The following discussion provides information and analysis of our results of operations from 2006 through 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 2008, the following significant events took place:

º in February 2008, we announced that Wal-Mart Stores Inc. ("Wal-Mart") would be the exclusive retailer of our l.e.i. brand for juniors, junior plus and girls beginning with the 2008 back-to-school shopping season at Walmart stores nationwide;
º in May 2008, we announced the sale of our remaining Mexican operations;
º in June 2008, we announced that we successfully completed amendments to our $1 billion and $750 million five-year revolving credit facilities (reducing the $1 billion facility commitment to $500 million), and in December 2008, we announced we had terminated the $500 million facility and further amended the $750 million facility (reducing the commitment to $600 million);
º in June 2008, we announced that we formed a joint venture with Royale Etenia LLC ("Royale") to develop, market and license the New York-based fashion brand Rachel Roy and that we also assumed the operating assets and liabilities of Rachel Roy Fashions, Inc.;
º in June 2008, we announced that we acquired a minority interest in GRI Group Limited, an international accessories and apparel brand management and retail-distribution network;
º in June 2008, we announced the completion of our accelerated stock repurchase ("ASR") program;
º in July 2008, we announced we had entered into an agreement with New Balance Athletic Shoe, Inc. ("New Balance") to license, create and distribute a fashion-lifestyle footwear collection that brings together New Balance's innovative performance and materials technology with Nine West's fashion styling; and
º on August 5, 2008, Standard & Poor's removed our corporate credit and senior unsecured debt ratings from credit watch and lowered the ratings to BB from BB+. It further lowered the ratings to BB- on October 29, 2008 while maintaining its previously-assigned negative outlook. On October 20, 2008, Moody's lowered our corporate family and probability of default ratings to Ba2 from Ba1 and assigned a ratings outlook of stable. As a result of the amendments to our revolving credit facility expiring on May 16, 2010, Standard & Poor's further downgraded our senior unsecured debt ratings from BB- to B+ on January 6, 2009, and Moody's further downgraded our senior unsecured debt ratings from Ba2 to Ba3 on January 8, 2009.

Trends

The current economic environment has resulted in lower consumer confidence and lower retail sales. This trend may lead to further reduced consumer spending, which could affect our net sales and our future profitability. Therefore, we have taken aggressive cost reduction actions to address the uncertainty posed by the current economic conditions and to protect our future profitability. Cost reduction actions underway are anticipated to result in annualized cash savings of approximately $33 million. These actions include personnel reductions, elimination of certain unprofitable divisions and a reduction in discretionary spending. In addition to cost reduction actions, we have reduced our 2009 planned capital spending to approximately $40 - $45 million from the $71.2 million expended in 2008.

We believe that several significant trends are occurring in the women's apparel, footwear and accessories industry. We believe that a trend exists among our major retail accounts to concentrate their women's apparel, footwear and accessories buying among a narrowing group of vendors and to differentiate their product offerings through exclusivity of brands. We also believe that consumers in the United States and Canada are shopping in multiple channels, including specialty shops and national chains where value is perceived to be higher. We have responded to these trends by enhancing the brand equity of our brands through our focus on design, quality and value, and through strategic acquisitions which provide significant diversification to the business by successfully adding new distribution channels, labels and product lines. Through this diversification, we have evolved into a multidimensional resource in apparel, footwear and accessories and retail. We have leveraged the strength of our brands to increase both the number of locations and amount of selling space in which our products are offered and to introduce product extensions. We have also leveraged our design, production and marketing capabilities to develop and provide proprietary branded and private label products to major wholesale customers.

We also believe that consumers will continue to increase their purchasing of apparel, footwear and accessories through e-commerce web sites. During 2008, we upgraded our existing sites, www.ninewest.com, www.easyspirit.com and www.bandolino.com, and launched www.jny.com. We also plan to launch www.anneklein.com in early 2009. Through these web sites, we market either footwear and accessories, apparel or a combination of these products, primarily under their respective brand names. The selection of products is substantially consistent with the product offerings in our corresponding retail store concepts. Our e-commerce systems allow us to fulfill customer orders from inventory at our retail store locations if the items are not available at our distribution center.

