<PAGE>


<PAGE>
________________________________________________________________________________
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K
 
<TABLE>
<C>              <S>
       X         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
                 OR
 
      __         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
 
                        COMMISSION FILE NUMBER: 1-10857
                         ------------------------------
                            THE WARNACO GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                                           <C>
                        DELAWARE                                                 95-4032739
            (STATE OR OTHER JURISDICTION OF                                   (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                 IDENTIFICATION NO.)
 
                     90 PARK AVENUE                                                  10016
                NEW YORK, NEW YORK 10016                                          (ZIP CODE)
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300
                         ------------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                     NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS                     ON WHICH REGISTERED
------------------------------------------------    ------------------------
 
<S>                                                 <C>
Class A Common Stock, par value $0.01 per share     New York Stock Exchange
Convertible Trust Originated Preferred
  Securities*                                       New York Stock Exchange
</TABLE>

------------------
*Issued by Designer Finance Trust. Payments of distributions and payment on
liquidation or redemption are guaranteed by the registrant.
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 
                         ------------------------------
 
     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes [x]      No [ ]
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
     The aggregate market value of the Class A Common Stock, the only voting
stock of the registrant issued and outstanding, held by non-affiliates of the
registrant as of April 1, 1998, was approximately $2,143,544,000.
     The number of shares outstanding of the registrant's Class A Common Stock
as of April 1, 1998: 63,048,069.
     Documents incorporated by reference: The definitive Proxy Statement of The
Warnaco Group, Inc. relating to the 1998 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
 
________________________________________________________________________________
<PAGE>
<PAGE>
                                     PART I
 
ITEM 1. BUSINESS.
 
  (A) GENERAL DEVELOPMENT OF BUSINESS.
 
     The Warnaco Group, Inc. (the 'Company'), a Delaware corporation, was
organized in 1986 for the purpose of acquiring the outstanding shares of Warnaco
Inc. ('Warnaco'). As a result of the Company's acquisition of Warnaco, Warnaco
became a wholly-owned subsidiary of the Company.
 
     The Company and its subsidiaries design, manufacture and market a broad
line of women's intimate apparel, such as bras, panties, sleepwear, shapewear
and daywear, and men's apparel, such as sportswear, underwear and accessories,
all of which are sold under a variety of internationally recognized owned and
licensed brand names. During fiscal 1997, the Company acquired Designer Holdings
Ltd. ('Designer Holdings'), which develops, manufactures and markets designer
jeanswear and sportswear for men, women and juniors, and holds a 40-year
extendable license from Calvin Klein, Inc. to develop, manufacture and market
designer jeanswear and jeans related sportswear collections in North, South and
Central America under the Calvin Klein Jeans'r', CK/Calvin Klein Jeans'r' and
CK/Calvin Klein/Khakis'r' labels. During fiscal 1996, the Company made three
strategic acquisitions, GJM, Lejaby and Bodyslimmers, designed to increase the
breadth of the Company's product lines and increase the worldwide distribution
of the Company's products. In March 1994, the Company acquired the worldwide
trademarks, rights and business of Calvin Klein'r' men's underwear and licensed
the Calvin Klein trademark for men's accessories. In addition, the acquisition
included the worldwide trademarks and rights of Calvin Klein women's intimate
apparel.
 
     The Company's growth strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and improving manufacturing efficiencies and cost controls. The Company
attributes the strength of its brand names to the quality, fit and design of its
products which have developed a high degree of consumer loyalty and a high level
of repeat business. The Company operates three divisions, Intimate Apparel,
Menswear and Retail Outlet Stores, which accounted for 65.6%, 29.7% and 4.7%,
respectively, of net revenues in fiscal 1997, with the Intimate Apparel Division
accounting for a larger percentage of the Company's gross profit for the same
period.
 
     The Intimate Apparel Division designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Valentino Intimo'r', Van Raalte'r', White Stag'r', Fruit of
the Loom'r', Bodyslimmers'r', Marilyn Monroe'r' and Speedo'r' brand names. In
addition, the Intimate Apparel Division designs, manufactures and markets men's
underwear under the Calvin Klein brand name. The Intimate Apparel Division is
the leading marketer of women's bras to department and specialty stores in the
United States, accounting for 34% of such women's bra sales in 1997. The
Warner's and Olga brand names, which are owned by the Company, are 124 and 57
years old, respectively.
 
     The Intimate Apparel Division's strategy is to increase its channels of
distribution and expand its highly recognized brand names worldwide. In February
1996, the Company purchased the GJM Group of Companies ('GJM') from Cygne
Designs, Inc. GJM is a private label maker of sleepwear and intimate apparel.
The acquisition provided the Company with design, marketing and manufacturing
expertise in the sleepwear business, broadening the Company's product line and
contributing to the Company's base of low cost manufacturing capacity. In June
1996, the Company purchased Bodyslimmers. Bodyslimmers is a leading designer and
manufacturer of body slimming undergarments targeted at aging baby boomers,
which also increased the Company's presence in a growing segment of the intimate
apparel market. In July 1996, the Company acquired the Lejaby/Euralis Group of
Companies ('Lejaby'). Lejaby is a leading maker of intimate apparel in Europe.
The Lejaby acquisition increased the size of the Company's operations in Western
Europe and provides the Company with an opportunity to expand the distribution
of its products in the critical European market. In December 1996, the Company
introduced its Marilyn Monroe line of intimate apparel.
 
     In 1991, the Company entered into a license agreement with Fruit of the
Loom, Inc. for the design, manufacture and marketing of moderate priced bras,
daywear and other related items to be distributed through mass merchandisers,
such as Wal-Mart and Kmart, under the Fruit of the Loom brand name
 
                                       1
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<PAGE>
and has built its market share to over 6% in the mass merchandise market. This
license was renewed by the Company in 1994. In late 1994, the Company purchased
the Van Raalte trademark for $1.0 million and launched an intimate apparel line
through Sears stores in July 1995.
 
     The Menswear Division designs, manufactures, imports and markets moderate
to premium priced men's apparel and accessories under the Chaps by Ralph
Lauren'r', Calvin Klein and Catalina'r' brand names. In December 1997, the
Company completed the acquisition of Designer Holdings which develops,
manufactures and markets designer jeanswear and jeans related sportswear for
men, women and juniors under the Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis labels. The Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis brands will complement the Company's existing product
lines, including Calvin Klein underwear for men and women and Calvin Klein men's
accessories. Chaps by Ralph Lauren has increased its net revenues by
approximately 600% since 1991 from $39.0 million to $272.3 million in 1997,
predominantly by refocusing its products to the age 25 to 50 consumer and by
using natural fibers in its products. In 1995, the Company extended its Chaps by
Ralph Lauren license through December 31, 2004. The Menswear Division's strategy
is to build on the strength of its owned and licensed brand names and eliminate
those businesses which generate a profit contribution below the Company's
required return. Consistent with this strategy, the Company has eliminated
several underperforming brands since 1992, including its Hathaway business,
which was sold to a group of investors in November 1996.
 
     The Company has been expanding its brand names throughout the world by
increasing the activities of its wholly-owned operating subsidiaries in Canada,
Europe and Mexico. International operations generated $290.4 million, or 20.2%,
of the Company's net revenues in fiscal 1997, compared to $212.4 million, or
20.0%, of the Company's net revenues in fiscal 1996 and $135.5 or 14.8% in
fiscal 1995. The Company attributes such increase primarily to the acquisition
of Lejaby in July 1996.
 
     The Company's business strategy with respect to its Retail Outlet Stores
Division is to provide a channel for disposing of the Company's excess and
irregular inventory, thereby limiting its exposure to off-price retailers and to
shift to more profitable intimate apparel stores to improve its margins. The
Company had 106 stores at the end of fiscal 1997 (including two stores in
Canada, 11 stores in the United Kingdom and one in France) compared to 73 stores
and 61 stores at the end of fiscal 1996 and fiscal 1995, respectively. In 1997,
35 stores were added as a result of the acquisition of Designer Holdings.
 
     The Company's products are distributed to over 16,000 customers operating
more than 26,000 department, specialty and mass merchandise stores, including
such leading retailers in the United States as Dayton-Hudson, Macy's and other
units of Federated Department Stores, J.C. Penney, Victoria's Secret, The May
Department Stores, Mercantile Stores, Sears, Kmart and Wal-Mart and such leading
retailers in Canada as The Hudson Bay Company and Zeller's. The Company's
products are also distributed to such leading European retailers as House of
Fraser, British Home Stores, Harrods, Galeries Lafayette, Au Printemps and El
Corte Ingles. The Company has a joint venture with News Corp. Limited to further
expand its channels of distribution and market the products of the Company and
others directly to consumers in Asia and the Middle East through the Satellite
Television Asian Region Network ('STAR').
 
  (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
 
     The Company operates within one industry segment, the design, manufacture,
distribution and marketing of apparel. No customer accounted for 10% or more of
the Company's net revenues in the three years ended in fiscal 1997. See Note 7
to the Consolidated Financial Statements on pages F-1 to F-31.
 
  (C) NARRATIVE DESCRIPTION OF BUSINESS.
 
     The Company designs, manufactures and markets a broad line of women's
intimate apparel, and men's apparel and accessories sold under a variety of
internationally recognized brand names owned or licensed by the Company. The
Company operates three divisions, Intimate Apparel, Menswear and
 
                                       2
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<PAGE>
Retail Outlet Stores, which accounted for 65.6%, 29.7% and 4.7% respectively, of
net revenues in fiscal 1997.
 
INTIMATE APPAREL
 
     The Company's Intimate Apparel Division designs, manufactures and markets
women's intimate apparel, which includes bras, panties, sleepwear, shapewear and
daywear. The Company also designs and markets men's underwear. The Company's bra
brands accounted for 34% of women's bra sales in the 1997 calendar year in
department and specialty stores in the United States. Management considers the
Intimate Apparel Division's primary strengths to include its strong brand
recognition, product quality and design innovation, low cost production, strong
relationships with department and specialty stores and its ability to deliver
its merchandise rapidly. Building on the strength of its brand names and
reputation for quality, the Company has historically focused its intimate
apparel products on the upper moderate to premium priced range distributed
through leading department and specialty stores. In order to expand its market
penetration in recent years, the Company (i) in 1991, entered into a license
agreement with Fruit of the Loom, Inc., and in June 1992, began to distribute
moderate priced bras, daywear and other related items under this license through
mass merchandise stores, (ii) in March 1994, acquired the worldwide trademarks,
rights and businesses of Calvin Klein men's underwear and the worldwide
trademarks, rights and businesses of Calvin Klein women's intimate apparel upon
the expiration of an existing license on December 31, 1994, (iii) in late 1994,
purchased the Van Raalte trademark for $1 million and launched an intimate
apparel line through Sears stores in July 1995, (iv) in June 1995, entered into
an agreement to manufacture and distribute intimate apparel products under the
Speedo brand name, (v) in February 1996, acquired substantially all of the
assets of GJM, a private label manufacturer of women's sleepwear and lingerie,
(vi) in fiscal 1996, acquired the stock and assets of the Lejaby/Euralis Group
of Companies, a leading European manufacturer and marketer of intimate apparel,
(vii) in June 1996, acquired the business of Bodyslimmers, a marketer of body
slimming undergarments targeted at aging baby boomers, and (viii) in December
1996, launched the Marilyn Monroe brand of intimate apparel and sleepwear.
 
     The intimate apparel division markets its lines under the following brand
names:
 
<TABLE>
<CAPTION>
            BRAND NAME                           PRICE RANGE                        TYPE OF APPAREL
-----------------------------------  -----------------------------------   ---------------------------------
 
<S>                                  <C>                                   <C>
Valentino Intimo...................                premium                         intimate apparel
Lejaby(1)..........................           better to premium                    intimate apparel
Bodyslimmers(1)....................           better to premium                    intimate apparel
Calvin Klein.......................           better to premium            intimate apparel/men's underwear
Olga...............................                better                          intimate apparel
Speedo sports bras.................                better                          intimate apparel
Marilyn Monroe(2)..................                better                          intimate apparel
Warner's...........................       upper moderate to better                 intimate apparel
Van Raalte.........................               moderate                         intimate apparel
Fruit of the Loom..................               moderate                         intimate apparel
White Stag.........................               moderate                         intimate apparel
</TABLE>
 
------------------
 
(1) Business acquired in fiscal 1996.
 
(2) New product line introduced in December 1996.
 
                            ------------------------
     The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate
apparel), Lejaby, Bodyslimmers and Van Raalte brand names and trademarks which
account for approximately 80% of the Company's Intimate Apparel net revenues.
The Company also has exclusive licenses in perpetuity for the White Stag
trademark for women's sportswear and intimate apparel and the Speedo trademark
for women's sports bras. The Company licenses the other brand names under which
it markets its product lines, primarily on an exclusive basis. The Company also
manufactures intimate apparel on a private and exclusive label basis for certain
leading specialty and department stores. The Warner's brand is 124 years old and
the Olga brand is 57 years old.
 
                                       3
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<PAGE>
     In August 1991, the Company entered into an exclusive license agreement
with Fruit of the Loom, Inc. ('Fruit of the Loom') for the design, manufacture
and marketing of moderate priced bras which are distributed through mass
merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand
name. The license agreement has since been extended to include full slips, half
slips, camisoles and petticoats as well as coordinated fashion sets (bras and
panties) and certain control bottoms. The Company began shipping Fruit of the
Loom products in June 1992 and has built its current market share to over 6% in
the mass merchandise market. The agreement with Fruit of the Loom has allowed
the Company to enter the mass merchandise market, which is growing faster than
the department and specialty store market.
 
     In March 1994, the Company acquired the worldwide trademarks, rights and
business of Calvin Klein men's underwear, and effective January 1, 1995, the
worldwide trademark, rights and business of Calvin Klein women's intimate
apparel. The purchase price was approximately $60.9 million and consisted of
cash payments of $33.1 million in fiscal 1994, $5.0 million in fiscal 1995 and
the issuance of 1,699,492 shares of the Company's Common Stock with a fair
market value of $22.8 million for such shares. Since that time, the Company has
acquired the business of several former international licensees and distributors
of Calvin Klein underwear products including those in Canada, Germany, Italy,
Portugal and Spain. In addition, the Company entered into an exclusive worldwide
license agreement to produce men's accessories and small leather goods under the
Calvin Klein label. The Calvin Klein underwear brand accounted for net revenues
of $318.7 million in fiscal 1997, an increase of 30.5% over the $244.3 million
recorded in fiscal 1996 and nearly six times greater than the $55.0 million
recorded in fiscal 1994, the first year of the acquisition.
 
     In fiscal 1996, the Company acquired GJM, a private label maker of
sleepwear and intimate apparel. The acquisition provided the Company with
design, marketing and manufacturing expertise in the sleepwear business,
broadening the Company's product line and contributing to the Company's base of
low cost manufacturing capacity. In June 1996, the Company purchased
Bodyslimmers, a leading designer and manufacturer of body slimming undergarments
targeted at aging baby boomers. The purchase of Bodyslimmers increased the
Company's presence in a growing segment of the intimate apparel market. In July
1996, the Company acquired Lejaby.
 
     Lejaby is a leading maker of intimate apparel in Europe. The Lejaby
acquisition increased the size of the Company's operations in Western Europe and
provides the Company with an opportunity to expand the distribution of its
products, including Calvin Klein, in the critical European market. In December
1996, the Company introduced its Marilyn Monroe line of intimate apparel
designed to expand the Company's product offerings. These acquisitions, along
with the introduction of the Marilyn Monroe line, contributed $183.3 million in
net revenues for fiscal 1997, nearly 20% of the Company's Intimate Apparel net
revenues.
 
     The Company attributes the strength of its brands to the quality, fit and
design of its intimate apparel, which has developed a high degree of customer
loyalty and a high level of repeat business. The Company believes that it has
maintained its leadership position, in part, through product innovation with
accomplishments such as introducing the alphabet bra (A, B, C and D cup sizes),
the first all-stretch bra, the body stocking, the use of two way stretch
fabrics, seamless molded cups for smooth look bras, the cotton-Lycra bra and the
sports bra. The Company also introduced the use of hangers and certain
point-of-sale hang tags for in-store display of bras, which was a significant
change from marketing bras in boxes, and enabled women, for the first time, to
see the product in the store. The Company's product innovations have become
standards in the industry.
 
