The following discussion provides information and analysis of our results of operations for the 14 week periods ended April 4, 2009 (hereinafter referred to as the "first fiscal quarter of 2009") and April 5, 2008 (hereinafter referred to as the "first fiscal quarter of 2008") and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.

Executive Overview

We design, contract for the manufacture of and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores and several e-commerce web sites. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.

During 2009 to date, the following significant events took place:

º as a result of the amendments to our revolving credit facility expiring on May 16, 2010, Standard & Poor's downgraded our senior unsecured debt ratings from BB- to B+ on January 6, 2009, and Moody's downgraded our senior unsecured debt ratings from Ba2 to Ba3 on January 8, 2009;
º on April 1, 2009, we commenced a cash tender offer to purchase any and all of our outstanding 4.250% Senior Notes due 2009 (the "2009 Notes"), as well as a consent solicitation to amend the indenture governing our 2009 Notes, our 5.125% Senior Notes due 2014 and our 6.125% Senior Notes due 2034;
º we have decided to close approximately 225 underperforming retail stores by December 31, 2010;
º on April 2, 2009, we announced the launch of our www.anneklein.com e-commerce web site; and
º on April 16, 2009, we announced the launch of the Rachel Rachel Roy collection of affordable contemporary sportswear, footwear and accessories, that will debut in August 2009 exclusively at select Macy's Inc. stores nationwide and on www.macys.com.

We began 2009 with 1,017 retail locations. During the fiscal quarter ended April 4, 2009, we decided to close approximately 225 underperforming retail locations by the end of 2010, of which 17 closed during the quarter. We accrued $3.1 million of termination benefits and associated employee costs for approximately 1,050 employees, including both store employees and administrative support personnel. In connection with our decision to close these stores, we reviewed them for impairments in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As a result of this review, we recorded $20.4 million of impairment losses on leasehold improvements and furniture and fixtures located in the stores to be closed. These costs are reported as selling, general and administrative expenses in the retail segment.

Critical Accounting Policies

Several of our accounting policies involve significant or complex judgements and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of both our goodwill and intangible assets with indefinite lives. Estimates related to accounts receivable affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to inventory and goodwill affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to intangible assets with indefinite lives affect our licensing, other and eliminations segment.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions given to our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.

We test our goodwill and our trademarks for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that would reduce the fair value of an asset below its carrying value. These tests utilize discounted cash flow models to estimate fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates, and material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trademark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv) projected long-term growth rates used in the derivation of terminal values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances. Upon our decision to close approximately 225 of our retail stores, we tested our retail segment goodwill and our trademarks for impairment. No impairment charges resulted from these tests.

Results of Operations

Statements of Operations Stated in Dollars and as a Percentage of Total Revenues

(In millions)                  Fiscal Quarter Ended
                        -----------------------------------
                         April 4, 2009      April 5, 2008
                        ----------------   ----------------
Net sales               $  879.4    98.7 % $  963.4    98.8 %
Licensing income            11.5     1.3       11.5     1.2
Other revenues               0.2     0.0        0.5     0.1
                        -- ----- - -----   -- ----- - -----
Total revenues             891.1   100.0      975.4   100.0
Cost of goods sold         597.8    67.1      654.7    67.1
                        -- ----- - -----   -- ----- - -----
Gross profit               293.3    32.9      320.7    32.9
Selling, general and
administrative expenses    279.6    31.4      280.8    28.8
                        -- ----- - -----   -- ----- - -----
Operating income            13.7     1.5       39.9     4.1
Net interest expense
and financing costs         12.9     1.4        9.7     1.0
Gain on sale of
interest in Australian
joint venture                  -       -        0.3     0.0
Equity in loss of
unconsolidated
affiliate                    0.3     0.0          -       -
                        -- ----- - -----   -- ----- - -----
Income before provision
for income taxes             0.5     0.1       30.5     3.1
Provision for income
taxes                        0.2     0.0       11.0     1.1
                        -- ----- - -----   -- ----- - -----
Net income              $    0.3     0.0 % $   19.5     2.0 %
                        -- ----- - -----   -- ----- - -----

Percentage totals may not add due to rounding.

