reporting on February 4, 2003. The decrease in gross
profit primarily reflects lower net revenues. The decrease in gross profit as
a percentage of net revenues reflects the lower net revenues, an unfavorable
regular to off-price sales mix primarily in the Calvin Klein jeans business and
manufacturing and distribution inefficiencies associated with lower volume.

First Half

Gross profit increased $29.3 million, or 12.5%, to $263.6 million (33.9% of
net revenues) for the First Half of Fiscal 2003 from $234.3 million (29.6% of
net revenues) for the First Half of Fiscal 2002. Gross profit for the First Half
of Fiscal 2002 was reduced by $23.3 million (2.9% of net revenues) of
distribution and other product related expenses, which items are expensed in
selling, general and administrative expenses commencing with the adoption of
fresh start reporting on February 4, 2003. The remaining increase in gross
profit reflects an improved regular to off-price sales mix, improved sales
allowance and markdown experience, improved inventory and accounts receivable
management and more efficient product sourcing.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Second Quarter

Selling, general and administrative expenses for the Second Quarter of
Fiscal 2003 decreased $5.8 million, or 5.7%, to $94.9 million (28.2% of net
revenues) compared to $100.6 million (26.3% of net revenues) for the Second
Quarter of Fiscal 2002. Selling, general and administrative expenses for the
Second Quarter of Fiscal 2002 did not include $10.4 million (2.7% of net
revenues) of distribution and other product related expenses, which items are
expensed in selling, general and administrative expenses commencing with the
adoption of fresh start reporting on February 4,

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2003. Depreciation and amortization expense decreased approximately $5.0 million
in the Second Quarter of Fiscal 2003 compared to the Second Quarter of Fiscal
2002, reflecting the adjustments in the carrying value of the Company's fixed
assets to fair value in connection with the adoption of fresh start reporting on
February 4, 2003. The Second Quarter of Fiscal 2002 includes $4.1 million of
lease expense for certain operating leases that were settled in connection with
the Company's bankruptcy. There is no comparable expense in the Second Quarter
of Fiscal 2003. In addition, legal and professional fees and certain employee
related costs relating to the Chapter 11 Cases of $2.7 million were recorded in
selling, general and administrative expenses in the Second Quarter of Fiscal
2003. Comparable expenses in the Second Quarter of Fiscal 2002 were included in
reorganization items.

First Half

Selling, general and administrative expenses for the First Half of Fiscal
2003 increased $1.3 million, or 0.6%, to $204.0 million (26.2% of net revenues)
compared to $202.7 million (25.6% of net revenues) for the First Half of Fiscal
2002. Selling, general and administrative expenses in the First Half of Fiscal
2002 did not include $23.3 million (2.9% of net revenues) of distribution and
other product related expenses, which items are expensed in selling, general
and administrative expenses commencing with the adoption of fresh start
reporting on February 4, 2003. Depreciation and amortization expense decreased
approximately $8.7 million in the First Half of Fiscal 2003 compared to the
First Half of Fiscal 2002 reflecting the adjustments in the carrying value of
the Company's fixed assets to fair value in connection with the adoption of
fresh start reporting on February 4, 2003. The First Half of Fiscal 2002
includes $8.2 million of lease expense for certain operating leases that were
settled in connection with the Company's bankruptcy. There is no comparable
expense in the First Half of Fiscal 2003. In addition, legal and professional
fees and certain employee related costs relating to the Chapter 11 Cases of $4.0
million were recorded in selling, general and administrative expenses in the
First Half of Fiscal 2003. Comparable expenses in the First Half of Fiscal 2002
were included in reorganization items.

AMORTIZATION OF SALES ORDER BACKLOG

Amortization of sales order backlog of $6.3 million and $10.5 million for
the Second Quarter of Fiscal 2003 and First Half of Fiscal 2003, respectively,
represents amortization expense of the appraised value of the Company's existing
order backlog at February 4, 2003. The unamortized balance of $2.1 million will
be amortized during the third quarter of fiscal 2003.

REORGANIZATION ITEMS

First Half

Reorganization items were $29.9 million in the First Half of Fiscal 2003
reflecting the final settlement of bankruptcy claims and lease terminations of
$10.1 million, employee retention and severance claims of $14.5 million, legal
and professional fees of $4.5 million and other costs of $0.8 million.
Reorganization items for the First Half of Fiscal 2002 were $58.1 million
reflecting the GECC lease settlement of $22.9 million, losses and write downs
related to sales of fixed assets and sales of business units of $9.9 million
and employee retention and severance of $10.4 million and legal and professional
fees of $14.9 million.