     The Company believes that a shift in consumer attitudes is stimulating
growth in the intimate apparel industry. Women increasingly view intimate
apparel as a fashion-oriented purchase rather than as a purchase of a basic
necessity. The shift has been driven by the expansion of intimate apparel
specialty stores and catalogs, such as Victoria's Secret, and an increase in
space allocated to intimate apparel by department stores. The Company believes
that it is well-positioned to benefit from increased demand for intimate apparel
due to its reputation for forward-looking design, quality, fit and fashion and
to the breadth of its product lines at a range of price points. Over the past
five years, the Company has further improved its position by obtaining the
licenses to produce intimate apparel under the Valentino Intimo name in the
premium end of the market and the Marilyn Monroe name in the better
 
                                       4
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<PAGE>
end of the market and by continuing to introduce new products under the Warner's
and Olga brands in the better end of the market, by obtaining the license from
Fruit of the Loom to produce bras, daywear and other related items, and by
producing White Stag bras for the mass merchandise segment of the market, by
acquiring the Calvin Klein trademarks for premium priced women's intimate
apparel and better priced men's underwear, by purchasing the Van Raalte
trademark and introducing an intimate apparel line through Sears stores in July
1995, by entering an agreement to manufacture and distribute intimate apparel
products under the Speedo brand name and by making strategic acquisitions to
expand product lines and distribution channels such as GJM, Lejaby and
Bodyslimmers in 1996. The Company has further improved its position by
continuing to strengthen its relationships with its department store, specialty
store and mass merchandise customers.
 
     The Intimate Apparel Division's net revenues have increased at a compound
annual growth rate of 18.5% since 1991, to $941.2 million in fiscal 1997, as the
Company has increased its penetration with existing accounts, expanded sales to
new customers such as Van Raalte to Sears and Fruit of the Loom to mass
merchandisers such as Wal-Mart and Kmart and broadened its product lines to
include men's underwear. The Company believes that it is one of the lowest-cost
producers of intimate apparel in the United States, producing approximately
eight million dozen garments per year.
 
     The Company's bras are sold primarily in the department and specialty
stores, the Company's traditional customer base for intimate apparel. In June
1992, the Company expanded into a new channel of distribution, mass
merchandisers, with its Fruit of the Loom product line, which offers a range of
styles designed to meet the needs of the consumer profile of this market. The
Company also sees opportunities for continued growth in the Intimate Apparel
Division for bras specifically designed for the 'full figure' market, as well as
in its panty and daywear product lines, and acquired Bodyslimmers in June 1996
to provide important brand name recognition in this growing segment of the
intimate apparel market.
 
     The Intimate Apparel Division has subsidiaries in Canada and Mexico in
North America and in the United Kingdom, France, Belgium, Ireland, Spain, Italy,
Austria, Switzerland and Germany in Europe and in the Philippines, Sri Lanka,
the People's Republic of China and Hong Kong in Asia. International sales
accounted for approximately 30.1% of the Intimate Apparel Division's net
revenues in fiscal 1997 compared to 25.4% in fiscal 1996 and 18.4% in fiscal
1995. The increase in international net revenues is primarily attributable to
the acquisition of Lejaby in July 1996 and increased net revenues for Calvin
Klein Europe. The Company has acquired the businesses of several former
distributors and licensees of its Calvin Klein underwear products in the past
three years, including those in Canada, Germany, Italy, Portugal and Spain. The
Company's objective in acquiring its former licensees and distributors is to
expand its business in foreign markets through a coordinated set of product
offerings, marketing and pricing strategies and by consolidating distribution to
obtain economies of scale. Net revenues attributable to the international
divisions of the Intimate Apparel Division were $282.9 million, $204.1 million
and $126.7 million in fiscal 1997, 1996 and 1995, respectively. Management's
strategy is to increase its market penetration in Europe and to open additional
channels of distribution. In 1994, the Company entered into a joint venture with
News Corp. Limited to market, on an exclusive basis, the products of the Company
and others over the STAR network, serving Asia and the Middle East. The STAR
network reaches over 60 million households in 53 countries in an area that
includes two-thirds of the world's population. Initial shipments of merchandise
to STAR were made in the fourth quarter of fiscal 1995.
 
     The Company's intimate apparel products are manufactured principally in the
Company's facilities in North America, Central America, the Caribbean Basin, the
United Kingdom, France, Ireland, Morocco (joint venture), the Philippines, Sri
Lanka and the People's Republic of China. Over the last three years the Company
has opened one new manufacturing facility in response to increased demand. In
addition, to support anticipated future growth, the Company has plans to open in
Mexico during 1998 two new manufacturing facilities, a cutting facility and a
distribution facility. Certain direct and incremental plant start-up costs
associated with the establishment of new manufacturing facilities in countries
where special efforts are needed to recruit and train entire work forces are
capitalized and amortized over five years. See Note 1 to the Consolidated
Financial Statements. Capitalized costs represent direct and incremental costs
associated with a new facility and include site selection and site
 
                                       5
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development, worker training costs, rent and other operating costs incurred
prior to achieving full production in the facility. Amortization of these costs,
together with the initial inefficiencies associated with new facilities,
resulted in a lower gross margin during the 1993 and 1994 fiscal years. The
Company has realized a portion of the benefits associated with these plants in
fiscal 1995 through fiscal 1997 with Intimate Apparel Division gross profit
margin increasing 300 basis points since fiscal 1994. See Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 15 to 24. The Company believes it takes approximately five years before
new facilities achieve the manufacturing efficiencies of established plants.
 
     Although the Intimate Apparel Division generally markets its product lines
for three retail selling seasons (spring, fall and holiday), its sales and
revenues are somewhat seasonal. Approximately 60% of the Intimate Apparel
Division's net revenues and operating income were generated during the second
half of the 1997 fiscal year.
 
MENSWEAR
 
     The Menswear Division designs, manufactures, imports and markets moderate
to better priced sportswear, better to premium priced men's accessories and
moderate to better priced dress shirts and neckwear. Management considers the
Menswear Division's primary strengths to include its strong brand recognition,
product quality, reputation for fashion styling, strong relationships with
department and specialty stores and its ability to deliver merchandise rapidly.
 
     The Menswear Division markets its lines under the following brand names:
 
<TABLE>
<CAPTION>
             BRAND NAME                           PRICE RANGE                         TYPE OF APPAREL
------------------------------------  ------------------------------------   ---------------------------------
 
<S>                                   <C>                                    <C>
Calvin Klein........................             better/premium              men's underwear (a) and
                                                                               accessories, men's, women's and
                                                                               juniors designer jeanswear and
                                                                               jeans related sportswear
Chaps by Ralph Lauren...............             upper moderate              dress shirts, neckwear, knit and
                                                                               woven sport shirts, sweaters,
                                                                               sportswear and bottoms
Catalina............................                moderate                 men's and women's sportswear and
                                                                               dress shirts and furnishings
</TABLE>
 
------------------
 
(a) See Intimate Apparel Division.
 
                            ------------------------
 
     The Calvin Klein, Chaps by Ralph Lauren and Catalina accessories brand
names are licensed on an exclusive basis by the Company.
 
     The Menswear Division's strategy is to build on the strength of its brand
names, strengthen its position as a global apparel company and eliminate those
businesses which generate a profit contribution below the Company's required
return. In order to improve profitability, the Company (i) did not renew its
Golden Bear by Jack Nicklaus'r' license, which expired in June 1994, (ii) sold
its Hathaway dress shirt business in November 1996 and (iii) acquired Designer
Holdings during the fourth quarter of 1997. The Company recorded losses
associated with exiting the Hathaway business of approximately $46.0 million in
1996 and $10.6 million in fiscal 1997, consisting of operating losses incurred
prior to the disposition and losses related to the write-down of the Hathaway
assets, including intangible assets. The acquisition of Designer Holdings
contributed $133.3 million to net revenues in fiscal 1997.
 
     Despite the strategic decision to discontinue approximately $140.0 million
of annualized net revenues in underperforming brands, the Menswear Division's
net revenues have increased at a compound annual growth rate of 15.4% since 1991
to $425.9 million in fiscal 1997. The reduction in net revenues from
discontinued brands has been more than offset by the success of the Chaps by
Ralph Lauren brand which has increased its net revenues by approximately 600%
since fiscal 1991 to $272.3
 
                                       6
 <PAGE>
<PAGE>
million in fiscal 1997, and the addition of the Calvin Klein jeanswear and jeans
related sportswear brands.
 
     Sportswear. In 1989, the Company began repositioning its Chaps by Ralph
Lauren product lines by changing to the use of all natural fibers and updating
its styling, which has generated significant net revenue increases, as mentioned
above. In 1994, the Company sold or terminated its licenses for Christian Dior
sportswear, neckwear, dress shirts and accessories. In addition, the Company did
not renew its Golden Bear by Jack Nicklaus license which expired in June 1994.
In 1993, the Company entered into a license agreement to design men's and
women's sportswear and men's dress shirts and furnishings bearing the Catalina
trademark. Catalina products are sold through the mass merchandise segment of
the market, generating royalty income of approximately $3.0 million in fiscal
1997.
 
     Accessories. The Menswear Division markets men's small leather goods and
belts and soft side luggage under the Calvin Klein brand name pursuant to a
worldwide license. The first shipments of Calvin Klein accessories were made in
the third quarter of fiscal 1995 to United States customers. The line has
already grown significantly, accounting for approximately $17.3 million and
$11.1 million of net revenues in fiscal 1997 and 1996, respectively. Management
believes that one of the strengths of its accessories lines is the high level of
international consumer recognition associated with the Calvin Klein label. The
Company's strategy is to expand the accessories business, which has consistently
generated higher margins than other menswear products.
 
     International sales accounted for approximately 4.0% of net revenues of the
Menswear Division in fiscal 1996. Net revenues attributable to international
operations of the Menswear Division were $8.3 million and $8.8 million in fiscal
1996 and 1995, respectively. The decrease in international sales over the last
three years reflects the Company's strategic decision to exit the Hathaway
business and terminate the Christian Dior licenses. The Company expects to
generate future revenue from international sales of Calvin Klein accessories.
 
     Sportswear apparel (knit shirts and sweaters and other apparel) is sourced
principally from the Far East. Dress shirts are sourced from the Far East and
the Caribbean Basin. Accessories are sourced from the United States, Europe and
the Far East. Neckwear is sourced primarily from the United States.
 
     The Menswear Division, similar to the Intimate Apparel Division, generally
markets its apparel products for three retail selling seasons (spring, fall and
holiday). New styles, fabrics and colors are introduced based upon consumer
preferences, market trends and to coincide with the appropriate retail selling
season. Sales of the Menswear Division's product lines follow individual
seasonal shipping patterns ranging from one season to three seasons, with
multiple releases in some of the division's more fashion-oriented lines.
Consistent with industry and consumer buying patterns, approximately 62.0% of
the Menswear Division's net revenues and 77.0% of the Menswear Division's
operating income (excluding the Designer Holdings acquisition in the fourth
quarter of fiscal 1997) were generated in the second half of the calendar year,
reflecting the strength of the fall and holiday shopping seasons.
 
RETAIL OUTLET STORES DIVISION
 
     The Retail Outlet Stores Division primarily sells the Company's products to
the general public. The Company's business strategy with respect to its retail
outlet stores is to provide a channel for disposing of the Company's excess and
irregular inventory, thereby limiting its exposure to off-price retailers. The
Company's retail outlet stores are situated in areas where they generally do not
conflict with the Company's principal channels of distribution. Operating income
for the Retail Outlet Stores Division in fiscal 1997 improved 22.4% over fiscal
1996 to $7.1 million. As of January 3, 1998, the Company operated 106 stores.
 
INTERNATIONAL OPERATIONS
 
     The Company has subsidiaries in Canada and Mexico in North America and in
the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria,
Switzerland, the Netherlands and Germany in Europe, which engage in sales,
manufacturing and marketing activities. The results of the Company's operations
in these countries are influenced by the movement of foreign currency exchange
rates. With the exception of the fluctuation in the rates of exchange of the
local currencies in which these
 
                                       7
 <PAGE>
<PAGE>
subsidiaries conduct their business, the Company does not believe that the
operations in Canada and Western Europe are subject to risks which are
significantly different from those of the domestic operations. Mexico has
historically been subject to high rates of inflation and currency restrictions
which may, from time to time, impact the Mexican operation. The Company also
sells directly to customers in Mexico. Net revenues from these shipments
represent less than 1% of the Company's net revenues.
 
     The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, the Dominican Republic, Canada, Ireland, the United Kingdom, France,
Morocco (joint venture), Sri Lanka, the People's Republic of China and the
Philippines. The Company maintains warehousing facilities in Canada, Mexico, the
United Kingdom, Spain, Belgium, Italy, Austria, Switzerland, France and Germany
and contracts for warehousing in the Netherlands. The Intimate Apparel Division
operates manufacturing facilities in Mexico and in the Caribbean Basin pursuant
to duty-advantaged (commonly referred to as 'Item 807') programs. The Company's
policy is to have many potential sources of manufacturing so that a disruption
at any one facility will not significantly impact the Company.
 
     The majority of the Company's purchases which are imported into the United
States are invoiced in United States dollars and, therefore, are not subject to
currency fluctuations. Those transactions denominated in foreign currencies are
hedged to minimize any impact of such currency fluctuations.
 
SALES AND MARKETING
 
     The Intimate Apparel and Menswear Divisions sell to over 16,000 customers
operating more than 26,000 department, mass merchandise and men's and women's
specialty store doors throughout North America and Europe. None of the Company's
customers accounted for more than 10% of the Company's net revenues during the
fiscal year ended January 3, 1998.
 
     The Company's retail customers are served by approximately 300 sales
representatives. The Company also employs marketing coordinators who work with
the Company's customers in designing in-store displays and planning the
placement of merchandise. The Company has implemented Electronic Data
Interchange ('EDI') programs with most of its retailing customers which permit
the Company to receive purchase orders electronically and, in some cases, to
transmit invoices electronically. These innovations assist the Company in
providing products to customers on a timely basis.
 
     The Company utilizes various forms of advertising media. In fiscal 1997,
the Company spent approximately $86.2 million, or 6.0% of net revenues, for
advertising and promotion of its various product lines, compared with $59.5
million, or 5.6% of net revenues in fiscal 1996. The statement of income for
fiscal 1995 includes a special charge for advertising costs, previously
deferrable, of $11.7 million ($7.3 million after income tax benefits) related to
the change in accounting for certain advertising costs in accordance with
Statement of Position 93-7, 'Reporting on Advertising Costs,' ('SOP 93-7')
issued by the American Institute of Certified Public Accountants in December
1993, for years beginning after July 1994. The increase in advertising costs in
fiscal 1997, compared with fiscal 1996, reflects the Company's desire to
maintain its strong market position in Calvin Klein underwear and Warner's,
Olga, and Fruit of the Loom intimate apparel. The Company participates in
advertising on a cooperative basis with retailers, principally through newspaper
advertisements.
 
COMPETITION
 
     The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater resources
than the Company.
 
     The Company also competes with foreign producers, but to date, such foreign
competition has not materially affected the Intimate Apparel or Menswear
Divisions. In addition to competition from other branded apparel manufacturers,
the Company competes in certain product lines with department store private
label programs. The Company believes that its manufacturing skills, coupled with
its existing Central American and Caribbean Basin manufacturing facilities and
selective use of off-shore sourcing, enable the Company to maintain a cost
structure competitive with other major apparel manufacturers.
 
                                       8
 <PAGE>
<PAGE>
     The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its owned and licensed
brand names and its strong presence and market share in the major department,
specialty and mass merchandise store chains.
 
     A substantial portion of the Company's sales are of products, such as
intimate apparel and men's underwear, that are basic and not very susceptible to
rapid design changes. This relatively stable base of business is a significant
contributing factor to the Company's favorable competitive and cost position in
the apparel industry.
 