On January 1, 2005, the World Trade Organization's 148 member nations lifted all quotas on apparel and textiles. As a result, all textiles and textile apparel manufactured in a member nation and exported after January 1, 2005 are no longer subject to quota restrictions. A special safeguard provision that had provided the U.S. with an additional four years beyond January 1, 2005 to apply quotas on Chinese imports of textiles expired on December 31, 2008. The lifting of quotas and expiration of safeguard provisions allows retailers, apparel firms and others to import unlimited quantities of apparel and textile items from China, India and other low-cost countries, which could lead to lower production costs, allow us to improve the quality of our products for a given cost, or allow us to concentrate production in the most efficient markets. However, litigation and political activity have been initiated by interested parties seeking to re-impose quotas. In addition, if the prices of the imported goods can be shown to be less than those offered by domestic producers for the same items, the U.S. International Trade Commission may recommend that anti-dumping duties be imposed on those goods. As a result, we are unable to predict the long-term effects of the lifting of quota restrictions and related events on our results of operations.

Rachel Roy Joint Venture

On June 10, 2008, we formed a joint venture with Royale to develop, market and license the New York-based fashion brand Rachel Roy. Under the terms of the agreement, we own a 50% interest in the joint venture, with the remaining interest owned by Royale. The joint venture plans to develop the Rachel Roy brand through continued global expansion of the wholesale business, introduction of new product categories, and stand-alone retail stores in key U.S. and international locations. Rachel Roy will continue to lead the design of the brand. We also assumed the operations and the assets and liabilities of the existing designer collection business formerly operated by Rachel Roy Fashions, Inc. under a license with the new joint venture. These entities are consolidated by us and, accordingly, the results of operations are reflected in our financial statements. In connection with the acquisition, no material assets or liabilities were recorded in this transaction.

On June 20, 2008, we acquired a 10% equity interest in GRI, an international accessories and apparel brand management and retail-distribution network, for $20.2 million. GRI, which (including its franchisees) operates over 800 points of sale in 12 Asian countries, is the exclusive licensee of several of our brands in Asia, including Nine West, Anne Klein New York, AK Anne Klein, Easy Spirit, Enzo Angiolini and Joan & David. GRI also distributes other women's apparel, shoes and accessory brands.

Under the terms of our investment, GRI will be entitled to receive a future cash payment from us of up to $10.0 million if GRI's net income for its fiscal year ending January 31, 2009 exceeds a specified earnings target. Any additional payment will be recorded as an additional investment in GRI but will not increase our 10% equity interest. Based on projected results of GRI for the remainder of its fiscal year, we currently do not anticipate making any additional payments. The results of GRI are reported under the equity method of accounting.

Accelerated Share Repurchase Program

On September 6, 2007, we entered into an ASR agreement with Goldman, Sachs & Co. ("Goldman") to repurchase $400 million of our outstanding common stock. Purchases under the ASR were subject to collar provisions that established minimum and maximum numbers of shares based generally on the volume-weighted average price of our common stock during the term of the ASR program. Final settlement of the ASR program was scheduled for no later than July 19, 2008 and could occur earlier at the option of Goldman or later under certain circumstances. Through June 5, 2008, 17.9 million shares had been delivered to us by Goldman under the terms of the ASR. On June 5, 2008, Goldman informed us that it had concluded the ASR. As a result, we received a final delivery of 3.2 million shares on June 10, 2008, bringing the aggregate number of shares received under the ASR program to 21.1 million shares. No cash was required to complete the final delivery of shares. The combined average price for the shares delivered under the ASR was $19.00 per share.

Strategic Decisions Regarding Certain Moderate Apparel Brands

Our continued strategic operational reviews and efforts to improve profitability and the continued trend of our moderate and jeanswear customers towards differentiated product offerings led us to make the strategic decision to exit some of our moderate apparel product lines during 2007. As a result of this exit, we renamed our wholesale moderate apparel segment as our wholesale jeanswear segment to better reflect the products we produce in that segment. We believe that exiting these product lines will strengthen our future operating results and allow us to focus primarily on growth opportunities in our remaining wholesale product lines, which have strong fundamentals and operate at higher margins. This decision did not impact in any way our denim and junior division labels such as Gloria Vanderbilt, l.e.i., Energie, GLO, Grane and others, which are also reported in the wholesale jeanswear segment. The moderate product lines we exited have not been classified as discontinued operations as they do not meet the criteria for discontinued operations as set forth in SFAS No. 144. As a result of the loss of these projected revenues, we recorded impairments for our Norton McNaughton and Erika trademarks of $80.5 million in our licensing, other and eliminations segment in 2007. In connection with this decision, we closed our Goose Creek, South Carolina and Edison, New Jersey distribution centers. See "Accrued Restructuring Costs" in Notes to Consolidated Financial Statements.