RESTRUCTURING ITEMS

Included in restructuring items for the Second Quarter of Fiscal 2003 are
contract termination costs of $2.5 million and facility shutdown costs of $3.6
million relating to the closing of two sewing plants in Puerto Cortes, Honduras
and Los Angeles, CA, the closing of a cutting and warehousing facility in
Thomasville, GA and the consolidation of a distribution facility in Secaucus,
NJ.

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OPERATING INCOME (LOSS)

The following table presents operating income by group, including
depreciation and amortization expense in each group.

Second Quarter

Operating loss decreased $16.5 million to $10.8 million for the Second
Quarter of Fiscal 2003 compared to an operating loss of $27.3 million for the
Second Quarter of Fiscal 2002. The decrease was primarily due to a decrease of
$36.5 million in reorganization and restructuring items from $42.6 million in
the Second Quarter of Fiscal 2002 to $6.1 million in the Second Quarter of
Fiscal 2003. The decrease in reorganization and restructuring items was offset
by a decrease in operating income by the Company's business groups of $10.1
million and the amortization of sales order backlog of $6.3 million. The
increase in corporate expenses reflects the recognition of stock compensation
expense of $2.2 million and legal and professional fees and certain employee
costs relating to the Chapter 11 Cases of $2.7 million. Comparable expenses in
the Second Quarter of Fiscal 2002 were included in reorganization items.

First Half

Operating income increased $39.5 million to $13.0 million for the First Half
of Fiscal 2003 compared to an operating loss of $26.5 million for the First Half
of Fiscal 2002 primarily reflecting increased operating income by the Company's
business groups of $32.1 million and a decrease in reorganization and
restructuring items of $22.0 million. Corporate expenses increased $3.8 million
reflecting the recognition of stock compensation expense of $2.5 million and
legal and professional fees and certain employee costs relating to the Chapter
11 Cases of $4.0 million. Comparable expenses in the First Half of Fiscal 2002
were included in reorganization items.

Intimate Apparel Group

Intimate Apparel Group operating income is as follows:

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Second Quarter

The Intimate Apparel Group's operating income decreased $4.2 million, or
26.1%, to $11.9 million (8.8% of net revenues) for the Second Quarter of Fiscal
2003 compared to operating income of $16.1 million (10.1% of net revenues) for
the Second Quarter of Fiscal 2002. The decrease in operating income and
operating income as a percentage of net revenues is primarily attributable to
the decreased revenues in Warner's/Olga/Body Nancy Ganz which resulted in
unfavorable manufacturing variances due to lower production levels.

First Half

The Intimate Apparel Group's operating income increased $10.1 million to
$31.0 million (10.8% of net revenues) for the First Half of Fiscal 2003 compared
to operating income of $20.9 million (6.6% of net revenues) for the First Half
of Fiscal 2002. Operating losses from discontinued and sold units were $0.4
million for the First Half of Fiscal 2003 compared to $3.8 million for the First
Half of Fiscal 2002. The improvement in operating margin is attributable to
increased revenues, primarily in Calvin Klein underwear and Lejaby partially
offset by lower operating margins in Warner's/Olga/Body Nancy Ganz.

Sportswear Group

Sportswear Group operating income is as follows:

Second Quarter

The Sportswear Group's operating income decreased $6.8 million, or 219.1%,
to an operating loss of $3.7 million (4.1% of net revenues) for the Second
Quarter of Fiscal 2003 compared to operating income of $3.1 million (2.9% of net
revenues) for the Second Quarter of Fiscal 2002. The decrease in Calvin Klein
jeans operating income primarily reflects decreased revenues and lower gross
margins. The lower operating margin reflects an unfavorable mix of off-price to
regular sales and the timing of the shipments of certain programs in Calvin
Klein jeans that were shipped in the first quarter of fiscal 2003 while the
corresponding programs in fiscal 2002 were shipped in the second and third
quarters. A.B.S by Allen Schwartz experienced lower revenues and operating
income as a result of a weak retail market.

First Half

The Sportswear Group's operating income increased $3.0 million, or 22.9%, to
$16.2 million (7.0% of net revenues) for the First Half of Fiscal 2003 compared
to operating income of $13.2 million (5.6% of net revenues) for the First Half
of Fiscal 2002. The increase in Calvin Klein jeans operating margin reflects
increased gross margins as a result of lower product costs of certain jeans
which were manufactured domestically for the First Half of Fiscal 2002 and
which, for the second half of fiscal 2002 and First Half of Fiscal 2003, were
sourced at lower costs from a third party. In addition, operating income in
Calvin Klein jeans Canada increased due to an improved sales mix, lower returns
and the effect of a stronger Canadian dollar.