RAW MATERIALS
 
     The Company's raw materials are principally cotton, wool, silk, synthetic
and cotton-synthetic blends of fabrics and yarns. Raw materials used by the
Intimate Apparel and Menswear Division are available from multiple sources.
 
IMPORT QUOTAS
 
     Substantially all of the Company's Menswear Division's sportswear products
are manufactured by contractors located outside the United States. These
products are imported and are subject to federal customs laws, which impose
tariffs as well as import quota restrictions established by the Department of
Commerce. While importation of goods from certain countries may be subject to
embargo by United States Customs authorities if shipments exceed quota limits,
the Company closely monitors import quotas through its Washington, D.C. office
and can, in most cases, shift production to contractors located in countries
with available quotas or to domestic manufacturing facilities. The existence of
import quotas has, therefore, not had a material effect on the Company's
business. Substantially all of the Company's Intimate Apparel Division's
products are manufactured in the Company's facilities located in Mexico, the
Caribbean Basin, Europe and Asia. The Company's policy is to have many potential
manufacturing sources so that a disruption at any one facility will not
significantly impact the Company.
 
EMPLOYEES
 
     As of January 3, 1998, the Company and its subsidiaries employ
approximately 20,000 employees. Approximately 20.0% of the Company's employees,
all of whom are engaged in the manufacture and distribution of its products, are
represented by labor unions. The Company considers labor relations with
employees to be satisfactory and has not experienced any significant
interruption of its operations due to labor disagreements.
 
TRADEMARKS AND LICENSING AGREEMENTS
 
     The Company has license agreements permitting it to manufacture and market
specific products using the trademarks of others. The Company's exclusive
license and design agreements for the Chaps by Ralph Lauren trademark expire on
December 31, 2004. These licenses grant the Company an exclusive right to use
the Chaps by Ralph Lauren trademark in the United States and Mexico. The
Company's license to develop, manufacture and market designer jeanswear and
jeans related sportswear under the Calvin Klein trademark in North, South and
Central America extends for an initial term expiring on December 31, 2034 and is
extendable at the Company's option for a further 10 year term expiring on
December 31, 2044. The Company's license to use the Valentino Intimo trademark
for intimate apparel in the United States, its territories and possessions,
Puerto Rico and Canada, expires on December 31, 2002, and is extendable subject
to the mutual agreement of the parties. In October 1995, the Company entered
into a worldwide licensing arrangement granting the Company exclusive, worldwide
rights to use the Valentino Intimo trademark for intimate apparel for a period
coterminous with the Company's United States license, through December 31, 2002,
subject to extension by mutual agreement of the parties. The Company has an
exclusive license agreement to use the Fruit of the Loom trademark in the United
States of America, its territories and possessions, Canada and Mexico through
December 31, 1998, subject to renewal for a further term by mutual agreement of
the parties.
 
                                       9
 <PAGE>
<PAGE>
     The Company's exclusive worldwide license agreement with Calvin Klein, Inc.
to produce Calvin Klein men's accessories is for a period of five years through
June 30, 1999 and is renewable for a five year period through June 30, 2004,
solely at the option of the Company. The Company has entered into license
agreements with Authentic Fitness Corporation to produce and sell men's and
women's sportswear and men's dress shirts and furnishings under the Catalina
label and certain intimate apparel under the Speedo label. The Company's
exclusive license to use the Catalina trademark for these products worldwide
expires in December 2003 and the Company's exclusive license to use the Speedo
name for intimate apparel products continues in perpetuity.
 
     The Company is the exclusive worldwide licensee of the Estate of Marilyn
Monroe for use of the name, voice, image and likeness of Marilyn Monroe on
men's, boys', women's and girls' underwear, sleepwear, bodywear and certain
activewear products, for a five year period expiring December 31, 2000, with two
successive five year renewal periods through December 31, 2005 and December 31,
2010, respectively, each at the Company's option. Under a separate license
arrangement with Twentieth Century Fox Licensing and Merchandising, the Company
has been granted the right to use artwork, film titles, and other creative
elements of films owned or controlled by Fox, Inc., in which Marilyn Monroe
appeared, on and in connection with the products produced by the Company under
its license agreement with the Estate of Marilyn Monroe, for a period
coterminous with that license agreement, including subsequent renewals of that
agreement.
 
     Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based on a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
 
     The Company owns other trademarks, the most important of which are
Warner's, Olga, Calvin Klein men's underwear and sleepwear, Calvin Klein women's
intimate apparel and sleepwear, Van Raalte, Lejaby, Rasurel and Bodyslimmers.
The Company has a license in perpetuity for White Stag women's sportswear and
intimate apparel as well as Speedo sports bras.
 
     The Company licenses the Warner's, White Stag, Catalina and Calvin Klein
brand names to domestic and international licensees for a variety of products.
These agreements generally require the licensee to pay royalties and fees to the
Company based on a percentage of the licensee's net sales. The Company regularly
monitors product design, development, quality, merchandising and marketing and
schedules meetings throughout the year with licensees to assure compliance with
the Company's overall marketing, merchandising and design strategies, and to
ensure uniformity and quality control. The Company, on an ongoing basis,
evaluates entering into distribution or license agreements with other companies
that would permit such companies to market products under the Company's
trademarks. Generally, in evaluating a potential distributor or licensee, the
Company considers the experience, financial stability, manufacturing performance
and marketing ability of the proposed licensee. Royalty income derived from
licensing was approximately $12.2 million, $10.3 million and $10.8 million in
fiscal 1997, 1996 and 1995, respectively.
 
     The Company believes that only the trademarks mentioned herein are material
to the business of the Company.
 
BACKLOG
 
     A substantial portion of net revenues is based on orders for immediate
delivery and, therefore, backlog is not necessarily indicative of future net
revenues.
 
  (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
 
     The information required by this portion of Item 1 is incorporated herein
by reference to Note 7 to the Consolidated Financial Statements on pages F-1 to
F-31.
 
                                       10
 <PAGE>
<PAGE>
ITEM 2. PROPERTIES.
 
     The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York 10016 and are occupied pursuant to a lease that
expires in 2004. In addition to its executive offices, the Company leases
offices in Connecticut, California and New York, pursuant to leases that expire
in 1999, 2000 and 2007, respectively.
 
     The Company has nine domestic manufacturing and warehouse facilities
located in Connecticut, Georgia, Pennsylvania, Tennessee, South Carolina,
Massachusetts and New Jersey and 31 international manufacturing and warehouse
facilities located in Canada, Costa Rica, the Dominican Republic, France,
Germany, Honduras, Mexico, People's Republic of China, the Philippines, Sri
Lanka, the United Kingdom, Ireland, Spain, Belgium, Italy, Switzerland, Holland
and Austria. Certain of the Company's manufacturing and warehouse facilities are
also used for administrative and retail functions. The Company owns six of its
domestic and three of its international facilities. The balance of the
facilities are leased. Lease terms, except for five month-to-month leases,
expire from 1998 to 2020. No facility is underutilized, except for the facility
located in Dothan, Alabama, which has discontinued operations and which the
Company has listed for sale.
 
     The Company leases sales offices in a number of major cities, including
Dallas and New York in the United States; Brussels, Belgium; Dusseldorf and
Frankfurt, Germany; Toronto, Canada; Lausanne, Switzerland; Milan, Italy; Paris,
France; and Hong Kong. The sales office leases expire between 1998 and 2008 and
are generally renewable at the Company's option. The Company also occupies
offices in London, England subject to a freehold lease which expires in 2114.
The Company leases 106 retail outlet store locations. Outlet store leases,
except for two month-to-month leases, expire from 1998 to 2008 and are generally
renewable at the Company's option.
 
     All of the Company's production and warehouse facilities are located in
appropriately designed buildings, which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes. The Company has expanded its production capacity in Mexico and
the Caribbean Basin during the last three years.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, that individually or in the aggregate
is material to the business of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     The Company held a special meeting of its stockholders on December 12, 1997
to vote upon a proposal to approve the issuance of shares of the Company's Class
A Common Stock in connection with the Agreement and Plan of Merger, dated as of
September 25, 1997, among the Company, WAC Acquisition Corporation and Designer
Holdings. The result of the voting was as follows:
 
<TABLE>
<CAPTION>
<S>                                                                                        <C>
Shares voted for the proposal...........................................................   44,286,313
Shares voted against the proposal.......................................................        8,798
Shares abstained........................................................................       84,153
</TABLE>
 
                                       11
 <PAGE>
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
 
     The executive officers of the Company, their age and their position are set
forth below.
 
<TABLE>
<CAPTION>
                       NAME                           AGE                        POSITION
---------------------------------------------------   ---   ---------------------------------------------------
 
<S>                                                   <C>   <C>
Linda J. Wachner...................................   52    Director, Chairman of the Board, President and
                                                              Chief Executive Officer
William S. Finkelstein.............................   49    Director, Senior Vice President and Chief Financial
                                                              Officer
Stanley P. Silverstein.............................   45    Vice President, General Counsel and Secretary
Carl J. Deddens....................................   45    Vice President and Treasurer
</TABLE>
 
     Mrs. Wachner has been a Director, President and Chief Executive Officer of
the Company since August 1987, and the Chairman of the Board since August 1991.
Mrs. Wachner was a Director and President of the Company from March 1986 to
August 1987. Mrs. Wachner held various positions, including President and Chief
Executive Officer, with Max Factor and Company from December 1978 to October
1984. Mrs. Wachner also serves as a Director of Travelers Group Inc., the New
York Stock Exchange, Applied Graphics Technologies, Inc. and Authentic Fitness
Corporation.
 
     Mr. Finkelstein has been Senior Vice President of the Company since May
1992 and Chief Financial Officer and Director of the Company since May 1995. Mr.
Finkelstein served as Vice President and Controller of the Company from November
1988 until his appointment as Senior Vice President. Mr. Finkelstein served as
Vice President of Finance of the Company's Activewear and Olga Divisions from
March 1988 until his appointment as Controller of the Company. Mr. Finkelstein
served as Vice President and Controller of SPI Pharmaceuticals Inc. from
February 1986 to March 1988 and held various financial positions, including
Assistant Corporate Controller with Max Factor and Company, between 1977 and
1985. Mr. Finkelstein also serves as a Director of Authentic Fitness
Corporation.
 
     Mr. Silverstein has been Vice President, General Counsel and Secretary of
the Company since December 1990. Mr. Silverstein served as Assistant Secretary
of the Company from June 1986 until his appointment as Secretary in January
1987.
 
     Mr. Deddens has been Vice President and Treasurer of the Company since
March 1996. Prior to joining the Company, Mr. Deddens served as Vice President
and Treasurer of Revlon, Inc. from 1991 to 1996 and as Assistant Treasurer from
1987 to 1991. Mr. Deddens held various financial positions with Allied-Signal
Corporation and Union Texas Petroleum Corporation from 1981 to 1987.
 
                                       12
<PAGE>
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     The Company's Class A Common Stock, $0.01 par value per share (the 'Common
Stock'), is listed on the New York Stock Exchange under the symbol 'WAC'. The
table below sets forth, for the periods indicated, the high and low sales prices
of the Company's Common Stock, as reported on the New York Stock Exchange
Composite Tape.
 
<TABLE>
<CAPTION>
                                                                                         DIVIDEND
PERIOD                                                                  HIGH      LOW    DECLARED
---------------------------------------------------------------------   ----      ---    --------
 
<S>                                                                     <C>       <C>    <C>
1996:
     First Quarter...................................................   $27 1/2   $21 1/2    $.07
     Second Quarter..................................................   $31 1/4   $24 1/4    $.07
     Third Quarter...................................................   $25 3/4   $21 5/8    $.07
     Fourth Quarter..................................................   $29 5/8   $22 3/4    $.07
 
1997:
     First Quarter...................................................   $33 3/8   $26 5/8    $.08
     Second Quarter..................................................   $34       $27 15/16  $.08
     Third Quarter...................................................   $35 9/16  $30 15/16  $.08
     Fourth Quarter..................................................   $33 1/4   $26 3/4    $.09
 
1998:
     First Quarter (through March 31, 1998)..........................   $39 9/16  $30        $.09(1)
</TABLE>
 
------------
 
(1) On February 19, 1998, the Company declared its regular quarterly cash
    dividend of $.09 per share payable on April 9, 1998 to stockholders of
    record as of March 12, 1998.
 
                            ------------------------
 
     As of March 31, 1998, there were 216 holders of the Common Stock, based
upon the number of holders of record and the number of individual participants
in certain security position listings.
 
     In fiscal 1995, the Company initiated a regular cash dividend of $0.28 per
share per annum. The initial cash dividend was paid on June 30, 1995. On
February 20, 1997, the Company's Board of Directors approved an increase in the
Company's quarterly cash dividend to $0.08 per share. On November 21, 1997, the
Company's Board of Directors approved an increase in the quarterly cash dividend
to $0.09 per share, which was paid on January 6, 1998.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     Set forth below is consolidated statement of income data with respect to
the fiscal years ended January 6, 1996, January 4, 1997 and January 3, 1998, and
consolidated balance sheet data at January 4, 1997 and January 3, 1998, all of
which are derived from, and qualified by reference to, the audited consolidated
financial statements included herein and such data should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
income data for the fiscal years ended January 8, 1994 and January 7, 1995 and
the consolidated balance sheet data at January 8, 1994, January 7, 1995 and
January 6, 1996 are derived from audited consolidated financial statements not
included herein.
 
                                       13
 <PAGE>
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED
                                        ---------------------------------------------------------------------
                                        JANUARY 8,     JANUARY 7,     JANUARY 6,     JANUARY 4,    JANUARY 3,
                                        1994(a)(b)      1995(a)       1996(e)(f)      1997(g)       1998(h)
                                        ---------------------------------------------------------------------
                                                     (IN MILLIONS, EXCEPT RATIOS AND SHARE DATA)
<S>                                     <C>            <C>            <C>            <C>           <C>
STATEMENT OF INCOME DATA:
Net revenues........................    $   703.8      $   788.8      $   916.2      $ 1,063.8     $ 1,435.7
Gross profit........................        236.4          255.8          309.7          327.7         432.2
Income before interest and income
  taxes.............................         69.7           96.2          113.9           26.0          82.8
Interest expense....................         38.9           32.5           33.9           32.4          45.9
Income (loss) from continuing
  operations........................         53.3           63.3           49.6           (8.2)         23.0
Net income (loss) applicable to
  Common Stock(d)...................         24.1           63.3           46.5           (8.2)         23.0
Dividends on Common Stock...........           --             --            9.5           14.5          17.3
Per Share Data(d):
Income (loss) from continuing
  operations:
    Basic...........................    $  1.34(c)     $  1.53(c)     $    1.12      $   (0.16)    $    0.44
    Diluted.........................    $  1.34(c)     $  1.53(c)     $    1.10      $   (0.16)    $    0.42
Net income (loss):
    Basic...........................    $    0.61      $    1.53      $    1.05      $   (0.16)    $    0.44
    Diluted.........................    $    0.61      $    1.53      $    1.03      $   (0.16)    $    0.42
Weighted average number of shares of
  Common Stock outstanding(d):
    Basic...........................    39,770,482     41,285,355     44,214,690     51,308,017    52,813,982
    Diluted.........................    39,770,482     41,285,355     45,278,117     51,308,017    54,820,728
Divisional Summary Data:
  Net revenues:
    Intimate Apparel................    $   423.2      $   565.3      $   689.2      $   802.0     $   941.2
    Menswear........................        243.2          183.8          185.7          214.4         425.9
    Retail Outlet Stores............         37.4           39.7           41.3           47.4          68.6
                                        ----------     ----------     ----------     ----------    ----------
                                        $   703.8      $   788.8      $   916.2      $ 1,063.8     $ 1,435.7
                                        ----------     ----------     ----------     ----------    ----------
                                        ----------     ----------     ----------     ----------    ----------
    Percentage of net revenues:
    Intimate Apparel................         60.1 %         71.7 %         75.2 %         75.4 %        65.6 %
    Menswear........................         34.6           23.3           20.3           20.2          29.7
    Retail Outlet Stores............          5.3            5.0            4.5            4.4           4.7
                                        ----------     ----------     ----------     ----------    ----------
                                            100.0 %        100.0 %        100.0 %        100.0 %       100.0 %
                                        ----------     ----------     ----------     ----------    ----------
                                        ----------     ----------     ----------     ----------    ----------
BALANCE SHEET DATA:
    Working capital.................    $   122.0      $   104.5      $   307.5      $   210.6     $   447.3
    Total assets....................        688.6          780.6          941.1        1,142.9       1,727.7
    Long term debt (excluding
      current maturities)...........        245.5          206.8          194.3          215.8         354.3
    Stockholders' equity............        159.1          240.5          500.3          475.7         808.1
</TABLE>
 
------------------
 
 (a) In October 1993, the Company discontinued a portion of its men's
     manufactured dress shirt and neckwear business segment. This resulted in a
     pre-tax charge of $19.9 million. Additionally, the Company incurred a $2.6
     million pre-tax charge associated with a previously discontinued business.
     The total non-recurring charges recorded in fiscal 1993 were $22.5 million
     or $0.33 per diluted share. In fiscal 1994, the Company recorded a $3.0
     million pre-tax charge (or $0.04 per diluted share) related to the
     California earthquake.
 