Fiscal Quarter Ended April 4, 2009 Compared to Fiscal Quarter Ended April 5, 2008

Revenues. Total revenues for the first fiscal quarter of 2009 were $891.1 million, compared with $975.4 million for the first fiscal quarter of 2008, a decrease of 8.6%. Revenues by segment were as follows:

(In millions)                           First          First
                                       Fiscal         Fiscal
                                      Quarter        Quarter         Increase     Percent
                                      of 2009        of 2008        (Decrease )    Change
                                   - -------- --- - -------- --- - ---------- - ----------
Wholesale better apparel           $    291.8     $    331.5     $      (39.7 )     (12.0% )
Wholesale jeanswear                     228.2          220.6              7.6         3.4%
Wholesale footwear and accessories      218.4          252.5            (34.1 )     (13.5% )
Retail                                  141.2          158.9            (17.7 )     (11.1% )
Licensing and other                      11.5           11.9             (0.4 )      (3.4% )
                                   - -------- --- - -------- --- - ---------- - ----------
  Total revenues                   $    891.1     $    975.4     $      (84.3 )      (8.6% )
                                   - -------- --- - -------- --- - ---------- - ----------

Wholesale better apparel revenues decreased $39.7 million, primarily due to reduced shipments of our Anne Klein, Jones New York Sport, Jones New York and Nine West products due to decreased consumer spending as a result of the general economic downturn, although we experienced decreased orders for nearly all better apparel product lines. Shipments of our Evan Picone suit and dress products increased based on the performance of these brands at retail.

Wholesale jeanswear revenues increased $7.6 million. Shipments of our
l.e.i. products to Wal-Mart Stores Inc. ("Walmart") were partially offset by reduced shipments of our Energie product line as a result of the general economic downturn and a $15.4 million reduction of shipments of product lines that we are discontinuing due to low long-term growth potential (including Jeanstar, Erika, Behold, Grane Girl and Code of Ethics).

Wholesale footwear and accessories revenues decreased $34.1 million. We experienced decreased orders for nearly all our footwear, handbag and accessories products due to decreased consumer spending as a result of the general economic downturn and $4.9 million of lost revenues due to the bankruptcy of several significant customers during the second half of 2008. We also experienced a reduction in sales in our international business due to the global economic conditions in Asia, Canada, Turkey and the bankruptcy of our United Kingdom licensee.

Retail revenues decreased $17.7 million, primarily due to a 10.6% decline in comparable store sales ($14.6 million) resulting from decreased consumer spending relating to current economic conditions, with

Revenues for the first fiscal quarter of 2008 include $0.4 million in the licensing and other segment of service fees charged to Barneys under a short-term transition services agreement entered into with Barneys at the time of the sale of Barneys. These revenues were based on contractual monthly fees as set forth in the agreement. The agreement ended in May 2008.

Gross Profit. The gross profit margins were 32.9% for both periods.

Wholesale better apparel gross profit margins were 35.3% and 34.7% for the first fiscal quarters of 2009 and 2008, respectively. The increase was due to the product mix and lower sales to off-price retailers in the current period.

Wholesale jeanswear gross profit margins were 23.4% and 21.4% for the first fiscal quarters of 2009 and 2008, respectively. The increase is primarily due to lower levels of off-price sales in the current period and costs in the prior period related to the repositioning of l.e.i. as an exclusive brand for Walmart and the discontinuance of certain other product lines.

Wholesale footwear and accessories gross profit margins were 26.3% and 27.3% for the first fiscal quarters of 2009 and 2008, respectively. The decrease was primarily due to additional discounting across all product lines due to the current economic conditions, as well as higher overhead unit costs in our costume jewelry business due to lower volume.

Retail gross profit margins were 44.9% and 48.8% for the first fiscal quarters of 2009 and 2008, respectively. The decrease was primarily the result of higher levels of promotional activity in our stores due to the current challenging retail environment.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $279.6 million in the first fiscal quarter of 2009 and $280.8 million in the first fiscal quarter of 2008.

Wholesale better apparel SG&A expenses decreased $2.4 million, primarily due to a $1.9 million decrease in distribution costs in the current period and a $1.0 million decrease in product development costs from a reduction in the number of styles offered in the current period, offset by $0.5 million of other cost increases.

Wholesale jeanswear SG&A expenses decreased $6.7 million, primarily due to a $3.4 million decrease in administrative salary and benefit costs, a $2.4 million reduction in depreciation and amortization expenses (due to accelerated depreciation in the prior period relating to discontinued brands), a $1.4 million reduction in occupancy costs due to the closing of certain facilities and $1.4 million of other cost savings, offset by $1.9 million of additional lease obligation costs recorded in the current period for a closed warehouse location.