52

Swimwear Group

Swimwear Group operating income is as follows:

Second Quarter

The Swimwear Group's operating income increased $0.9 million, or 6.9%, to
$14.3 million (13.0% of net revenues) for the Second Quarter of Fiscal 2003
compared to an operating income of $13.4 million (11.6% of net revenues) for the
Second Quarter of Fiscal 2002. The Swimwear Group's operating income for the
Second Quarter of Fiscal 2002 includes approximately $2.1 million of bad debt
expense associated with certain Speedo team dealers.

First Half

The Swimwear Group's operating income increased $19.1 million, or 56.6%, to
$52.7 million (20.1% of net revenues) for the First Half of Fiscal 2003 compared
to an operating income of $33.6 million (14.2% of net revenues) for the First
Half of Fiscal 2002. The increase in the Swimwear Group's operating income for
the First Half of Fiscal 2003 compared to the First Half of Fiscal 2002 reflects
increased operating margins in the Speedo business. Speedo increased operating
margin reflects a more efficient manufacturing operation and lower returns and
allowances.

REORGANIZATION ITEMS -- GAIN ON CANCELLATION OF DEBT AND FRESH START ADJUSTMENTS

The First Half of Fiscal 2003 includes a gain of $1,692.7 million related to
the cancellation of the Company's pre-petition debt and other liabilities
subject to compromise net of the fair value of cash and securities distributed
to the pre-petition creditors. Fresh start adjustments of $765.7 million
represent adjustments to the carrying amount of the Company's assets to fair
value in accordance with the provisions of American Institute of Certified
Public Accountants Statement of Position No. 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code ('SOP 90-7'). See Note 5 of
Notes to the Consolidated Condensed Financial Statements.

OTHER INCOME AND EXPENSE

Other income and expense for the Second Quarter of Fiscal 2003 reflects
translation gains on the current portion of amounts receivable from the
Company's European and Canadian subsidiaries of $1.4 million. For the First Half
of Fiscal 2003 the translation gains are partially offset by losses on the sale
of marketable securities received on certain bankruptcy settlements of $0.4
million.

INTEREST EXPENSE

During the term of the Chapter 11 Cases, the Company did not accrue interest
on its pre-petition debt and the only interest expense the Company incurred
related to the Company's Debtor-in-Possession Financing Agreement, as amended
and extended (the 'Amended DIP'), and certain foreign debt agreements that were
repaid in connection with the settlement of the Chapter 11 Cases. As a result of
the Company's emergence from bankruptcy and the issuance of the Second Lien
Notes (replaced by the 8 7/8% Senior Notes due 2013 (the 'Senior Notes') in

53

June 2003) the Company's interest expense for fiscal 2003 will be higher than
the amounts recorded in fiscal 2002.

Second Quarter

Interest expense increased $2.3 million, or 75.2%, to $5.4 million in the
Second Quarter of Fiscal 2003 compared with $3.1 million for the Second Quarter
of Fiscal 2002. Interest expense for the Second Quarter of Fiscal 2003 includes
interest on the Second Lien Notes of $3.5 million, interest on the $275 million
Senior Secured Revolving Credit Facility (the 'Exit Financing Facility') of
approximately $0.7 million, interest on the Senior Notes of $1.2 million and
amortization of deferred financing costs of $0.4 million partially offset by
interest income of $0.4 million. Amortization of deferred financing costs
totaled $2.5 million in the Second Quarter of Fiscal 2002 related to fees and
charges on the Amended DIP. In addition, interest expense in the Second Quarter
of Fiscal 2002 included approximately $2.9 million of interest income related
to the investment of cash balances held as collateral against letters of credit
and interest earned on certain income tax refunds received in June 2002.
Interest on foreign debt agreements was approximately $1.6 million in the
Second Quarter of Fiscal 2002.

First Half

Interest expense increased $1.7 million, or 16.7%, to $11.7 million for the
First Half of Fiscal 2003 compared with $10.1 million for the First Half of
Fiscal 2002. Interest expense for the First Half of Fiscal 2003 included
interest on foreign debt for one month of $1.1 million, interest on the Second
Lien Notes of $6.7 million, interest on the Exit Financing Facility of $1.8
million, interest on the Senior Notes of approximately $1.2 million and
amortization of deferred financing fees of $1.0 partially offset by interest
income of approximately $0.1 million. Amortization of deferred financing costs
totaled $4.7 million in the First Half of Fiscal 2002 related to fees and
charges on the Amended DIP. Interest on foreign debt agreements was
approximately $3.2 million in the First Half of Fiscal 2002. Accrued interest
related to the foreign debt agreements was included as part of liabilities
subject to compromise at February 4, 2003 and was paid on the emergence date
in accordance with the provisions of the Plan. See Notes 1 and 5 of Notes to
Consolidated Condensed Financial Statements.