 (b) Fiscal 1993 includes a $10.5 million after-tax charge ($0.27 per diluted
     share) for the cumulative effect of a change in accounting for
     postretirement benefits other than pensions and an $18.7 million after-tax
     extraordinary charge ($0.47 per diluted share) to write-off deferred
     financing costs and losses under related interest rate swap agreements.
 
 (c) Income reflects the benefits of utilizing the Company's net operating loss
     carryforward to offset the Company's federal income tax provision. Income
     before non-recurring items, after giving effect to a full tax provision at
     the Company's effective income tax rate of 38.0%, was $41.1 million (or
     $1.00 per share) in fiscal 1994 and $33.0 million (or $0.83 per share) in
     fiscal 1993.
 
 (d) All share and per share amounts have been restated to reflect the
     two-for-one stock split effective October 3, 1994 and the impact of
     Statement of Financial Accounting Standards No. 128, 'Earnings Per Share',
     adopted effective January 3, 1998.
 
                                              (footnotes continued on next page)
 
                                       14
 <PAGE>
<PAGE>
 (e) Effective with the 1995 fiscal year, the Company adopted the provisions of
     SOP 93-7 which requires, among other things, that certain costs which had
     previously been deferred and amortized against future revenues be expensed
     when the advertisement first runs. The Company incurred a pre-tax charge
     for advertising costs, previously deferrable, of $11.7 million ($7.3
     million net of income tax benefits, or $0.17 per diluted share) in the
     fourth quarter of fiscal 1995.
 
 (f) Fiscal 1995 includes a $3.1 million after-tax extraordinary charge ($0.06
     per diluted share) to write-off deferred financing costs.
 
 (g) Fiscal 1996 includes pre-tax charges related to the sale of the Company's
     Hathaway dress shirt operations of $46.0 million, consolidation and
     realignment of the Company's Intimate Apparel Division of $72.1 million and
     other items of $20.4 million. Total non-recurring items were $138.5 million
     ($88.8 million net of income tax benefits, or $1.67 per diluted share).
 
 (h) Fiscal 1997 reflects the acquisition of Designer Holdings during the fourth
     quarter and includes pre-tax charges related to the merger and integration
     of 1996 and 1997 acquisitions and the completion in 1997 of certain
     consolidation and restructuring actions announced in 1996. Total
     non-recurring items were $130.8 million ($81.1 million net of income tax
     benefits, or $1.48 per diluted share). Excluding non-recurring items, net
     income and net income per diluted share was $104.1 million and $1.87,
     respectively.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
  STRATEGIC ACTIONS (See Note 4 of Notes to Consolidated Financial Statements)
 
FISCAL 1997
 
     During the fourth quarter of 1997, the Company reported a pre-tax charge of
$130.8 million related to the acquisition and integration of Designer Holdings,
the Intimate Apparel consolidation and realignment program initiated in 1996 and
other items, including the final disposition of Hathaway assets (amounts in
millions):
 
<TABLE>
<CAPTION>
<S>                                                                                 <C>
Merger related integration costs.................................................   $ 49.9
Consolidation and realignment....................................................     59.5
Other items, including final disposition of Hathaway assets......................     21.4
                                                                                    ------
                                                                                     130.8
     Less income tax benefits....................................................    (49.7)
                                                                                    ------
                                                                                    $ 81.1
                                                                                    ------
                                                                                    ------
</TABLE>
 
     The charge consists primarily of a write-down of asset values, severance
and other employee costs, costs related to manufacturing realignment and lease
and other costs to combine existing outlet stores with those of Designer
Holdings.
 
     During the fourth quarter of 1997, the Company increased the scope of the
consolidation and restructuring of the Intimate Apparel Division started in
1996, primarily as a result of increased production volumes and demand
experienced throughout the year. Accordingly, additional products and styles
were discontinued and slower moving inventory liquidated.
 
MERGER RELATED INTEGRATION COSTS
 
     Designer Holdings and the Company previously operated retail outlets in
several common locations. The Company has elected to consolidate retail
operations in such locations into the larger Designer Holdings facilities. As a
result, the Company has provided for the anticipated lease termination costs,
write off of related fixed assets and the close out of store inventories and
surplus stocks not considered suitable for redirected marketing efforts in the
new store format. The Company has also taken steps to reduce the number of new
Designer Holdings retail stores previously planned. In
 
                                       15
 <PAGE>
<PAGE>
addition, following the merger in December 1997, the Company consolidated the
credit and collection functions of the companies, and initiated a program of
consolidating receivables from common customers, offering favorable settlement
of prior balances to accelerate collection efforts. Additional allowances
accepted under this program are expected to generate substantial cash earlier
than otherwise would be available. Under the Company's redirected marketing
strategy for Designer Holdings, it is anticipated that the volume of future
business with certain prior distribution outlets may be significantly reduced.
In connection with the integration, the Company recorded a pre-tax charge of
$49.9 million ($31.3 million net of income tax benefits).
 
     The consolidation of other administrative functions for the Company and
Designer Holdings, which is substantially complete, has resulted in workforce
reductions and closure of office facilities and will generate $19 million of
annual savings. Additional reductions and closures are being considered to
maximize savings.
 
CONSOLIDATION AND REALIGNMENT
 
     The Company expanded the intimate apparel consolidation and realignment
program initiated in 1996 to include other products and facilities. In large
part this was necessitated or prompted by the increased production volumes and
demand experienced throughout the year. Accordingly, additional products and
styles were discontinued and slower moving inventory liquidated, incurring
markdown losses to accommodate the increased volumes of higher margin
merchandise. The consolidation of retail stores and related restocking plans was
also a factor.
 
     Further reconfiguration of manufacturing facilities and the merger of
Warner's Europe with Lejaby operations achieved a workforce reduction greater
than originally anticipated but delayed realization of anticipated efficiencies
and resulted in additional costs including severance and termination costs,
primarily expensed as incurred. In connection with the consolidation and
realignment, the Company recorded a pre-tax charge of $59.5 million ($36.6
million net of income tax benefits).
 
OTHER
 
     The planned disposition of assets retained from the Hathaway sale was
achieved on terms less favorable than expected. In addition, insurance
recoveries related to a prior year customer bankruptcy were less than
anticipated. As a result of the above and certain other items, charges incurred
in 1997 exceeded estimates previously accrued by $21.4 million ($13.2 million
net of income tax benefits).
 
FISCAL 1996
 
     Following the acquisition of the GJM business in February 1996, which
expanded the Company's product lines and significantly added to the Company's
low cost sleepwear manufacturing capacity, the Company undertook a strategic
review of its businesses and manufacturing facilities. The acquisitions of
Bodyslimmers and Lejaby were also considered in this review. As a result of this
review, the Company took the following steps which resulted in a non-recurring
charge in fiscal 1996 as summarized below (in millions):
 
<TABLE>
<CAPTION>
<S>                                                                                 <C>
Loss related to the sale of the Hathaway business................................   $ 46.0
Charge for the consolidation and realignment of the Intimate Apparel Division....     72.1
Other items, including merger termination costs..................................     20.4
                                                                                    ------
                                                                                     138.5
Less income tax benefits.........................................................    (49.7)
                                                                                    ------
                                                                                    $ 88.8
                                                                                    ------
                                                                                    ------
</TABLE>
 
EXIT FROM THE HATHAWAY BUSINESS
 
     In May 1996, following a comprehensive evaluation of the Company's men's
dress shirt business, the Company decided to cease manufacturing and marketing
the Hathaway brand. In recent years, the
 
                                       16
 <PAGE>
<PAGE>
dress shirt business had become increasingly price driven and, as a result,
profit margins were considerably below those of the Company's core intimate
apparel business. In addition, the dress shirt business required continuous
investment, particularly of working capital, disproportionate to its return.
Accordingly, the Company elected to withdraw from the Hathaway dress shirt
business, freeing up funds for reinvestment in brands and businesses with higher
growth potential and greater returns.
 
     On November 12, 1996, the Company completed the sale of certain assets of
its Hathaway dress shirt business, including its Waterville, Maine and Prescott,
Ontario manufacturing facilities ('Hathaway Assets'). In connection with the
decision to exit the Hathaway business, the Company recorded a pre-tax charge of
approximately $46.0 million ($29.5 million net of income tax benefits). Included
in the charge are losses from the write-down of the Hathaway Assets to fair
value and losses incurred in the operation of the Hathaway business since the
Company announced its intent to exit this business. The pre-tax loss also
includes the write off of $13.8 million of Hathaway intangible assets, including
goodwill.
 
INTIMATE APPAREL CONSOLIDATION AND REALIGNMENT
 
     In April 1996, the Company announced the consolidation of certain intimate
apparel and other manufacturing, distribution and administrative operations in
the United States and Europe. The consolidation and realignment of the Intimate
Apparel Division was designed to reduce costs and improve the efficiency of the
Company's operations and resulted in annual cost savings in excess of $15
million. In connection with the consolidation and realignment, the Company
recorded a pre-tax charge of approximately $72.1 million ($46.2 million net of
income tax benefits), comprised primarily of a write-down of asset values,
accruals of lease and other contractual obligations, and employee termination
and severance costs. In order to maximize the cost savings and efficiencies as a
result of the consolidation of facilities and the additional volumes
contemplated as a result of the Lejaby, GJM and Bodyslimmers acquisitions, the
Company reevaluated the viability of all product assortments and styles. As a
result, certain products and styles were discontinued to permit the investment
of working capital in products and styles with greater returns. In addition, the
Company incurred certain costs and expenses associated with the realignment of
manufacturing plants, consolidation of the Company's intimate apparel sales
forces and other costs during the second and third quarters of fiscal 1996,
which are also included in the charge.
 
OTHER ITEMS
 
     The 1996 charge also includes a pre-tax charge of $17.4 million ($11.3
million net of income tax benefits) related to the cancellation of certain
contracts, realignment of its European organization and the write-off of
insurance and other receivables.
 
     In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996, the Company announced the termination of
the merger. The Company incurred legal, accounting and investment advisory fees
in connection with the proposed merger of approximately $3.0 million, ($1.9
million net of income tax benefits), all of which were charged to operations in
fiscal 1996.
 
     The non-recurring charge for the Hathaway disposition, the Intimate Apparel
Division consolidation and realignment and certain other items total $138.5
million ($88.8 million net of income tax benefits), or $1.66 per diluted share
for the year ended January 4, 1997.
 
RESULTS OF OPERATIONS
 
     The consolidated statements of income for the Company are summarized below
on an analytical basis. The Divisional Summary includes the Retail Outlet Stores
Division for reporting purposes; however, since the Company's business strategy
is to use its Retail Outlet Stores Division as a channel for its excess
inventory and the Company does not consider the results of such division to be
material, the Retail Outlet Stores Division is not discussed further.
 
                                       17
<PAGE>
<PAGE>
                                 SELECTED DATA
                              STATEMENT OF INCOME
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                          FISCAL YEAR ENDED
                                              --------------------------------------------------------------------------
                                              JANUARY 6,    % OF NET    JANUARY 4,    % OF NET    JANUARY 3,    % OF NET
                                                 1996       REVENUES       1997       REVENUES       1998       REVENUES
                                              ----------    --------    ----------    --------    ----------    --------
<S>                                           <C>           <C>         <C>           <C>         <C>           <C>
Net revenues...............................     $916.2        100.0%     $1,063.8       100.0%     $1,435.7       100.0%
Cost of goods sold(1)......................      606.5         66.2%        736.1        69.2%      1,003.5        69.9%
                                              ----------    --------    ----------    --------    ----------    --------
Gross profit(1)............................      309.7         33.8%        327.7        30.8%        432.2        30.1%
Selling, administrative and general
  expenses(2)..............................      195.8         21.4%        301.7        28.4%        349.4        24.3%
                                              ----------    --------    ----------    --------    ----------    --------
Income before interest and income taxes....      113.9         12.4%         26.0         2.4%         82.8         5.8%
Interest expense...........................       33.9                       32.4                      45.9
                                              ----------                ----------                ----------
Income (loss) before income taxes..........       80.0                       (6.4)                     36.9
Income taxes...............................       30.4                        1.8                      13.9
                                              ----------                ----------                ----------
Income (loss) before extraordinary item....     $ 49.6                   $   (8.2)                 $   23.0
Extraordinary item, net of income
  tax benefits of $1.9.....................       (3.1)                        --                        --
                                              ----------                 ---------                 ---------
Net income (loss)..........................     $ 46.5                   $   (8.2)                 $   23.0 
                                              ----------                 ---------                 ---------
                                              ----------                 ----------                ----------
</TABLE>
 
                               DIVISIONAL SUMMARY
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                          FISCAL YEAR ENDED
                                              --------------------------------------------------------------------------
                                                              % OF                      % OF                      % OF
                                              JANUARY 6,     GROSS      JANUARY 4,     GROSS      JANUARY 3,     GROSS
                                                 1996        PROFIT        1997        PROFIT        1998        PROFIT
                                              ----------    --------    ----------    --------    ----------    --------
<S>                                           <C>           <C>         <C>           <C>         <C>           <C>
Net revenues:
     Intimate Apparel......................     $689.2                   $  802.0                  $  941.2
     Menswear..............................      185.7                      214.4                     425.9
     Retail Outlet Stores..................       41.3                       47.4                      68.6
                                              ----------                ----------                ----------
                                                $916.2                   $1,063.8                  $1,435.7
                                              ----------                ----------                ----------
                                              ----------                ----------                ----------
Gross profit(1):
     Intimate Apparel......................     $259.2         83.7%     $  268.5        81.9%     $  316.8        73.3%
     Menswear..............................       35.5         11.5%         44.7        13.6%         99.9        23.1%
     Retail Outlet Stores..................       15.0          4.8%         18.5         5.6%         24.7         5.7%
     Divested Operations...................      --           --             (4.0)      (1.1)%         (9.2)      (2.1)%
                                              ----------    --------    ----------    --------    ----------    --------
                                                $309.7        100.0%     $  327.7       100.0%     $  432.2       100.0%
                                              ----------    --------    ----------    --------    ----------    --------
                                              ----------    --------    ----------    --------    ----------    --------
</TABLE>
 
------------
 
(1) Includes non-recurring expenses of $37.9 million in fiscal 1996 related to
    the decision to exit the Hathaway business and the restructuring and
    realignment of the Intimate Apparel Division and $76.6 million in fiscal
    1997 related to the acquisition of Designer Holdings and the completion of
    the 1996 consolidation and restructuring actions.
 
(2) Includes non-recurring expenses of $11.7 million in fiscal 1995, $100.6
    million in fiscal 1996 and $54.2 million in fiscal 1997 related to the
    write-off of certain deferred advertising costs, the sale of the Company's
    Hathaway dress shirt operation, consolidation and realignment of the
    Company's Intimate Apparel Division and other items and consolidation and
    restructuring of facilities and personnel related to the acquisition of
    Designer Holdings. Also, in fiscal 1997 includes $3.5 million attributable
    to minority interests in the income of Designer Holdings applicable to the
    period of less than 100% ownership by the Company.
 