Wholesale footwear and accessories SG&A expenses decreased $5.4 million, primarily due to reductions in salary and benefit costs ($4.4 million), travel ($1.0 million) and other administrative costs ($2.9 million) due to our cost-cutting initiatives, and reductions in style, design and sample costs ($1.5 million) and advertising costs ($1.4 million). These reductions were offset by $1.6 million of costs related to the bankruptcy of our United Kingdom footwear licensee, $1.5 million in settlements of sales and use tax audits, $1.4 million in loss accruals related to certain leased property and a $1.3 million increase in severance costs.

SG&A expenses for the licensing, other and eliminations segment decreased $6.2 million, primarily due to lower amortization of stock options and restricted stock ($2.7 million), a difference in timing of allocation of administrative costs to our operating segments ($1.4 million), a decrease in legal fees ($0.6 million) and other cost reductions ($0.6 million). The prior period also included $0.9 million of contract-termination costs.

Operating Income. The resulting operating income for the first fiscal quarter of 2009 was $13.7 million, compared with $39.9 million for the first fiscal quarter of 2008, due to the factors described above.

Net Interest Expense. Net interest expense was $12.9 million in the first fiscal quarter of 2009, compared with $9.7 million in the first fiscal quarter of 2008. The increase was the result of lower interest income on our invested cash balances due to overall lower interest rates in the current period and higher amortization of deferred financing fees related to the amendment to our revolving credit facility on January 5, 2009.

Income Taxes. The effective income tax rate was 34.0% and 36.0% for the first fiscal quarters of 2009 and 2008, respectively. The decrease is primarily due to a greater impact of the foreign income tax differential relative to pre-tax income in 2009 than in 2008.

Net Income and Earnings Per Share. Net income was $0.3 million in the first fiscal quarter of 2009, compared with net income of $19.5 million in the first fiscal quarter of 2008. Diluted earnings per share for the first fiscal quarter of 2009 was $0.00, compared with $0.23 for the first fiscal quarter of 2008, on 3.4% fewer shares outstanding.

Liquidity and Capital Resources

Our principal capital requirements have been for working capital needs, capital expenditures, dividend payments, acquisition funding and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations. We currently fund our operations primarily through cash generated by operating activities, and rely on our revolving credit facility for the issuance of trade letters of credit for the purchases of inventory and for cash borrowings as needed. As of April 4, 2009, total cash and cash equivalents were $194.3 million, a seasonal decrease of $144.0 million from the $338.3 million reported as of December 31, 2008.

Cash flows from operating activities used $139.3 million and $66.3 million in the fiscal quarters ended April 4, 2009 and April 5, 2008, respectively. The change from the prior period was primarily due to changes in working capital. Accounts receivable increased less in the current period due to the reduction in sales compared with the prior period. Inventory experienced less seasonal decreases in the current period due to increases in l.e.i. inventory related to the exclusive program with Walmart, compared with additional decreases in the prior period due to the liquidation of discontinued brands. Accounts payable used more cash in the current period due to the timing of inventory payments. We also received a $22.5 million federal tax refund in the prior period.

Cash flows from investing activities used $8.3 million and $22.2 million in the first fiscal quarters of 2009 and 2008, respectively, primarily for the purchases of property and equipment.

Cash flows from financing activities provided $3.9 million and used $13.2 million in the first fiscal quarters of 2009 and 2008, respectively. A net increase in short-term borrowings (from third-party intermediary advances to our contractors under our computerized payable settlement arrangements) was offset by a reduction in dividend payments as compared with the prior period.

Prior to January 5, 2009, we had a revolving credit agreement with several lending institutions to borrow an aggregate principal amount of up to $750 million. This agreement, which expires in May 2010, can be used for letters of credit or cash borrowings. On December 24, 2008, we announced that, effective as of January 5, 2009, we amended this facility to reduce the aggregate commitment to $600 million, increase the fees and interest rates, modify certain covenants and provide collateral for borrowings. Otherwise, the terms and conditions of the credit facility remained substantially unchanged.