INCOME TAXES

Second Quarter

The income tax benefit of $6.4 million in the Second Quarter of Fiscal 2003
reflects a benefit of $9.7 million on domestic losses offset by an income tax
expense of $3.3 million on foreign earnings as compared with a provision for
income taxes of $1.6 million on foreign earnings during the Second Quarter of
Fiscal 2002. During the Second Quarter of Fiscal 2003, the Company increased its
valuation allowance and decreased its deferred tax asset to an amount that will
more likely than not be realized. Both the increase in the valuation allowance
and the decrease in the deferred tax asset have been recorded against goodwill.
Similar to the Second Quarter of Fiscal 2002, the Company has not provided any
tax benefit for certain foreign losses incurred during the Second Quarter of
Fiscal 2003 where it is more likely than not that the Company will not realize
the income tax benefit for these losses.

First Half

The provision for income taxes for the First Half of Fiscal 2003 of $87.9
million reflects accrued income taxes of $2.8 million on domestic earnings and
$7.5 million on foreign earnings, as well as deferred income taxes of $77.6
million related to the increase in asset values recorded as part of the
Company's adoption of fresh start reporting. The Company recorded a valuation
allowance against the deferred tax assets created in the First Half of Fiscal
2003 as a result of the fresh start adjustments, as well as against certain
foreign net operating losses, to the amount that

54

will more likely than not be realized. The provision for income taxes for the
First Half of Fiscal 2002 reflects accrued income taxes of $5.5 million on
foreign earnings and an increase in the Company's valuation allowance of $46.0
million associated with impairment losses recorded by the Company in connection
with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets
('SFAS 142').

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

As of January 5, 2002, the Company had goodwill and other indefinite lived
intangible assets net of accumulated amortization of approximately $940.1
million. The Company adopted SFAS 142 effective January 6, 2002. Under the
provisions of SFAS 142, goodwill is deemed impaired if the net book value
of a business-reporting unit exceeds the fair value of that business-reporting
unit. Intangible assets may be deemed impaired if the carrying amount exceeds
the fair value of the assets. The Company engaged a third party appraisal firm
to assist in its determination of its business enterprise value ('BEV') in
connection with the preparation of the Plan. The Company allocated the appraised
BEV to its various reporting units and determined that the value of certain of
the Company's indefinite lived intangible assets and goodwill was impaired. As
a result, the Company recorded a charge of $801.6 million, net of income tax
benefit of $53.5 million, as a cumulative effect of a change in accounting from
the adoption of SFAS 142 on January 6, 2002. The income tax benefit of $53.5
million includes a tax benefit of $81.7 million relating to tax deductible
goodwill of $206.8 million offset by an increase in the valuation allowance of
$28.2 million on the Company's deferred tax asset resulting from the adoption of
SFAS 142 on January 6, 2002.

CAPITAL RESOURCES AND LIQUIDITY

FINANCING ARRANGEMENTS

On the Effective Date, the Company entered into the $275.0 million Exit
Financing Facility. The Exit Financing Facility provides for a four-year,
non-amortizing revolving credit facility. The Exit Financing Facility includes
provisions that allow the Company to increase the maximum available borrowing
from $275.0 million to $325.0 million, subject to certain conditions (including
obtaining the agreement of existing or new lenders to commit to lend the
additional amount). Borrowings under the Exit Financing Facility bear interest
at Citibank N.A.'s base rate plus 1.50% (5.50% at July 5, 2003) or at the London
Interbank Offered Rate ('LIBOR') plus 2.50% (approximately 3.6% at July 5,
2003). Pursuant to the terms of the Exit Financing Facility, the interest rate
the Company will pay on its outstanding loans will decrease by as much as 0.5%
in the event the Company achieves certain defined ratios. The Exit Financing
Facility contains financial covenants that, among other things, require the
Company to maintain a fixed charge coverage ratio above a minimum level, a
leverage ratio below a maximum level and to limit the amount of the Company's
capital expenditures. In addition, the Exit Financing Facility contains certain
covenants that, among other things, limit investments and asset sales, prohibit
the payment of dividends (subject to limited exceptions) and prohibit the
Company from incurring material additional indebtedness. As of July 5, 2003, the
Company was in compliance with the covenants of the Exit Financing Facility.
Initial borrowings under the Exit Financing Facility on the Effective Date were
$39.2 million. The Exit Financing Facility is guaranteed by Warnaco Group and
substantially all of the domestic subsidiaries of Warnaco Inc. ('Warnaco') and
the obligations under such guarantee, together with the Company's obligations
under the Exit Financing Facility, are secured by a lien on substantially all of
the domestic assets of the Company and its domestic subsidiaries. As of July 5,
2003 the Company had repaid all amounts owing under the Exit Financing Facility
and had approximately $51.1 million of cash available as collateral against
outstanding letters of credit of $56.2 million. At July 5, 2003, the Company had
$150.8 million of credit available under the Exit Financing Facility.