We announced in February 2008 that Wal-Mart would be the exclusive retailer of our l.e.i. brand for juniors, junior plus and girls beginning with the 2008 back-to-school shopping season at Wal-Mart stores nationwide.

Sale of Mexican Operations

On September 12, 2006, we announced the closing of our Mexican operations related to the decision by Polo to discontinue the Polo Jeans Company product line, which we produced for Polo subsequent to the sale of the Polo Jeans Company business to Polo in February 2006. At that time, we determined the estimated fair value of the property, plant and equipment employed in Mexico was less than its carrying

Sale of Barneys

On September 6, 2007, we completed the sale of Barneys to an affiliate of Istithmar PJSC. We received $937.4 million of cash (net of working capital adjustments) and paid an aggregate of $54.6 million in cash for bonuses for key Barneys employees, compensation for restricted stock held by certain employees of Barneys that was forfeited upon the completion of the sale and other fees and costs related to the sale.

As a result of the capital gain generated by the sale of Barneys, we reversed a $107.7 million deferred tax valuation allowance previously created from capital loss carryforwards that we had not expected to be able to utilize. The reversal of the tax valuation allowance has been recorded in income from continuing operations in 2007.

In accordance with the provisions of SFAS No. 144, the results of operations of Barneys for the current and prior periods have been reported as discontinued operations and the assets and liabilities relating to Barneys have been reclassified as held for sale for all prior periods in the Consolidated Balance Sheets.

Sale of Polo Jeans Company Business in 2006

In February 2006, we reached a settlement of certain litigation that we had commenced in 2003 with Polo. In connection with this settlement, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. Among other terms, we received gross proceeds of $355.0 million in connection with the sale and the settlement. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995.

We recorded a pre-tax loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold and a pre-tax gain of $100.0 million related to the litigation settlement. Approximately $3.7 million in state and local taxes were accrued related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we are using to partially offset the gain realized from the sale of Barneys.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method. Accounting rules require that we test at least annually for possible goodwill impairment. We perform our test in the fourth fiscal quarter of each year using a discounted cash flow analysis that requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. As a result of the 2006 impairment analysis, we determined that the goodwill balance existing in our wholesale jeanswear segment was impaired as a result of decreases in projected revenues and profitability with respect to certain moderate apparel brands, as well as changes in business strategy with respect to our Norton McNaughton brand. Accordingly, we recorded an impairment charge of $441.2 million. As a result of the 2007 impairment analysis, we determined that the remaining goodwill balance existing in our wholesale jeanswear segment was impaired as a result of decreases in projected revenues and profitability for certain brands. Accordingly, we recorded an impairment charge of $78.0 million. As a result of the 2008 impairment analysis, we determined that the goodwill balance existing in our wholesale footwear and accessories segment was impaired as a result of decreases in projected revenues and profitability for this segment. Accordingly, we recorded an impairment charge of $813.2 million.

We also perform our annual impairment test for trademarks during the fourth fiscal quarter of the year. As a result of the 2006 impairment analysis, we recorded trademark impairment charges of $50.2

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 all of our segments.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by 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 intangible assets with indefinite lives for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. We recorded goodwill impairments of $813.2 million, $78.0 million and $441.2 million in 2008, 2007 and 2006, respectively. We recorded trademark impairments of $25.2 million, $88.0 million and $50.2 million in 2008, 2007 and 2006, respectively. For more information, see "Goodwill and Other Intangible Assets" in Notes to Consolidated Financial Statements.

We test both our goodwill and our trademarks for impairment by utilizing discounted cash flow models to estimate their fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates. 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 trade mark 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 year 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. Based on our latest annual testing, the following table shows the range of assumptions we used to derive our fair value estimates and the hypothetical additional impairment charge for goodwill and trademarks resulting from a one percentage point unfavorable change in each of our fair value assumptions (amounts in millions).