Up to $450 million of the amended facility is available for the issuance of trade and standby letters of credit, and cash borrowings are limited to the lesser of (a) $400 million less amounts owed to the lending institutions or their administrative agent under hedging agreements, treasury management services agreements, open account agreements, letters of credit (other than those issued under the facility) and other funded loans (the "Additional Secured Agreements") and (b) the maximum amount of obligations permitted to be secured pursuant to the Indenture dated November 22, 2004 (relating to our outstanding Senior Notes) without any requirement to equally and ratably secure such Senior Notes. Borrowings under the amended revolving credit facility may be used to refinance existing indebtedness, for working capital needs and for other general corporate purposes, including acquisitions. Cash borrowings under the amended revolving credit facility and obligations under the Additional Secured Agreements are secured by inventory and receivables of Jones USA and certain of its affiliates, as well as the proceeds of such inventory and receivables, but only to the extent that the grant of that security would not require the Senior Notes issued under the Indenture to be equally and ratably secured by that collateral.

The amended revolving credit agreement requires us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the amended facility expiring on May 16, 2010), and contains covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, (7) engage in transactions with affiliates and (8) make capital expenditures. At April 4, 2009, we were in compliance with all covenants under the facility.

At April 4, 2009, $90.6 million of letters of credit and no cash borrowings were outstanding under the revolving credit facility. The estimated maximum amount of cash borrowings that was available to us on that date was $391.0 million. At April 4, 2009, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.

In May 2009, we expect to replace our amended revolving credit facility and our C$10.0 million unsecured line of credit in Canada with a new three-year secured revolving credit agreement (the "New Credit Facility"). We have received $600 million in commitments from lenders so far, and may request an increase of up to $50 million in the size of the New Credit Facility by obtaining additional commitments from lenders under the New Credit Facility or from other entities with the consent of the administrative agent. Under the New Credit Facility, up to the entire amount of the facility will be available for cash borrowings, with up to $400 million (assuming the overall size of the New Credit Facility is $600 million) available for trade letters of credit and up to $50 million (assuming the overall size of the New Credit Facility is $600 million) for standby letters of credit, and a subfacility available to our Canadian subsidiaries of up to $25 million for letters of credit and borrowings. Borrowings under the New Credit Facility may be used to refinance existing indebtedness, to repay the 2009 Notes, and for general corporate purposes in the ordinary course of business. Such borrowings will bear interest either based on the alternate base rate, as defined in the New Credit Facility, or based on Eurocurrency rates, each with a margin that depends on the availability remaining under the New Credit Facility. The New Credit Facility contains customary events of default.

Availability under the New Credit Facility will be determined in reference to a borrowing base consisting of a percentage of eligible accounts receivable, credit card receivables, inventory and licensee

As a result of the amendments to our revolving credit facility expiring on May 16, 2010, Standard & Poor's downgraded our senior unsecured debt ratings from BB- to B+ on January 6, 2009 and Moody's downgraded our senior unsecured debt ratings from Ba2 to Ba3 on January 8, 2009. Under the amended revolving credit facility, our fees and interest rates are no longer affected by our credit rating, so further changes to our ratings will not increase our borrowing costs. However, any future downgrades could affect our ability to obtain additional funding sources.

On April 29, 2009, we announced that our Board of Directors had declared a quarterly cash dividend of $0.05 per share to all common stockholders of record as of May 15, 2009 for payment on May 29, 2009.

On April 1, 2009, we commenced a cash tender offer to purchase any and all of our outstanding 4.250% Senior Notes due 2009 (the "2009 Notes"), as well as a consent solicitation to amend the indenture (the "Indenture") governing our outstanding 2009 Notes, our 5.125% Senior Notes due 2014 and our 6.125% Senior Notes due 2034 (collectively, the "Notes"). The purpose of the consent solicitation was to receive the consent of holders of at least a majority in principal amount of the Notes outstanding (the "Required Consents") for proposed amendments to the Indenture to provide for a carveout to the lien covenant, for liens incurred in connection with the new senior secured credit facility described above (the "Amendments"). We received the Required Consents on April 15, 2009; consequently, the Amendments will become operative upon payment of the consent fee to each validly consenting holder of the Notes, and will be binding on all holders, including non-consenting holders of Notes. The tender offer will expire in early May 2009. The consideration for each $1,000 principal amount of 2009 Notes validly tendered and not withdrawn pursuant to the tender offer will be $980, and the consideration for each $1,000 principal amount of Notes with respect to which holders validly delivered and did not revoke their consent pursuant to the consent solicitation will be $20.00.

Economic Outlook . . .