COMPARISON OF FISCAL 1997 TO FISCAL 1996
 
     Net revenues increased $371.9 million or 35.0% to $1,435.7 million compared
with $1,063.8 million in fiscal 1996. The acquisition of Designer Holdings
during the fourth quarter of fiscal 1997 added net revenues of $158.3 million.
Excluding the impact of the Designer Holdings acquisition and the 1996
divestiture of the Hathaway dress shirt business, net revenues improved by
$241.9 million or 23.4%.
 
                                       18
 <PAGE>
<PAGE>
    INTIMATE APPAREL DIVISION. Net revenues increased $139.2 million or 17.4% to
    $941.2 million in fiscal 1997 compared with $802.0 million in fiscal 1996.
    The increase is due to the strength of the Calvin Klein and the core Warners
    and Olga brands coupled with the full year impact in fiscal 1997 of the
    acquisition of the Lejaby companies in fiscal 1996. Net revenues of Calvin
    Klein increased by $74.4 million due primarily to stronger sales in Europe.
    Warners and Olga brand net revenues improved by $28.8 million due to
    increased market penetration. Incremental net revenues contributed by Lejaby
    were $43.8 million in fiscal 1997.
 
    MENSWEAR DIVISION. Net revenues increased $211.5 million or 98.6% to $425.9
    million in fiscal 1997 compared with $214.4 million in fiscal 1996. The
    improvement is due in part to the acquisition of Designer Holdings during
    the fourth quarter of 1997, which added net revenues of $133.3 million. In
    addition, the increase is due to continued strength in Chaps by Ralph
    Lauren, which added $100.3 million in fiscal 1997, or an increase of 58.3%
    over fiscal 1996, and Calvin Klein accessories, which added $6.2 million, or
    an increase of 55.9% over fiscal 1996. These increases were partially offset
    by a decrease in net revenues due to the disposition of the Hathaway dress
    shirt operations in November 1996. On a comparable basis, excluding the
    Designer Holdings acquisition and the divested Hathaway operations, net
    revenues increased $106.5 million or 57.2% in fiscal 1997.
 
     Gross profit increased 39.2% (excluding non-recurring items) to $508.8
million in fiscal 1997 compared with $365.6 million in fiscal 1996. Increases
were experienced across all divisions. On a comparable basis, excluding the
results of Designer Holdings in 1997 and the Hathaway business in 1996, gross
profit improved 29.0% or $107.0 million. The Company recorded non-recurring
charges in fiscal 1997 related to the acquisition of Designer Holdings and the
completion in 1997 of certain consolidation and restructuring actions announced
in 1996. On an as-reported basis, including the effects of the non-recurring
charges in 1997 and 1996, gross profit increased 31.9%.
 
    INTIMATE APPAREL DIVISION. Gross profit (excluding non-recurring items)
    increased 21.6% to $367.5 million in fiscal 1997 (39.0% of net revenues) in
    fiscal 1997 from $302.4 million (37.7% of net revenues) in fiscal 1996. The
    increase in gross profit reflects higher sales volumes along with a better
    mix of Calvin Klein primarily in Europe and the full year impact in 1997 of
    the Lejaby acquisition.
 
    MENSWEAR DIVISION. Gross profit (excluding non-recurring items) increased
    160.9% to $116.6 million in fiscal 1997 (27.4% of net revenues) compared
    with $44.7 million (20.8% of net revenues) in fiscal 1996. The increase in
    gross profit is the result of higher Chaps by Ralph Lauren volume along with
    the acquisition of Designer Holdings during the fourth quarter of 1997. The
    Company also benefitted from the disposition, in fiscal 1996, of the
    Hathaway dress shirt business. On a comparable basis, excluding the results
    of Designer Holdings in 1997 and the Hathaway business in 1996, gross profit
    improved 74.6% or $35.6 million in fiscal 1997.
 
     Selling, administrative and general expenses (excluding non-recurring
items) increased 46.8% to $295.2 million (20.6% of net revenues) in fiscal 1997
compared with $201.0 million (18.9% of net revenues) in fiscal 1996. The
increase is due to higher sales volume and reflects the Company's commitment to
invest in its brands through increased marketing and promotional activities. In
fiscal 1997, such costs were $86.2 million (6.0% of net revenues) compared with
$59.5 million (5.6% of net revenues) in fiscal 1996 with increased spending on
the Calvin Klein and Lejaby brands of intimate apparel and Calvin Klein
jeanswear and jeans related sportswear. Selling, administrative and general
expenses also increased due to higher Calvin Klein royalties, higher goodwill
amortization, the result of the acquisition of Designer Holdings and the Lejaby
companies and the inclusion of $3.5 million attributable to minority interests
in the income of Designer Holdings applicable to the period of less than 100%
ownership by the Company.
 
     Interest expense increased 41.7% to $45.9 million in fiscal 1997 from $32.4
million in fiscal 1996. The increase results primarily from a full year of
interest expense on funds borrowed to complete the 1996 acquisitions,
principally Lejaby.
 
     Income tax expense was $13.9 million for fiscal 1997 on an as-reported
basis, including tax benefits of $49.7 million applicable to the fiscal 1997
non-recurring charge and a $1.4 million tax benefit related to the minority
interest. The difference between the United States federal statutory rate of
35.0% and
 
                                       19
 <PAGE>
<PAGE>
the Company's effective tax rate of 38.0% (excluding the non-recurring charge
and the minority interest) reflects the impact of state income taxes and the
effects of non-deductible intangible amortization offset in part by taxes on
foreign income at rates lower than the United States statutory rate. For income
tax purposes, the Company has net operating loss carryforwards available to
offset future taxable income of approximately $79.6 million at January 3, 1998.
These carryforwards, which the Company expects to fully utilize, should result
in future tax savings of approximately $25.7 million at current United States
corporate tax rates. The net operating loss carryforwards expire beginning in
2004 and fully expire in 2010.
 
     Net income before non-recurring items increased 29.2% to $104.1 million (or
$1.87 per diluted share) in fiscal 1997 from $80.6 million (or $1.51 per diluted
share) in fiscal 1996. This increase reflects higher sales volumes and gross
margins partially offset by higher selling, administrative and general costs and
interest costs, as previously discussed. On an as-reported basis, net income
increased to $23.0 million in fiscal 1997 compared with a net loss of $8.2
million in fiscal 1996. Included in fiscal 1997 and 1996 net income are
non-recurring charges of $81.1 million and $88.8 million, respectively.
 
COMPARISON OF FISCAL 1996 TO FISCAL 1995
 
     Net revenues increased $147.6 million or 16.1% to $1,063.8 million compared
with $916.2 million in fiscal 1995 with double-digit increases across all
divisions.
 
    INTIMATE APPAREL DIVISION. Net revenues increased $112.8 million or 16.4% to
    $802.0 million in fiscal 1996 compared with $689.2 million in fiscal 1995.
    The increase in net revenues is attributable to an increase in Calvin Klein
    net revenues of $84.6 million, an increase in sleepwear net revenues of
    $55.0 million, reflecting the acquisitions of GJM in February 1996 and
    Lejaby in July 1996, which increased net revenues by $47.5 million. This was
    partially offset by a decrease in shipments to Avon and Victoria's Secret of
    approximately $75.0 million.
 
    MENSWEAR DIVISION. Menswear Division net revenues increased $28.7 million or
    15.5% to $214.4 million in fiscal 1996 compared with $185.7 million in
    fiscal 1995. The increase in net revenues is attributable to an increase in
    Chaps by Ralph Lauren net revenues of $38.1 million and the start-up of
    Calvin Klein accessories, which added $7.1 million to net revenues. The
    increases in Chaps by Ralph Lauren and Calvin Klein accessories were
    partially offset by a decrease in Hathaway net revenues due to the
    disposition of the Hathaway dress shirt operations in November 1996.
 
     Gross profit increased 18.0% to $365.5 million (excluding non-recurring
items) in fiscal 1996 compared with $309.7 million in fiscal 1995. Gross profit
as a percentage of net revenues was 34.4% in fiscal 1996 compared with 33.8% in
fiscal 1995. On an as-reported basis and including $37.9 million of
non-recurring expenses related to the Company's decision to exit its Hathaway
dress shirt operations and the realignment and restructuring of the Company's
intimate apparel division, gross profit increased 5.8% to $327.7 million in
fiscal 1996 from $309.7 million in fiscal 1995.
 
    INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit (excluding
    the effect of the realignment and restructuring charges) increased 16.6% to
    $302.3 million (37.7% of net revenues) in fiscal 1996 from $259.2 million
    (37.6% of net revenues) in fiscal 1995. The increase in gross profit
    reflects the higher sales volume noted above. The increase in gross profit
    as a percentage of net revenues reflects manufacturing efficiencies in the
    Company's manufacturing facilities and a higher mix of Calvin Klein sales
    partially offset by the slightly lower margins on the GJM private label
    business, which was acquired in February 1996.
 
    MENSWEAR DIVISION. Menswear Division gross profit (excluding the effect of
    the Hathaway charges) increased 25.9% to $44.7 million (20.8% of net
    revenues) in fiscal 1996 from $35.5 million (19.1% of net revenues) in
    fiscal 1995. The increase in gross profit reflects the higher sales volume
    noted above. The increase in gross profit as a percentage of net revenues
    reflects the more favorable mix of Chaps by Ralph Lauren and Calvin Klein
    accessories business and the sale of the Company's Hathaway dress shirt
    operations in November 1996.
 
     Selling, administrative and general expenses before non-recurring and
restructuring charges increased 9.2% to $201.1 million (18.9% of net revenues)
in fiscal 1996 compared with $184.1 million (20.1% of net revenues) in fiscal
1995. The increase in selling, administrative and general expenses
 
                                       20
 <PAGE>
<PAGE>
reflects higher sales volumes and an increase in marketing and promotion
expenses to $59.5 million (5.6% of net revenues) in fiscal 1996 compared with
$41.0 million (4.5% of net revenues) in fiscal 1995. Despite the increase in
marketing and promotion expense, selling, administrative and general expenses
improved as a percentage of net revenues, reflecting the cost savings realized
from the realignment and restructuring of the Company's Intimate Apparel
Division.
 
     Interest expense decreased slightly to $32.4 million in fiscal 1996 from
$33.9 million in fiscal 1995. The decrease in interest expense reflects the
benefit from the proceeds of the Company's stock offering, completed in October
1995, and a lower average interest rate, which was partially offset by interest
on funds borrowed to complete the GJM, Lejaby and Bodyslimmers acquisitions.
 
     Income tax expense was $1.8 million for fiscal 1996 on an as-reported
basis. The difference between the United States federal statutory income tax
rate of 35.0% and the Company's effective income tax rate of 38.9% (excluding
the benefits related to the non-recurring charges) primarily reflects the impact
of state income taxes and the effects of non-deductible intangible amortization.
 
     The net loss of $8.2 million in fiscal 1996 on an as reported basis
reflects the impact of the non-recurring charges noted above. Income before
non-recurring charges for fiscal 1996 was $80.6 million compared with income
before the adoption of SOP 93-7 of $56.9 million in fiscal 1995. The increase in
income before non-recurring charges reflects higher operating income.
 
CAPITAL RESOURCES AND LIQUIDITY
 
     The Company's liquidity requirements arise primarily from its debt service
and the funding of working capital needs, primarily inventory and accounts
receivable. The Company's borrowing requirements are seasonal, with peak working
capital needs generally arising at the end of the second quarter and during the
third quarter of the fiscal year. The Company typically generates a substantial
amount of its operating cash flow in the fourth quarter of the fiscal year,
reflecting third and fourth quarter shipments and the sale of inventory built
during the first half of the fiscal year.
 
     In December 1997, the Company completed the acquisition of Designer
Holdings, which develops, manufactures and markets designer jeanswear and
sportswear under a license from Calvin Klein, Inc. The purchase price consisted
of the issuance of 10,413,144 shares of the Company's stock valued at $353.4
million. Net assets acquired included $55.8 million of cash of Designer
Holdings.
 
     In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) of GJM, a private label manufacturer of women's
lingerie and sleepwear. The purchase price consisted of a cash payment of $12.5
million plus assumed liabilities.
 
     In the third and fourth quarters of fiscal 1996, the Company acquired
Lejaby, a leading European intimate apparel manufacturer, for approximately $79
million, including certain fees and expenses and assumed liabilities. Funds to
consummate the transaction were provided by members of the Company's bank credit
group. The terms of the bank loans are substantially the same as the terms of
the Company's existing credit agreements and included a term loan totaling 370
million French Francs and revolving loan facilities totaling 150 million French
Francs (the '1996 Bank Credit Agreements').
 
     In July 1996, the Company acquired Bodyslimmers, for approximately $6.5
million and assumed liabilities. The acquisition of Bodyslimmers expanded the
Company's product line to include body slimming undergarments, a fast growing
segment of the intimate apparel market targeting aging baby boomers. This
acquisition enhanced the Company's leading position in the domestic intimate
apparel market.
 
     Cash provided by (used in) operations in fiscal 1997 was $143.9 million,
compared with $27.0 million in fiscal 1996 and $(13.6) million in fiscal 1995.
Cash flow from operating activities for fiscal 1997 includes $29.0 million of
cash expenses for lease run-outs, facility costs and severance and other
personnel costs related to the 1997 non-recurring charge while fiscal 1996
includes $67.7 million of cash expenses related to the decision to exit the
Hathaway business and restructuring and realignment of the Intimate Apparel
Division. Cash provided from operating activities before the payments made on
the non-recurring charges was $172.9 million in fiscal 1997 and $94.8 million in
fiscal 1996. The improvement in cash flow from operating activities in fiscal
1997 compared with fiscal 1996 primarily
 
                                       21
 <PAGE>
<PAGE>
reflects higher net income and non-cash depreciation and amortization coupled
with lower working capital requirements. The lower working capital requirements
compared with fiscal 1996 were principally due to improved collections of
receivables, improved management of payables and reductions in prepaid expenses.
The increase in payables was also due to higher inventory levels at year end in
support of anticipated increased sales volumes. Cash flow from operating
activities increased $40.6 million in fiscal 1996 compared with fiscal 1995,
primarily as a result of decreased use of working capital, principally
inventory, reflecting the Company's efforts to control investment in this area.
Depreciation and amortization expense was $47.4 million, $27.6 million and $22.1
million in fiscal 1997, 1996 and 1995, respectively. The increase in
depreciation and amortization expense primarily reflects amortization of
intangible assets related to the acquisitions completed in fiscal 1995 through
fiscal 1997.
 
     Cash used in investing activities was $22.0 million in fiscal 1997 compared
with $156.5 million in fiscal 1996 and $84.0 million in fiscal 1995. Fiscal 1997
includes $55.8 million of cash acquired in connection with the acquisition of
Designer Holdings for Company stock. Fiscal 1996 includes $85.6 million, net of
cash acquired, related to the purchase of Lejaby, GJM and Bodyslimmers and $30.1
million related to the payment of acquired liabilities and acquisition accruals.
Capital expenditures for new facilities, improvements to existing facilities and
for machinery and equipment were approximately $57.4 million, $33.8 million and
$39.1 million in the 1997, 1996 and 1995 fiscal years, respectively. The Company
anticipates capital expenditures in fiscal 1998 to be approximately $90.0
million, including amounts for year 2000 compliance and a store fixture program
for Calvin Klein jeans. Increases in intangible and other assets in fiscal 1997
were principally due to additional investments in licenses and start-up costs
incurred for the Company's Mexican operations.
 