--------------------------------------------------------------------------------
                                                           Effect of one percentage
                                                           point unfavorable change
                                    Assumptions                       in:
                         --------------------------------- -------------------------
                             Goodwill        Trademarks      Goodwill    Trademarks
Discount rates                11.5%            11.5%           none        $ 4.1
Royalty rates                   --          4.0% - 7.0%        --           16.0
Weighted-average revenue       2.8%             7.5%           none         1.8
growth rates
Long-term growth rates         3.0%          0% - 3.0%         none         2.9

The impairment charges resulting from the goodwill impairment testing in 2008 were primarily the result of lower projected revenues and profitability across various product lines in our wholesale footwear and accessories segment and an increase in the discount rate. The impairment charges resulting from the trademark impairment testing in 2008 were primarily from decreases in projected revenues for certain footwear and costume jewelry product lines and an increase in the discount rate. We increased our discount rate from the 9.5% used in 2007 to 11.5% in 2008, which reflects the changes in our cost of capital and other factors.

At December 31, 2008, we had $160.7 million of goodwill remaining, of which $40.1 million has been assigned to the wholesale better apparel segment and $120.6 million has been assigned to the retail segment. We also had $575.9 million of indefinite-lived trademarks remaining. Should the economic conditions and trends (such as reduced consumer spending) prevailing at December 31, 2008 continue to deteriorate throughout 2009 and beyond, the goodwill assigned to our retail segment and the fair values of certain trademarks could become impaired.

Other than the assumptions used in the impairment testing of our goodwill and trademarks, we have not made any material changes to any of our critical accounting estimates in the last three years. Our senior management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Results of Operations

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

(In millions)                          2008                  2007                 2006
                                 -----------------     -----------------    -----------------
Net sales                        $ 3,562.6    98.5 %   $ 3,793.3    98.6 %  $ 4,014.8    98.2 %
Licensing income                      52.1     1.4          52.0     1.4         51.1     1.3
Service and other revenues             1.7     0.0           3.2     0.1         21.1     0.5
                                 - ------- - -----     - ------- - -----    - ------- - -----
   Total revenues                  3,616.4   100.0       3,848.5   100.0      4,087.0   100.0
Cost of goods sold                 2,440.2    67.5       2,609.1    67.8      2,674.2    65.4
                                 - ------- - -----     - ------- - -----    - ------- - -----
   Gross profit                    1,176.2    32.5       1,239.4    32.2      1,412.8    34.6
Selling, general and
administrative expenses            1,069.2    29.6       1,100.4    28.6      1,096.3    26.8
Loss on sale of Polo Jeans
Company business                         -     -               -     -           45.1     1.1
Trademark impairments                 25.2     0.7          88.0     2.3         50.2     1.2
Goodwill impairments                 813.2    22.5          78.0     2.0        441.2    10.8
                                 - ------- - -----     - ------- - -----    - ------- - -----
   Operating (loss) income          (731.4 ) (20.2 )       (27.0 )  (0.7 )     (220.0 )  (5.4 )
Interest income                        7.5     0.2           3.7     0.1          3.5     0.1
Interest expense and financing
costs                                 49.1     1.4          51.5     1.3         50.5     1.2
Gain on sale of stock in Rubicon
Retail Limited                           -       -             -      -          17.4     0.4
Gain on sale of interest in
Australian joint venture               0.8     0.0           8.2     0.2            -      -
Equity in (loss) earnings of
unconsolidated affiliates             (0.7 )   0.0           8.1     0.2          4.5     0.1
                                 - ------- - -----     - ------- - -----    - ------- - -----
   Loss from continuing
   operations before benefit for
   income taxes                     (772.9 ) (21.4 )       (58.5 )  (1.5 )     (245.1 )  (6.0 )
Benefit for income taxes              (6.6 )  (0.2 )      (104.4 )  (2.7 )      (70.1 )  (1.7 )
                                 - ------- - -----     - ------- - -----    - ------- - -----
   (Loss) income from continuing
   operations                       (766.3 ) (21.2 )        45.9     1.2       (175.0 )  (4.3 )
Income from discontinued
operations, including gain on
sale of Barneys in 2007, net of
tax                                    0.9     0.0         265.2     6.9         29.0     0.7
Cumulative effect of change in
accounting for share-based
payments, net of tax                     -     -               -      -           1.9     0.0
                                 - ------- - -----     - ------- - -----    - ------- - -----
   Net (loss) income             $  (765.4 ) (21.2 %)  $   311.1     8.1 %  $  (144.1 )  (3.5 %)
                                 - ------- - -----     - ------- - -----    - ------- - -----

. . .