55

SECOND LIEN NOTES

In accordance with the Plan, on the Effective Date, the Company issued
$200.9 million Second Lien Notes to certain pre-petition creditors and others in
a transaction exempt from the registration requirements of the Securities Act,
pursuant to Section 1145(a) of the Bankruptcy Code. The Second Lien Notes were
scheduled to mature on February 4, 2008, subject to, in certain instances,
earlier repayment in whole or in part. The Second Lien Notes bore an annual
interest rate (9.5% at July 5, 2003) which was the greater of (i) 9.5% plus a
margin (initially 0%, and beginning on August 4, 2003, 0.5% would have been
added to the margin every six months); and (ii) LIBOR plus 5.0% plus a margin
(initially 0%, and beginning on August 4, 2003, 0.5% would have been added to
the margin every six months). The indenture pursuant to which the Second Lien
Notes were issued contained certain covenants that, among other things, limited
investments and asset sales, and prohibited the Company from paying dividends
(subject to limited exceptions) and incurring material additional indebtedness.
The Second Lien Notes were guaranteed by most of the Company's domestic
subsidiaries and the obligations under such guarantee, together with the
Company's obligations under the Second Lien Notes, were secured by a second
priority lien on substantially the same assets which secured the Exit Financing
Facility. The Second Lien Notes were payable in equal annual installments of
$40.2 million beginning in April 2004 through April 2008. Second Lien Note
principal payments could only be made if the Company achieved a defined fixed
charge coverage ratio and had additional borrowing availability, after the
principal payment, of $75 million or more under the Exit Financing Facility.

All outstanding principal and accrued interest on the Second Lien Notes of
$202.9 million was repaid with the proceeds of the Company's offering, on
June 12, 2003, of the $210,0 million Senior Notes.

SENIOR NOTES

On June 12, 2003 Warnaco completed the sale of $210.0 million Senior Notes
at par. The Senior Notes mature on June 15, 2013. The Senior Notes bear interest
at 8 7/8% payable semi-annually beginning December 15, 2013. The Senior Notes
are unconditionally guaranteed, jointly and severally, by Warnaco Group and
substantially all of Warnaco's domestic subsidiaries. The Senior Notes are
effectively subordinate in right of payment to existing and future secured debt
(including the Exit Financing Facility) and to the obligations (including trade
accounts payable) of the subsidiaries that are not guarantors of the Senior
Notes. The guarantees of each guarantor are effectively subordinate to that
guarantor's existing and future secured debt (including guarantees of the Exit
Financing Facility) to the extent of the value of the assets securing that debt.
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's subsidiaries to pay
dividends or make other distributions to Warnaco or to Warnaco Group, 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
covenants of the Senior Notes at July 5, 2003. Redemption of the Senior Notes
prior to their maturity is subject to premiums as set forth in the indenture.
Proceeds from the sale of the Senior Notes were used to repay the outstanding
principal balance on the Second Lien Notes of $200.9 million and accrued
interest thereon of $2.0 million. The proceeds were also used to pay
underwriting fees, legal and professional fees and other expenses associated
with the offering of approximately $7.1 million. In connection with the offering
of the Senior Notes, the Company entered into a registration rights agreement
with the initial purchasers of the Senior Notes. The registration rights
agreement grants the holders of the Senior Notes certain exchange and
registration rights that required the Company to file a registration statement
with the SEC within 60 days after the issuance of the Senior Notes. If, within
the time periods specified in the

56

registration rights agreement, the Company is unable to complete a registration
and exchange of the Senior Notes or, alternatively, cause to be declared
effective a shelf registration statement for the resale of the Senior Notes, the
Company will be required to pay special interest to the holders of the Senior
Notes. Special interest will accrue at a rate of 0.25% per annum during the 90
day period immediately following the occurrence of a registration default and
will increase by 0.25% per annum at the end of each subsequent 90 day period,
but in no event shall exceed 1.0% per annum. The Company filed the required
registration statement on August 8, 2003. No principal payments prior to the
maturity date are required.