     Cash (used in) provided by financing activities was $(125.2) million,
$135.2 million and $100.0 million in fiscal 1997, 1996 and 1995, respectively.
During fiscal 1997, debt repayments, including payments on credit facilities,
were $377.7 million. In 1997, the Company renegotiated its bank arrangements,
including facilities for revolving credit, trade credit and letters of credit.
Net proceeds under the revolving credit facility were $291.1 million in fiscal
1997. For the year ended January 3, 1998, the Company repurchased 839,319 shares
of its common stock at a cost of $26.5 million and paid cash dividends of $16.2
million. During fiscal 1996, the Company entered into the 1996 Credit
Agreements, proceeds from which were used to purchase Lejaby in fiscal 1996. In
addition, the Company increased the outstanding balance on its revolving lines
of credit by approximately $105.5 million in fiscal 1996. In fiscal 1995, the
Company sold 9,717,000 shares of Common Stock which resulted in net proceeds to
the Company of $224.3 million. Proceeds from the sale of Common Stock were
primarily used to repay outstanding debt. Debt repayments were $27.8 million and
$46.8 million in fiscal 1996 and 1995, respectively.
 
     The Company has paid a quarterly cash dividend since June 1995. The
dividend payment was raised to $0.08 per share from $0.07 per share in February
1997 and increased to $0.09 per share in January 1998.
 
     At January 3, 1998, the Company had approximately $504.4 million of
additional borrowing availability under the revolving loan portions of its
United States bank facilities. The Company also has bank credit agreements in
Canada, Europe and Asia. At January 3, 1998, the Company had approximately $65.7
million of additional borrowing availability under these agreements. The Company
believes that funds available under its various bank facilities, together with
cash flow to be generated from future operations, will be sufficient to meet the
capital expenditure requirements and working capital needs of the Company,
including interest and debt principal payments for the next twelve months and
for the next several years.
 
YEAR 2000 AND ECONOMIC AND MONETARY UNION ('EMU') COMPLIANCE
 
     Following a comprehensive review of current systems and future requirements
to support international growth, the Company initiated a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the program are to achieve competitive benefits for the Company,
as well as assuring that all information systems will meet 'year 2000' and EMU
compliance. Full implementation of this program is expected to require
expenditures, primarily capital, of approximately $50 million over the next
three years. Funding requirements have been incorporated
 
                                       22
 <PAGE>
<PAGE>
into the Company's capital expenditure planning and are not expected to have a
material adverse impact on financial condition, results of operations or
liquidity.
 
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
 
     This Report includes 'forward-looking statements' within the meaning of
Section 27A of Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this Annual Report, including,
without limitation, the statements under 'Management's Discussion and Analysis
of Financial Condition,' 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.
 
SEASONALITY
 
     The operations of the Company are somewhat seasonal, with approximately
58.0% of net revenues, 61.0% of operating income before non-recurring items and
substantially all of the Company's net cash flow from operating activities
(excluding the acquisition of Designer Holdings in the fourth quarter of 1997)
generated in the second half of the year. Generally, the Company's operations
during the first half of the year are financed by increased borrowings. The
following sets forth the net revenues, operating income before non-recurring
items and net cash flow from operating activities generated for each quarter of
fiscal 1997 and fiscal 1996.
 
<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                         ---------------------------------------------------------------------
                                                                     (IN MILLIONS)
                                         APR 6,   JUL 6,   OCT 5,   JAN 4,   APR 5,   JUL 5,   OCT 4,   JAN 3,
                                          1996     1996     1996     1997     1997     1997     1997    1998(2)
                                         ------   ------   ------   ------   ------   ------   ------   ------
 
<S>                                      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Net revenues...........................  $206.5   $222.8   $292.0   $342.5   $251.5   $290.2   $333.4   $560.6
Operating income(1)....................  $ 32.3   $ 31.0   $ 49.6   $ 51.6   $ 39.5   $ 38.8   $ 62.3   $ 73.0
Cash flow from operating
  activities(1)........................  $(71.3)  $ (8.2)  $ 12.7   $164.6   $(75.5)  $(20.3)  $ 17.0   $251.7
</TABLE>
 
------------
 
(1) Before non-recurring items.
 
(2) Includes net revenues of $133.3 million and operating income of $15.4
    million of Designer Holdings, acquired in the fourth quarter of 1997.
 
INFLATION
 
     The Company does not believe that the relatively moderate levels of
inflation in the United States, Canada and Western Europe have had a significant
effect on its net revenues or its profitability. Management believes that, in
the past, the Company has been able to offset such effects by increasing prices
or by instituting improvements in productivity. Mexico historically has been
subject to high rates of inflation; however, the effects of inflation on the
operation of the Company's Mexican subsidiaries have not had a material impact
on the results of the Company.
 
IMPACT OF NEW ACCOUNTING STANDARDS
 
     In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, 'Reporting
Comprehensive Income' and SFAS No. 131, 'Disclosure about Segments of an
Enterprise and Related Information'. Both SFAS No. 130 and SFAS No. 131 are
effective for financial statements for fiscal years beginning after December 15,
1997. The Company is studying the application of the new statements to evaluate
disclosure requirements. The
 
                                       23
 <PAGE>
<PAGE>
adoption of these statements will have no impact on the Company's consolidated
financial position, liquidity, cash flows or results of operations.
 
     In February 1998, the FASB approved, subject to revision, the proposed
Statement of Position (SOP) on Reporting on the Costs of Start-Up Activities.
The SOP provides guidance on the financial reporting of start-up costs and
requires that such costs, as defined, be expensed as incurred. The SOP is
effective for fiscal years beginning after December 15, 1998 and the Company
will adopt the provisions of the new SOP for the 1999 fiscal year as a change in
accounting. Based upon amounts capitalized at January 3, 1998, net of
amortization, the impact of implementing the SOP would result in after-tax
charge for start-up costs previously capitalized currently estimated at
approximately $28.3 million.
 
ITEM 7A. 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, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or trading purposes. The Company has interest rate agreements with
several financial institutions to limit exposure to interest rate volatility.
Additionally, the Company enters into foreign currency forward and option
contracts to mitigate the risks of doing business in foreign currencies. The
Company hedges currency exposures of firm commitments and anticipated
transactions denominated in non-functional currencies to protect against the
possibility of diminished cash flow and adverse impact on earnings. The
Company's currency exposures vary, but are primarily concentrated in the
Canadian dollar, Mexican peso, British pound, German mark and French franc.
 
     The value of market risk sensitive instruments is subject to change as a
result of movement in market rates and prices. Based on a hypothetical
(one-percentage point) increase in interest rates, the potential losses in
future earnings, fair value and cash flows are immaterial.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
     The information required by Item 10 is incorporated by reference from page
17 of Item 4 of Part I included herein and from the Proxy Statement of The
Warnaco Group, Inc., relating to the 1998 Annual Meeting of Stockholders.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
     The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
 
                                       24
<PAGE>
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
 
  (a) 1.  The Consolidated Financial Statements of The Warnaco Group, Inc.
 
<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                           ----------
<S>                                                                                        <C>
Report of Independent Accountants.......................................................          F-1
Report of Independent Accountants.......................................................          F-2
Consolidated Balance Sheets as of January 4, 1997 and January 3, 1998...................          F-3
Consolidated Statements of Income for the Years Ended January 6, 1996, January 4, 1997
  and January 3, 1998...................................................................          F-4
Consolidated Statements of Stockholders' Equity for the Years Ended January 6, 1996,
  January 4, 1997 and January 3, 1998...................................................          F-5
Consolidated Statements of Cash Flows for the Years Ended January 6, 1996, January 4,
  1997 and January 3, 1998..............................................................          F-6
Notes to Consolidated Financial Statements .............................................   F-7 - F-31
</TABLE>
 
      2.  Financial Statement Schedule:
 
<TABLE>
          <S>                                                                                             <C>
          Report of Independent Accountants on Financial Statement Schedule............................   S-1
          Schedule II. Valuation and Qualifying Accounts and Reserves..................................   S-2
</TABLE>
 
         All other schedules for which provision is made in the applicable
         accounting regulations of the Securities and Exchange Commission which
         are not included with this additional financial data have been omitted
         because they are not applicable or the required information is shown in
         the Consolidated Financial Statements or Notes thereto.
 
      3.  LIST OF EXHIBITS:
 
<TABLE>
     <S>       <C>                                                                   
      3.1      Amended and Restated Certificate of Incorporation of the Company (incorporated herein
               by reference to Exhibit 3.1 to the Company's Form 10-Q filed May 16, 1995).
      3.2      Amended Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
               Company's Form 10-K filed April 4, 1997).
      4.1      Registration Rights Agreement dated March 14, 1994 between the Company and Calvin
               Klein, Inc. ('CK') (incorporated herein by reference to Exhibit 4.1 to the Company's
               Form 10-Q filed May 24, 1994).
      4.2      Amended and Restated Declaration of Trust of Designer Finance Trust, dated as of
               November 6, 1996, among Designer Holdings, as Sponsor, IBJ Schroder Bank & Trust
               Company, as Property Trustee, Delaware Trust Capital Management, Inc. as Delaware
               Trustee and Merril M. Halpern and Arnold H. Simon, as Trustees (incorporated herein by
               reference to Exhibit 4.1 to the Company's Form 10-Q filed November 12, 1997).
      4.3      First Supplemental Indenture dated as of March 31, 1998, between Designer Holdings,
               The Warnaco Group, Inc. and IBJ Schroder Bank & Trust Company, as Trustee.
      4.4      Preferred Securities Guarantee Agreement dated as of March 31, 1998, between The
               Warnaco Group, Inc., as Guarantor and IBJ Schroder Bank & Trust Company, as Preferred
               Guarantee Trustee, with respect to the Preferred Securities of Designer Finance Trust.
     10.1      Credit Agreement, dated as of August 12, 1997 (the 'U.S. $600,000,000 Credit
               Agreement'), among Warnaco Inc., as Borrower, and The Bank of Nova Scotia and
               Citibank, N.A. as Managing Agents, Citibank, N.A. as Documentation Agent, the Bank of
               Nova Scotia as Administrative Agent, Competitive Bid Agent, Swing Line Bank and an
               Issuing Bank and certain other lenders named therein (incorporated herein by reference
               to Exhibit 10.1 to the Company's Form 10-Q filed November 12, 1997).
     10.2      Second Amended and Restated Credit Agreement, dated as of August 12, 1997 (the 'U.S.
               $300,000,000 Credit Agreement'), among Warnaco Inc., as the U.S. Borrower, Warnaco
               (HK) Ltd., as the Foreign Borrower, Citibank, N.A., as the Documentation Agent, The
               Bank of Nova Scotia, as the Administrative Agent, and certain other lenders named
               therein (incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q
               filed November 12, 1997).
</TABLE>
 
                                       25
 <PAGE>
<PAGE>
 
<TABLE>
     <C>       <S>                                                                      
     10.3      First Amendment to the U.S. $300,000,000 Credit Agreement, dated as of October 14,
               1997 among Warnaco Inc., as the U.S. Borrower, Warnaco (HK) Ltd. as the Foreign
               Borrower, Citibank, N.A., as the Documentation Agent, The Bank of Nova Scotia, as
               Administrative Agent, and certain other lenders party thereto (incorporated herein by
               reference to Exhibit 10.3 to the Company's Form 10-Q filed November 12, 1997).
     10.4      Employment Agreement, dated as of January 6, 1991, between the Company and Linda J.
               Wachner (incorporated herein by reference to Exhibit 10.7 to the Company's
               Registration Statement on Form S-1, No. 33-42641).
     10.5      Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the
               Company's Registration on Form S-1, No. 33-45877).
     10.6      1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.9 to the
               Company's Registration Statement on Form S-1, No. 33-45877).
     10.7      Amended and Restated 1988 Employee Stock Purchase Plan, as amended (incorporated
               herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form
               S-1, No. 33-45877).
     10.8      Warnaco Employee Retirement Plan (incorporated herein by reference to Exhibit 10.11 to
               the Company's Registration Statement on Form S-1, No. 33-45877).
     10.9      Executive Management Agreement, dated as of May 9, 1991, as extended, between the
               Company, Warnaco Inc. and The Spectrum Group, Inc. (incorporated herein by reference
               to Exhibit 10.13 to the Company's Registration Statement on Form S-1, No. 33-45877).
     10.10     1993 Non-Employee Director Stock Plan (incorporated herein by reference to the
               Company's Proxy Statement for its 1994 Annual Meeting of Stockholders).
     10.11     Amended and Restated 1993 Stock Plan (incorporated herein by reference to the
               Company's Proxy Statement for its 1994 Annual Meeting of Stockholders).
     10.12     The Warnaco Group, Inc. Supplemental Incentive Compensation Plan (incorporated herein
               by reference to the Company's Proxy Statement for its 1994 Annual Meeting of
               Stockholders).
     10.13     Amended and Restated License Agreement dated as of January 1, 1996, between Polo Ralph
               Lauren, L.P. and Warnaco Inc. (incorporated herein by reference to Exhibit 10.4 to the
               Company's Form 10-Q filed November 12, 1997).
     10.14     Amended and Restated Design Services Agreement dated as of January 1, 1996, between
               Polo Ralph Lauren Enterprises, L.P. and Warnaco Inc. (incorporated herein by reference
               to Exhibit 10.5 to the Company's Form 10-Q filed November 12, 1997).
     10.15     Agreement and Plan of Merger dated as of September 25, 1997 among The Warnaco Group,
               Inc., WAC Acquisition Corporation and Designer Holdings Ltd. (incorporated herein by
               reference to Exhibit 2, attached as Appendix A to the Joint Proxy Statement/Prospectus
               to the Company's Registration Statement on Form S-4, No. 333-40207).
     10.16     Stock Exchange Agreement dated as of September 25, 1997 among The Warnaco Group, Inc,
               New Rio, L.L.C. and each of the members of New Rio signatory hereto (incorporated
               herein by reference to Exhibit 10.1, attached as Appendix B to the Joint Proxy
               Statement/Prospectus to the Company's Registration Statement on Form S-4, No.
               333-40207).
     10.17     1997 Stock Option Plan.
     10.18     License Agreement dated as of August 4, 1994 (the 'Calvin Klein License Agreement')
               between Calvin Klein, Inc. and Calvin Klein Jeanswear Company; incorporated by
               reference to Exhibit 10.20 to Designer Holdings, Ltd.'s Registration Statement on Form
               S-1 (File No. 333-2236).
     10.19     Amendment to the Calvin Klein License Agreement dated as of December 7, 1994;
               incorporated by reference to Exhibit 10.21 to Designer Holdings, Ltd.'s Registration
               Statement on Form S-1 (File No. 333-2236).
     10.20     Amendment to the Calvin Klein License Agreement dated as of January 10, 1995;
               incorporated by reference to Exhibit 10.22 to Designer Holdings, Ltd.'s Registration
               Statement on Form S-1 (File No. 333-2236).
</TABLE>
 
                                       26
 <PAGE>
<PAGE>
 
<TABLE>
     <C>       <S>                                                                            
     10.21     Amendment to the Calvin Klein License Agreement dated as of February 28, 1995;
               incorporated by reference to Exhibit 10.23 to Designer Holdings, Ltd.'s Registration
               Statement on Form S-1 (File No. 333-2236).
     10.22     Amendment to the Calvin Klein License Agreement dated as of April 22, 1996;
               incorporated by reference to Exhibit 10.38 to Designer Holdings, Ltd.'s Registration
               Statement on Form S-1 (File No. 333-2236).
     21        Subsidiaries of the Company.
     23.1(a)   Consent of Independent Accountants.
     23.1(b)   Consent of Independent Accountants.
     27        Financial Data Schedule.
     99        Designer Holdings, Ltd. Annual Report on Form 10-K for the year ended December 31,
               1996 (incorporated herein by reference -- Commission file number 1-11707).
</TABLE>
 
(b)  REPORTS ON FORM 8-K.
 
     The Company filed reports on Form 8-K on October 21, 1997, November 24,
1997 and December 29, 1997.
 
                                       27
<PAGE>
<PAGE>
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) 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 in the City of New
York, State of New York, on the 3rd day of April, 1998.
 
                                          THE WARNACO GROUP, INC.
 