LIQUIDITY

The Company emerged from bankruptcy on February 4, 2003. Initial borrowings
under the Exit Financing Facility were $39.2 million on February 4, 2003 all of
which had been repaid by July 5, 2003. As of July 5, 2003 the Company had
approximately $51.1 million of cash available to collateralize $56.2 million of
letters of credit outstanding.

For the period February 4, 2003 (the date the Company emerged from
bankruptcy) to July 5, 2003, debt decreased $33.7 million to $212.8 million from
$246.5 million and cash increased $45.2 million to $65.9 million from $20.7
million. The decrease in debt and increase in cash reflects strong cash flow
from operations in the First Half of Fiscal 2003.

At July 5, 2003, the Company had positive working capital of $371.9 million.
The Company believes that the credit available under its Exit Financing Facility
combined with cash flows from operations will be sufficient to fund the
Company's operating and capital expenditures requirements for at least the next
two to four years. Should the Company require additional sources of capital it
will consider reducing its capital expenditures, seeking additional financing or
selling assets to meet such requirements.

CASH FLOWS

The following discussion of cash flows includes cash flows for the period
January 5, 2003 to February 4, 2003 combined with cash flows for the period
February 5, 2003 to July 5, 2003 in order to provide comparison to the First
Half of Fiscal 2002. The following table summarizes the cash flows from
operating, investing and financing activities of the Company for the First Half
of Fiscal 2003 and Fiscal 2002:

For the First Half of Fiscal 2003 cash provided by operating activities was
$64.3 million compared to $218.5 million in the First Half of Fiscal 2002. Cash
provided by operating activities for the First Half of Fiscal 2003 reflects
positive net income, improvements in accounts receivable and inventory
management partially offset by the seasonal reduction in accounts payable
primarily related to the purchase of swimwear inventory. Cash provided by
operating activities in the First Half of Fiscal 2002 reflects the clean-up of
excess and obsolete inventory and the collection of old accounts receivable
accomplished as part of the Company's turnaround plan in fiscal 2002 as well as
the sale of inventory related to the closing of the Company's domestic outlet
retail stores. For the First Half of Fiscal 2003, cash used in investing
activities was $7.0 million compared to cash provided from investing activities
of $22.8 million in the First Half of Fiscal 2002. During the First

57

Half of Fiscal 2003 cash used in investing activities primarily reflects the
purchase of property, plant and equipment. Cash provided by investing activities
during the First Half of Fiscal 2002 includes proceeds from the sales GJM and
Penhaligon's business units of $20.4 million and proceeds from the sale of other
assets of $7.6 million partially offset by capital expenditures of $5.2 million.

Cash used in financing activities for both the First Half of Fiscal 2002 and
Fiscal 2003 primarily reflects the repayment of amounts outstanding on the
Company's revolving credit agreements. Financing activities for the First Half
of Fiscal 2003 includes the realization of proceeds of $210.0 million from the
issuance of the Senior Notes in June 2003 offset by the repayment of the
principal balance of the Second Lien Notes of $200.9 million, and the payment of
underwriting and professional fees associated with the issuance of the Senior
Notes of approximately $7.1 million. Cash used in financing activities for the
period January 5, 2003 to February 4, 2003 includes the payment of outstanding
amounts on certain foreign debt agreements of $106.1 million in connection with
the Company's emergence from bankruptcy on February 4, 2003 partially offset by
the initial borrowing of $39.2 million under the Exit Financing Facility.

NEW ACCOUNTING STANDARDS

In November 2002, the Financial Accounting Standards Board (the 'FASB')
issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others ('FIN
45'). This interpretation requires certain disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN 45 are effective for interim and annual periods beginning after
December 15, 2002. The initial recognition and initial measurement requirements
of FIN 45 are effective prospectively for guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have an effect on the
Company's consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities ('SFAS
133') and No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, establish accounting and reporting standards for derivative
instruments including derivatives embedded in other contracts (collectively
referred to as 'derivatives') and for hedging activities. SFAS 149 amends SFAS
133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. This Statement contains amendments relating to
FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in
Accounting Measurements, and FASB Statements No. 65, Accounting for Certain
Mortgage Banking Activities, No. 91 Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain
Required Disclosures about Financial Instruments for Certain Nonpublic Entities.
The provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 is not expected to have a material
effect on the Company's consolidated financial statements.

During May 2003, the FASB issued SFAS No. 150, 'Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity'
('SFAS 150'). SFAS 150 clarifies the accounting for certain financial
instruments that could previously be accounted for as equity. SFAS 150
requires those instruments be classified as liabilities in statements of
financial position and is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not
expect the adoption of SFAS 150 to have a material effect on the Company's
consolidated financial statements.

58

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This Quarterly Report may contain 'forward-looking statements' within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), that reflect, when made,
the Company's expectations or beliefs concerning future events that involve
risks and uncertainties, including general economic conditions affecting the
apparel industry, changing fashion trends, pricing pressures which may cause the
Company to lower its prices, increases in the prices of raw materials the
Company uses, changing international trade regulation and elimination of quotas
on imports of textiles and apparel, the Company's history of losses, the changes
in the Company's senior management team, the Company's ability to protect its
intellectual property rights, the Company's dependency on a limited number of
customers, the Company's dependency on the reputation of its brand names, the
Company's exposure to conditions in overseas markets, the competition in the
Company's markets, the Company's recent emergence from bankruptcy, the
comparability of financial statements for periods before and after the Company's
adoption of fresh start reporting; the Company's history of insufficient
disclosure controls and procedures and internal controls and restated financial
statements, the Company's future plans concerning guidance regarding its results
of operations, the effect of the SEC's investigation, the effect of local laws
and regulations, shortages of supply of sourced goods or interruptions in the
Company's manufacturing, the impact of SARS, the Company's level of debt, the
Company's ability to obtain additional financing, the restrictions on the
Company's operations imposed by the Exit Financing Facility and the indenture
governing the Senior Notes and the Company's ability to service its debt. All
statements other than statements of historical facts included in this Quarterly
Report, including, without limitation, the statements under Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. 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.
These forward-looking statements may contain the words 'believe,' 'anticipate,'
'expect,' 'estimate,' 'project,' 'will be,' 'will continue,' 'will likely
result,' or other similar words and phrases. Forward-looking statements and the
Company's plans and expectations are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
anticipated, and the Company's business in general is subject to certain risks
that could affect the value of its stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates. Prior to the Petition Date, the Company
selectively used financial instruments to manage these risks.

INTEREST RATE RISK

The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. As of July 5, 2003, the
Company did not have any borrowings outstanding under the Exit Financing
Facility, however if the initial borrowing of $39.2 million at February 4, 2003
had been outstanding for the entire Second Quarter and First Half of Fiscal
2003, a hypothetical 1% adverse change in interest rates as of February 4, 2003
(i.e., an increase from the Company's actual interest rate of 3.6% at July 5,
2003 to 4.6%) would have resulted in an increase of approximately $0.1 million
and $0.2 million in interest expense for the Second Quarter and First Half of
Fiscal 2003, respectively. A 1% change in interest rates would not have had any
effect on interest related to the Second Lien Notes or the Senior Notes as the
minimum interest rate on the Second Lien Notes was significantly higher than
current variable interest rate plus the applicable margin and the interest rate
on the Senior Notes is fixed. See Note 15 of Notes to Consolidated Condensed
Financial Statements.

59

FOREIGN EXCHANGE RISK

The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
British pound and the Euro. Prior to the Petition Date, the Company entered into
foreign currency forward and option contracts to mitigate the risk of doing
business in foreign currencies. As of July 5, 2003, the Company had no such
financial instruments outstanding.

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 report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.

(b) Internal Control Over Financial Reporting. There have not been any
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
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

The Company's independent auditors, Deloitte & Touche LLP ('Deloitte') had
advised the Company's management and its Audit Committee of certain matters
noted in connection with its audits of the Company's consolidated financial
statements for fiscal 2000 and fiscal 2001 which Deloitte considered material
weaknesses constituting reportable conditions under standards established by the
American Institute of Certified Public Accountants.

Beginning in fiscal 2001 and continuing through fiscal 2002, the Company
took corrective actions including replacing certain financial staff, hiring
additional financial staff and instituting monthly and quarterly reviews to
ensure timely and consistent application of accounting principles and procedures
and transaction review and approval procedures.

In connection with the audit of the Company's consolidated financial
statements for fiscal 2002, Deloitte did not advise management or the Audit
Committee of any material weaknesses or reportable conditions related to the
Company's internal controls or its operations.

60

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 20 -- 'Legal Matters.'

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The information required by this Item 2 of Part II is incorporated herein by
reference to the discussion of 'Chapter 11 Cases' in Part I, Item 1. Financial
Statements Note 1 -- 'Nature of Operations and Basis of Presentation' as well as
Note 15 -- 'Debt.'

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 28, 2003. There
were present in person or by proxy, holders of 37,777,266 shares of Common
Stock, or 83.95% of all votes eligible for the meeting.