                                          By:        /S/ LINDA J. WACHNER
                                                ............................
                                                      Linda J. Wachner
                                               Chairman, President and Chief
                                                     Executive Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                              DATE
------------------------------------------  --------------------------------------------   -------------------
 
<C>                                         <S>                                            <C>
           /s/ LINDA J. WACHNER             Chairman of the Board; Director;                  April 3, 1998
------------------------------------------  President and Chief Executive
             LINDA J. WACHNER               Officer (Principal Executive Officer)
 
        /s/ WILLIAM S. FINKELSTEIN          Director; Senior Vice President and Chief         April 3, 1998
------------------------------------------  Financial Officer (Principal Financial and
          WILLIAM S. FINKELSTEIN            Accounting Officer)
 
       /s/ JOSEPH A. CALIFANO, JR.          Director                                          April 3, 1998
------------------------------------------
         JOSEPH A. CALIFANO, JR.
 
            /s/ JOSEPH H. FLOM              Director                                          April 3, 1998
------------------------------------------
              JOSEPH H. FLOM
 
           /s/ ANDREW G. GALEF              Director                                          April 3, 1998
------------------------------------------
             ANDREW G. GALEF
 
            /s/ JAMES R. JONES              Director                                          April 3, 1998
------------------------------------------
              JAMES R. JONES
 
            /s/ WALTER F. LOEB              Director                                          April 3, 1998
------------------------------------------
              WALTER F. LOEB
 
          /s/ STEWART A. RESNICK            Director                                          April 3, 1998
------------------------------------------
            STEWART A. RESNICK
</TABLE>
 
                                       28
<PAGE>
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
The Board of Directors and Stockholders of
The Warnaco Group, Inc.
 
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of The Warnaco Group,
Inc. and its subsidiaries at January 3, 1998 and January 4, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 3, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
 
As discussed in Note 3 to the consolidated financial statements, during the year
ended January 6, 1996 the Company adopted the provisions of the American
Institute of Certified Public Accountants' Statement of Position 93-7,
'Reporting on Advertising Costs.'
 
The summarized financial information disclosed in Note 13 relating to the
Company's wholly owned subsidiary Designer Holdings Ltd. as of December 31, 1996
and for each of the two years in the period ended December 31, 1996 has been
derived from financial statements audited by the independent accountants whose
report thereon is included herein.
 
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 20, 1998
 
                                      F-1
<PAGE>
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
Designer Holdings Ltd:
 
We have audited the consolidated balance sheet of Designer Holdings Ltd. (the
'Company') as of December 31, 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1996 and 1995 (which financial statements are incorporated by
reference). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designer Holdings
Ltd. as of December 31, 1996, and the consolidated results of their operations
and their cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
March 12, 1997
 
                                      F-2
<PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                           JANUARY 4,
                                                                                                              1997
                                                                                                           -----------
<S>                                                                                                        <C>
ASSETS
Current assets:
     Cash...............................................................................................   $    11,840
     Accounts receivable, less reserves of $11,337 -- 1996 and $46,124 -- 1997..........................       211,038
     Inventories........................................................................................       387,318
     Prepaid expenses and other current assets..........................................................        40,313
                                                                                                           -----------
          Total current assets..........................................................................       650,509
                                                                                                           -----------
Property, plant and equipment, at cost:
     Land and land improvements.........................................................................         5,690
     Buildings and building improvements................................................................        67,868
     Machinery and equipment............................................................................       133,223
                                                                                                           -----------
                                                                                                               206,781
     Less: Accumulated depreciation.....................................................................        85,244
                                                                                                           -----------
          Net property, plant and equipment.............................................................       121,537
                                                                                                           -----------
Other assets:
     Deferred financing costs, less accumulated amortization of $553 -- 1996 and $1,410 -- 1997.........         3,536
     Licenses, trademarks, intangible and other assets, at cost, less accumulated amortization of
      $61,801 -- 1996 and $81,866 -- 1997...............................................................       164,402
     Excess of cost over net assets acquired, less accumulated amortization of $36,005 -- 1996 and
      $40,060 -- 1997...................................................................................       180,495
     Deferred income taxes..............................................................................        22,465
                                                                                                           -----------
          Total other assets............................................................................       370,898
                                                                                                           -----------
                                                                                                           $ 1,142,944
                                                                                                           -----------
                                                                                                           -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Borrowings under revolving credit facility.........................................................   $   146,960
     Borrowings under foreign credit facilities.........................................................        19,185
     Current portion of long-term debt..................................................................        49,281
     Accounts payable...................................................................................       174,149
     Accrued liabilities................................................................................        50,123
     Income taxes payable...............................................................................           195
                                                                                                           -----------
          Total current liabilities.....................................................................       439,893
                                                                                                           -----------
Long-term debt..........................................................................................       215,805
Deferred income taxes...................................................................................       --
Other long-term liabilities.............................................................................        11,532
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust
  Holding Solely Convertible Debentures.................................................................       --
Stockholders' equity:
     Preferred Stock; $.01 par value 10,000,000 shares authorized, none issued in 1996 and 1997,
      respectively......................................................................................       --
     Class A Common Stock, $.01 par value, 130,000,000 shares authorized, 52,398,112 and 63,294,423
      issued in 1996 and 1997, respectively.............................................................           524
     Additional paid-in capital.........................................................................       575,691
     Cumulative translation adjustment..................................................................        (3,307)
     Accumulated deficit................................................................................       (69,667)
     Treasury stock, at cost............................................................................       (12,030)
     Notes receivable for common stock issued and unearned stock compensation...........................       (15,497)
                                                                                                           -----------
          Total stockholders' equity....................................................................       475,714
                                                                                                           -----------
                                                                                                           $ 1,142,944
                                                                                                           -----------
                                                                                                           -----------
 
<CAPTION>
                                                                                                          JANUARY 3,
                                                                                                             1998
                                                                                                          -----------
<S>                                                                                                        <C>
ASSETS
Current assets:
     Cash...............................................................................................  $    12,009
     Accounts receivable, less reserves of $11,337 -- 1996 and $44,592 -- 1997..........................      296,378
     Inventories........................................................................................      526,185
     Prepaid expenses and other current assets..........................................................       45,228
                                                                                                          -----------
          Total current assets..........................................................................      879,800
                                                                                                          -----------
Property, plant and equipment, at cost:
     Land and land improvements.........................................................................        9,867
     Buildings and building improvements................................................................       77,308
     Machinery and equipment............................................................................      145,207
                                                                                                          -----------
                                                                                                              232,382
     Less: Accumulated depreciation.....................................................................      101,982
                                                                                                          -----------
          Net property, plant and equipment.............................................................      130,400
                                                                                                          -----------
Other assets:
     Deferred financing costs, less accumulated amortization of $553 -- 1996 and $1,410 -- 1997.........        8,751
     Licenses, trademarks, intangible and other assets, at cost, less accumulated amortization of
      $61,801 -- 1996 and $81,866 -- 1997...............................................................      359,462
     Excess of cost over net assets acquired, less accumulated amortization of $36,005 -- 1996 and
      $40,060 -- 1997...................................................................................      349,235
     Deferred income taxes..............................................................................      --
                                                                                                          -----------
          Total other assets............................................................................      717,448
                                                                                                          -----------
                                                                                                          $ 1,727,648
                                                                                                          -----------
                                                                                                          -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Borrowings under revolving credit facility.........................................................  $   --
     Borrowings under foreign credit facilities.........................................................       12,751
     Current portion of long-term debt..................................................................        7,850
     Accounts payable...................................................................................      289,817
     Accrued liabilities................................................................................      116,892
     Income taxes payable...............................................................................        5,203
                                                                                                          -----------
          Total current liabilities.....................................................................      432,513
                                                                                                          -----------
Long-term debt..........................................................................................      354,263
Deferred income taxes...................................................................................       18,009
Other long-term liabilities.............................................................................       14,022
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust
  Holding Solely Convertible Debentures.................................................................      100,758
Stockholders' equity:
     Preferred Stock; $.01 par value 10,000,000 shares authorized, none issued in 1996 and 1997,
      respectively......................................................................................      --
     Class A Common Stock, $.01 par value, 130,000,000 shares authorized, 52,398,112 and 63,294,423
      issued in 1996 and 1997, respectively.............................................................          633
     Additional paid-in capital.........................................................................      940,461
     Cumulative translation adjustment..................................................................      (14,838)
     Accumulated deficit................................................................................      (63,900)
     Treasury stock, at cost............................................................................      (38,567)
     Notes receivable for common stock issued and unearned stock compensation...........................      (15,706)
                                                                                                          -----------
          Total stockholders' equity....................................................................      808,083
                                                                                                          -----------
                                                                                                          $ 1,727,648
                                                                                                          -----------
                                                                                                          -----------
</TABLE>
 
  This Statement should be read in conjunction with the accompanying Notes to
                       Consolidated Financial Statements.
 
                                      F-3
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCLUDING PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                       FOR THE YEAR ENDED
                                                                             --------------------------------------
                                                                             JANUARY 6,    JANUARY 4,    JANUARY 3,
                                                                                1996          1997          1998
                                                                             ----------    ----------    ----------
 
<S>                                                                          <C>           <C>           <C>
Net revenues..............................................................    $ 916,179    $1,063,823    $1,435,730
Cost of goods sold(a).....................................................      606,498       736,116     1,003,509
Selling, administrative and general expenses(b)...........................      195,793       301,732       349,431
                                                                             ----------    ----------    ----------
Income before interest and income taxes...................................      113,888        25,975        82,790
Interest expense..........................................................       33,867        32,435        45,873
                                                                             ----------    ----------    ----------
Income (loss) before income taxes.........................................       80,021        (6,460)       36,917
Provision for income taxes................................................       30,408         1,779        13,885
                                                                             ----------    ----------    ----------
Income (loss) before extraordinary item...................................       49,613        (8,239)       23,032
Extraordinary item, net of income tax benefits of $1,913..................       (3,120)       --            --
                                                                             ----------    ----------    ----------
Net income (loss).........................................................    $  46,493    $   (8,239)   $   23,032
                                                                             ----------    ----------    ----------
                                                                             ----------    ----------    ----------
 
Basic earnings (loss) per common share:
     Income (loss) before extraordinary item..............................    $    1.12    $    (0.16)   $     0.44
     Extraordinary item...................................................        (0.07)       --            --
                                                                             ----------    ----------    ----------
Basic earnings (loss) per common share....................................    $    1.05    $    (0.16)   $     0.44
                                                                             ----------    ----------    ----------
                                                                             ----------    ----------    ----------
 
Diluted earnings (loss) per common share:
     Income (loss) before extraordinary item..............................    $    1.10    $    (0.16)   $     0.42
     Extraordinary item...................................................        (0.07)       --            --
                                                                             ----------    ----------    ----------
Diluted earnings (loss) per common share..................................    $    1.03    $    (0.16)   $     0.42
                                                                             ----------    ----------    ----------
                                                                             ----------    ----------    ----------
 
Weighted average number of common shares outstanding:
     Basic................................................................       44,215        51,308        52,814
                                                                             ----------    ----------    ----------
                                                                             ----------    ----------    ----------
     Diluted..............................................................       45,278        51,308        54,821
                                                                             ----------    ----------    ----------
                                                                             ----------    ----------    ----------
</TABLE>
 
------------
 
 (a) Includes $37,868 and $76,625 of non-recurring items for the years ended
     January 4, 1997 and January 3, 1998. See Note 4 of Notes to Consolidated
     Financial Statements.
 
 (b) Includes $11,745, $100,672 and $54,179 of non-recurring and special items
     for the years ended January 6, 1996, January 4, 1997 and January 3, 1998,
     respectively and, in the year ended January 3, 1998, includes $3,518
     representing minority interest in subsidiary for the period of less than
     100% ownership. See Notes 2, 3 and 4 of Notes to Consolidated Financial
     Statements.
 
  This Statement should be read in conjunction with the accompanying Notes to
                       Consolidated Financial Statements.
 
                                      F-4
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                                   NOTES
                                                                                                                 RECEIVABLE
                                                                                                                 FOR COMMON
                                               CLASS A   ADDITIONAL   CUMULATIVE                                 STOCK AND
                                               COMMON     PAID-IN     TRANSLATION   ACCUMULATED    TREASURY    UNEARNED STOCK
                                                STOCK     CAPITAL     ADJUSTMENT      DEFICIT        STOCK      COMPENSATION
                                               -------   ----------   -----------   ------------   ---------   --------------
<S>                                            <C>       <C>          <C>           <C>            <C>         <C>
Balance at January 7, 1995....................  $ 421     $337,872     ($  1,732)     ($83,897)    ($  5,000)     ($ 7,192)
Sold 9,717,000 shares of Class A Common Stock
  net of expenses of $10,180..................     97      222,931
Payments of employee notes receivable.........                                                                       1,028
Issued 320,000 shares of restricted stock.....      3        6,957                                                  (6,960)
Dividends declared............................                                          (9,492)
Employee stock options exercised..............                 205
Amortization of unearned stock compensation...                                                                         580
Net income....................................                                          46,493
Change in cumulative translation adjustment...                            (2,013)
                                               -------   ----------   -----------   ------------   ---------   --------------
Balance at January 6, 1996....................    521      567,965        (3,745)      (46,896)       (5,000)      (12,544)
Issued 190,700 shares of restricted stock.....      2        5,576                                                  (5,578)
Dividends declared............................                                         (14,532)
Employee stock options exercised and payment
  of employee notes receivable................      1        2,150                                                     123
Amortization of unearned stock compensation...                                                                       2,502
Net loss......................................                                          (8,239)
Change in cumulative translation adjustment...                               438
Purchase of 250,000 shares of treasury
  stock.......................................                                                        (7,030)
                                               -------   ----------   -----------   ------------   ---------   --------------
Balance at January 4, 1997....................    524      575,691        (3,307)      (69,667)      (12,030)      (15,497)
Issued 87,172 shares of restricted stock......      1        3,600                                                  (3,601)
Dividends declared............................                                         (17,265)
Employee stock options exercised and payment
  of employee notes receivable................      4        9,498                                                      70
Net cash settlements under equity option
  arrangements................................              (1,620)
Amortization of unearned stock compensation...                                                                       3,322
Net income....................................                                          23,032
Change in cumulative translation adjustment...                           (11,531)
Purchase of 839,319 shares of treasury
  stock.......................................                                                       (26,537)
Issuance of 10,413,144 shares for the
  acquisition of Designer Holdings Ltd........    104      353,292
                                               -------   ----------   -----------   ------------   ---------   --------------
Balance at January 3, 1998....................  $ 633     $940,461     ($ 14,838)     ($63,900)    ($ 38,567)     ($15,706)
                                               -------   ----------   -----------   ------------   ---------   --------------
                                               -------   ----------   -----------   ------------   ---------   --------------
 
<CAPTION>
 
                                                 TOTAL
                                                --------
<S>                                            <<C>
Balance at January 7, 1995....................  $240,472
Sold 9,717,000 shares of Class A Common Stock
  net of expenses of $10,180..................   223,028
Payments of employee notes receivable.........     1,028
Issued 320,000 shares of restricted stock.....     --
Dividends declared............................    (9,492)
Employee stock options exercised..............       205
Amortization of unearned stock compensation...       580
Net income....................................    46,493
Change in cumulative translation adjustment...    (2,013)
                                                --------
Balance at January 6, 1996....................   500,301
Issued 190,700 shares of restricted stock.....     --
Dividends declared............................   (14,532)
Employee stock options exercised and payment
  of employee notes receivable................     2,274
Amortization of unearned stock compensation...     2,502
Net loss......................................    (8,239)
Change in cumulative translation adjustment...       438
Purchase of 250,000 shares of treasury
  stock.......................................    (7,030)
                                                --------
Balance at January 4, 1997....................   475,714
Issued 87,172 shares of restricted stock......     --
Dividends declared............................   (17,265)
Employee stock options exercised and payment
  of employee notes receivable................     9,572
Net cash settlements under equity option
  arrangements................................    (1,620)
Amortization of unearned stock compensation...     3,322
Net income....................................    23,032
Change in cumulative translation adjustment...   (11,531)
Purchase of 839,319 shares of treasury
  stock.......................................   (26,537)
Issuance of 10,413,144 shares for the
  acquisition of Designer Holdings Ltd........   353,396
                                                --------
Balance at January 3, 1998....................  $808,083
                                                --------
                                                --------
</TABLE>
 
  This Statement should be read in conjunction with the accompanying Notes to
                       Consolidated Financial Statements.
 