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

The proposal to approve the Company's 2003 Stock Incentive Plan was
approved. The votes were 25,535,447 For; 808,128 Against; 586,505 Abstentions;
and 10,847,186 Broker Non-Votes.

The proposal to approve the Company's 2003 Incentive Compensation Plan was
approved. The votes were 36,474,267 For; 717,456 Against; and 585,543
Abstentions.

The proposal for Deloitte & Touche LLP to serve as the Company's independent
auditors until the next stockholders' meeting was ratified. The votes were
37,776,456 For; 275 Against; and 535 Abstentions.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

- ---------
* Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.

(b) Reports on Form 8-K

On April 7, 2003, the Company filed a Current Report on Form 8-K dated April
7, 2003. The Report on Form 8-K reported at Item 12 that the Company issued a
press release announcing its financial results for the fiscal year ended January
4, 2003.

On April 14, 2003, the Company filed a Current Report on Form 8-K dated
April 14, 2003. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for the period commencing December 1,
2002 and ending January 4, 2003.

On April 15, 2003, the Company filed a Current Report on Form 8-K dated
April 15, 2003. The Report on Form 8-K reported at Item 9 that the Company
issued a press release announcing that it had named Joe Gromek President and
Chief Executive Officer, effective April 15, 2003.

On April 28, 2003, the Company filed a Current Report on Form 8-K dated
April 28, 2003. The Report on Form 8-K reported at Item 5 that the Company
issued a press release announcing the election of David A. Bell and Charles R.
Perrin to its board of directors.

On May 7, 2003, the Company filed a Current Report on Form 8-K dated May 7,
2003. The Form 8-K reported at Item 5 the Company's adoption of fresh start
reporting and included the Company's consolidated balance sheet as of February
4, 2003 and the Company's independent auditors' opinion with respect to the
Company's consolidated balance sheet.

On May 15, 2003, the Company filed a Current Report on Form 8-K dated May
15, 2003. The Report on Form 8-K reported at Item 12 that the Company issued a
press release announcing its financial results for the first quarter ended April
5, 2003.

On May 27, 2003, the Company filed a Current Report on Form 8-K dated May
27, 2003. The Form 8-K reported at Item 5 that the Company issued a press
release announcing a proposed financing.

On May 29, 2003, the Company filed a Current Report on Form 8-K dated May
29, 2003. The Form 8-K reported at Item 9 that the Company furnished certain
financial and other information.

On June 2, 2003, the Company filed a Current Report on Form 8-K dated June
2, 2003. The Report on Form 8-K reported at Item 9 and Item 12 that the Company
furnished certain financial and other information.

On June 6, 2003, the Company filed a Current Report on Form 8-K dated June
6, 2003. The Form 8-K reported at Item 5 that the Company issued a press release
announcing that it has priced its offering of the Senior Notes.

On June 9, 2003, the Company filed a Current Report on Form 8-K dated June
9, 2003. The Report on Form 8-K reported at Item 5 that the Company issued a
press release announcing that it and Calvin Klein, Inc., a subsidiary of
Phillips-Van Heusen Corporation, amended certain existing agreements between the
two parties and agreed to enter into a new swimwear licensing agreement.

On June 11, 2003, the Company filed a Current Report on Form 8-K dated June
11, 2003. The Report on Form 8-K reported at Item 9 and Item 12 that the Company
furnished certain financial and other information which supplemented the
information set forth in the Company's Forms 8-K filed on May 29, 2003 and June
2, 2003.

63

On June 13, 2003, the Company filed a Current Report on Form 8-K dated June
12, 2003. The Report on Form 8-K reported at Item 5 that the Company issued a
press release announcing the closing of its offering of Senior Notes.

On July 8, 2003, the Company filed a Current Report on Form 8-K dated July
8, 2003. The Report on Form 8-K reported at Item 5 that the Company issued a
press release announcing that it had elected Sheila A. Hopkins to its Board of
Directors, effective July 7, 2003.

On August 11, 2003, the Company filed a Current Report on Form 8-K dated
August 11, 2003. The Report on Form 8-K reported at Item 12 that the Company
issued a press release announcing first half and second quarter results for the
period ended July 5, 2003.

64

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 18, 2003 /s/ JOSEPH R. GROMEK
.............................................
JOSEPH R. GROMEK
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: August 18, 2003 /s/ JAMES P. FOGARTY
.............................................
JAMES P. FOGARTY
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

65

EXHIBIT INDEX

- ---------
* Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.

67

STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as.............................. 'TM'
The registered trademark symbol shall be expressed as................... 'r'
The section symbol shall be expressed as................................ 'SS'
The dagger symbol shall be expressed as................................. 'D'