                                      F-5
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          INCREASE (DECREASE) IN CASH
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                     JANUARY 6,      JANUARY 4,      JANUARY 3,
                                                                                        1996            1997            1998
                                                                                     ----------      ----------      ----------
<S>                                                                                  <C>             <C>             <C>
Cash flow from operating activities:
  Net income (loss).............................................................     $   46,493      ($   8,239)      $  23,032
  Adjustments to reconcile net income (loss) to net cash from operating
     activities:
     Depreciation and amortization..............................................         22,058          27,576          47,385
     Extraordinary item.........................................................          3,120          --              --
     Amortization of unearned stock compensation................................            580           2,502           3,322
     Non-recurring expenses.....................................................         --             138,540         129,272
     (Increase) decrease in deferred income tax assets..........................         21,641          (3,643)          7,760
  Other changes in operating accounts...........................................       (107,473)        (61,984)        (37,920)
                                                                                     ----------      ----------      ----------
Net cash from operating activities before non-recurring items...................        (13,581)         94,752         172,851
Cash expenses related to non-recurring charges..................................         --             (67,747)        (28,972)
                                                                                     ----------      ----------      ----------
Net cash from operating activities..............................................        (13,581)         27,005         143,879
                                                                                     ----------      ----------      ----------
Cash flow from investing activities:
  Proceeds from sale/leaseback transaction......................................         --              --              33,223
  Proceeds from the sale of fixed assets........................................            616           1,087           1,704
  Increase in intangibles and other assets......................................        (34,320)         (8,178)        (26,964)
  Purchase of property, plant and equipment.....................................        (39,122)        (33,765)        (57,399)
  Acquisition of businesses.....................................................        (11,200)        (85,600)         55,800
  Payment of assumed liabilities and acquisition accruals.......................         --             (30,052)        (28,346)
                                                                                     ----------      ----------      ----------
Net cash from investing activities..............................................        (84,026)       (156,508)        (21,982)
                                                                                     ----------      ----------      ----------
Cash flow from financing activities:
  Proceeds from sale of common stock and payment of notes receivable from
     employees..................................................................        224,261           2,274           7,270
  (Repayments) borrowings under credit facilities...............................        (64,646)        105,500        (153,394)
  Proceeds from other debt......................................................            872          79,249         291,109
  Repayments of debt............................................................        (46,800)        (27,839)       (224,281)
  Increase in deferred financing cost...........................................         (1,599)         (2,441)         (1,492)
  Cash dividends paid...........................................................         (5,868)        (14,532)        (16,220)
  Purchase of treasury shares and net cash settlements under equity option
     arrangements...............................................................         --              (7,030)        (28,157)
  Other.........................................................................         (6,242)         --              --
                                                                                     ----------      ----------      ----------
Net cash from financing activities..............................................         99,978         135,181        (125,165)
                                                                                     ----------      ----------      ----------
Effect on cash due to currency translation......................................         --              --               3,437
                                                                                     ----------      ----------      ----------
Increase in cash................................................................          2,371           5,678             169
Cash at beginning of year.......................................................          3,791           6,162          11,840
                                                                                     ----------      ----------      ----------
Cash at end of year.............................................................     $    6,162      $   11,840       $  12,009
                                                                                     ----------      ----------      ----------
                                                                                     ----------      ----------      ----------
Other changes in operating accounts:
  Accounts receivable...........................................................     ($   7,948)     ($  29,690)      ($ 35,929)
  Inventories...................................................................       (104,283)        (36,526)       (122,383)
  Prepaid expenses..............................................................         (7,256)        (16,985)         26,377
  Accounts payable and accrued expenses.........................................          8,702          23,411          92,096
  Income taxes..................................................................          5,325          (2,792)          1,919
  Other.........................................................................         (2,013)            598          --
                                                                                     ----------      ----------      ----------
                                                                                     ($ 107,473)     ($  61,984)      ($ 37,920)
                                                                                     ----------      ----------      ----------
                                                                                     ----------      ----------      ----------
</TABLE>
 
  This Statement should be read in conjunction with the accompanying Notes to
                       Consolidated Financial Statements.
 
                                      F-6
<PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Organization: The Warnaco Group, Inc. ('Company') was incorporated in
Delaware on March 14, 1986 and on May 10, 1986 acquired substantially all of the
outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal
operating subsidiary of the Company.
 
     Nature of Operations: The Company designs, manufactures and markets a broad
line of women's intimate apparel, designer jeanswear and jeans related
sportswear for men, women and juniors, men's underwear and men's sportswear,
accessories and dress furnishings under a number of owned and licensed brand
names. The Company's products are sold to department and specialty stores, mass
merchandise stores and catalog and other retailers throughout the United States,
Canada, Mexico and Western Europe.
 
     Basis of Consolidation and Presentation: The accompanying Consolidated
Financial Statements include the accounts of the Company and all subsidiary
companies for the years ended January 6, 1996 ('Fiscal 1995'), January 4, 1997
('Fiscal 1996') and January 3, 1998 ('Fiscal 1997'). All intercompany
transactions are eliminated.
 
     Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
     Certain prior year amounts have been reclassified to conform to the current
year presentation.
 
     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 as of the respective balance
sheet date and are applied directly to stockholders' equity. Gains and losses on
contracts designated as hedges of net investments in foreign subsidiaries are
recognized as cumulative translation adjustments in stockholders' equity until
such time as the investment is liquidated. Income and expense items for the
Company's foreign operations are translated using monthly average exchange
rates.
 
     Inventories: Inventories are stated at the lower of cost, determined on a
first-in-first-out basis, or market.
 
     Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the estimated useful lives of the assets or life
of the lease, whichever is shorter, using the straight-line method, as
summarized below:
 
<TABLE>
<S>                                                                                 <C>
Buildings......................................................................      20-40 years
Building improvements..........................................................       2-20 years
Machinery and equipment........................................................       3-10 years
</TABLE>
 
     Assets under capital lease and related amortization of capitalized leases
are included in property, plant and equipment and accumulated depreciation and
the associated liability is included in long-term debt.
 
     Intangible Assets: Licenses, trademarks and other intangible assets are
amortized over the estimated economic life of the assets which range from 7 to
40 years. The excess of cost over net assets acquired is amortized over 40
years. The Company periodically reviews the carrying value of intangibles for
recoverability based on future (undiscounted) cash flow. Deferred financing
costs are amortized over the life of the related debt, using the debt
outstanding method.
 
                                      F-7
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     Start-Up Costs: The Company defers certain costs associated with the
start-up of new manufacturing facilities and certain new businesses. Deferred
costs are amortized using the straight-line method, principally over five years.
The Company periodically reviews the carrying value of start-up costs for
recoverability based on future cash flows. Start-up costs, net of accumulated
amortization, were $38,637 and $45,590 at January 4, 1997 and January 3, 1998,
respectively, and are included in other assets.
 
     Employee Retirement Plans: The Company has a non-contributory pension plan
and a defined contribution retirement plan for the benefit of qualifying
employees. Contributions are deposited with fund managers who invest the assets
of the plans.
 
     Income Taxes: The provision for income taxes, income taxes payable and
deferred income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109, 'Accounting for Income Taxes' (SFAS No. 109).
Under SFAS No. 109, 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.
 
     Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers, net of estimates for normal returns and allowances.
 
     Stock Options: The Company accounts for options granted, using the
intrinsic value method, under its stock incentive programs following Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' (APB
25) and related interpretations.
 
     Financial Instruments: Derivative financial instruments are used by the
Company in the management of its interest rate and foreign currency exposures
and are accounted for on an accrual basis. The Company also uses derivative
financial instruments to execute purchases of its shares under its stock
buyback program. The Company does not use derivative financial instruments for
trading or speculative purposes. Gains and losses resulting from effective
hedges of existing assets, liabilities or firm commitments are deferred and
recognized when the offsetting gains and losses are recognized on the related
hedged items. Income and expense are recorded in the same category as that
arising from the related asset or liability being hedged. Gains realized on
termination of interest rate swap contracts are deferred and amortized over
the remaining terms of the original swap agreement. Costs of interest rate
cap contracts are amortized over the effective lives of the contracts if
considered to be economic hedges; otherwise, they are marked to market.
 
     A number of major international financial institutions are counterparties
to the Company's financial instruments, including derivative financial
instruments. The company monitors its positions with, and the credit quality
of, these counterparty financial institutions and does not anticipate
non-performance of these counterparties. Management believes that the Company
would not suffer a material loss in the event of nonperformance by these
counterparties.

     Concentration of Credit Risk: The Company sells its products to department
stores, specialty outlets, catalogs, direct sellers and mass merchandisers. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations. No customer accounted for more than 10% of the
Company's net revenues in the three fiscal years ended January 3, 1998.
 
     Earnings Per Share: In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, 'Earnings Per Share' (SFAS No. 128), which
revised the methodology of calculating earnings per share and requires the dual
presentation of basic and diluted earnings per share. The Company adopted SFAS
No. 128 in the fourth quarter of 1997. All earnings per share amounts for all
periods presented have been restated to conform to the SFAS No. 128
requirements.
 
     Accounting Changes: In June 1997, the FASB issued SFAS No. 130, 'Reporting
Comprehensive Income' (SFAS No. 130) and SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information' (SFAS No. 131). In December
1997, the FASB issued SFAS No. 132, 'Employers' Disclosures about Pensions and
Other Postretirement Benefits' (SFAS No. 132), which revises disclosure
requirements for employers' pension and other retiree benefits. These statements
are effective for financial statements for fiscal years beginning after December
15, 1997. The Company is studying the application of these new statements to
evaluate the disclosure requirements. The adoption
 
                                      F-8
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
of these statements will have no impact on the Company's consolidated financial
position, liquidity, cash flows or results of operations.
 
     On February 18, 1998, the FASB approved the issuance of an AICPA Statement
of Position (SOP) requiring that pre-operating costs relating to the start-up of
new manufacturing facilities be expensed as incurred. It has been the Company's
consistent accounting policy to capitalize such costs for amortization over
appropriate periods not to exceed five years. Adoption of the SOP will be
required for the Company in fiscal 1999 and will be reported as adoption of a
change in accounting principle, net of tax. Based on amounts capitalized at
January 3, 1998, net of amortization, the impact of this SOP would result in a
non-cash charge of $28,266, net of income tax.
 
NOTE 2 - ACQUISITIONS
 
     In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) comprising the GJM Group of Companies ('GJM').
GJM was a private label manufacturer of women's lingerie and sleepwear and now
also manufactures products for the Company's Intimate Apparel Division. The
purchase price consisted of a cash payment of $12,500 plus assumed liabilities.
 
     In the third and fourth quarters of fiscal 1996, the Company acquired the
assets and stock of the companies comprising the Lejaby/Euralis group of
companies ('Lejaby'), a leading European intimate apparel manufacturer, for
approximately $79,249 plus assumed liabilities and certain fees and expenses.
Funds to consummate the transaction were provided by members of the Company's
bank credit group. The terms of the bank loans are substantially the same as the
terms of the Company's 1995 Bank Credit Agreements and include a term loan
facility of 370 million French Francs and revolving loan facilities of 150
million French Francs. The term and revolving loans mature on December 31, 2001.
On July 19, 1996, the Company acquired Bodyslimmers, for approximately $6,500
plus assumed liabilities. Bodyslimmers designs and markets body slimming
undergarments for women.
 
     The GJM, Lejaby and Bodyslimmers acquisitions were accounted for using the
purchase method of accounting and the results of operations have been included
in the consolidated results of operations since the respective dates of
acquisition. The purchase price of the respective acquisitions was allocated to
the fair value of the assets acquired, including certain trademarks and
intangible assets. In addition, the Company incurred certain costs to
consolidate the acquired businesses into the Company's operations and terminate
certain contracts and agreements. The allocation of acquisition costs to the
fair value of the assets acquired and liabilities assumed is summarized below:
 
<TABLE>
<S>                                                          <C>
Accounts receivable.......................................            $ 34,700
Inventories...............................................              30,500
Other current assets......................................               1,200
Fixed assets..............................................               6,900
Intangible and other assets...............................              90,500
Notes payable.............................................              (2,300)
Accounts payable..........................................             (29,100)
Accrued liabilities.......................................             (46,800)
                                                                   -----------
Purchase price -- net of cash balances of acquired
  entities................................................            $ 85,600
                                                                   -----------
                                                                   -----------
</TABLE>
 
     These acquisitions did not have a material pro-forma impact on 1996
consolidated earnings. The final purchase prices did not materially differ from
the amounts shown above.
 
     In October 1997, the Board of Directors of the Company and the owners of
51.3% of Designer Holdings Ltd. ('Designer Holdings') common stock consummated a
Merger Agreement and Exchange
 
                                      F-9
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
Agreement whereby the Company acquired 51.3% of Designer Holdings outstanding
common stock in exchange for 5,340,773 shares of the Company's common stock and
agreed, subject to shareholder approval, to acquire the remaining shares
outstanding at the same exchange ratio. In December 1997, the Company acquired
the remaining 48.7% of the outstanding common stock of Designer Holdings in
exchange for 5,072,371 shares of the Company's common stock. Designer Holdings
develops, manufactures and markets designer jeanswear and jeans related
sportswear for men, women and juniors, and has a 40-year extendable license from
Calvin Klein, Inc. to develop, manufacture and market designer jeanswear and
sportswear collections in North, South and Central America under the Calvin
Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis labels.
 
     The acquisition was accounted for using the purchase method of accounting.
Accordingly, the accompanying consolidated financial statements include the
results of the Designer Holdings business commencing in October 1997. The
minority interest in the results of operations for periods of less than 100%
ownership by the Company have been included in selling, administrative and
general expenses. In these transactions, the Company issued a total of
10,413,144 shares of its common stock, valued at fair market value ($33.94 per
share), resulting in a total purchase price of $353,400. The preliminary
allocation of the total purchase price, exclusive of cash received of
approximately $55,800, to the fair value of the net assets acquired is
summarized as follows:
 
<TABLE>
<S>                                                                     <C>
Accounts receivable..................................................     $   85,100
Inventories..........................................................         74,300
Prepaid and other current assets.....................................         41,000
Property and equipment...............................................          7,900
Intangible and other assets..........................................        343,300
Accounts payable and accrued liabilities.............................        (93,200)
Deferred income taxes................................................        (59,800)
Other liabilities....................................................           (500)
Mandatorily redeemable preferred securities..........................       (100,500)
                                                                        --------------
Purchase price -- net of cash balances...............................     $  297,600
                                                                        --------------
                                                                        --------------
</TABLE>
 
     Included in intangible and other assets above are $130,000 for licenses and
$159,000 of goodwill.
 
     The allocation of purchase price is subject to revision when additional
information concerning the asset and liability valuations becomes available.
Accordingly, the final purchase price allocation could differ from the amounts
shown.
 
     The following summarized unaudited pro forma information combines financial
information of the Company with Designer Holdings for fiscal 1997 and 1996
assuming the acquisition had occurred as of January 7, 1996. The unaudited pro
forma information does not reflect any cost savings or other benefits
anticipated by the Company's management as a result of the acquisition.
 
<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED
                                                                               ------------------------
                                                                               JANUARY 4,    JANUARY 3,
                                                                                  1997          1998
                                                                               ----------    ----------
<S>                                                                            <C>           <C>
Statement of Income Data:
Net revenues................................................................   $1,544,200    $1,800,800
Income before extraordinary item............................................       14,100        18,700
Net income..................................................................       11,800        18,700
Income per common share:
     Basic..................................................................   $     0.23    $     0.31
                                                                               ----------    ----------
                                                                               ----------    ----------
     Diluted................................................................   $     0.22    $     0.29
                                                                               ----------    ----------
                                                                               ----------    ----------
</TABLE>
 
     The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred on the dates specified above, nor is it
 
                                      F-10
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
indicative of future results of operations for the combined companies at any
future date or for any future periods.
 
     In February 1995, the Company terminated the license agreement for the
production of men's underwear and women's intimate apparel bearing the Calvin
Klein name in Canada. The cost of terminating the license agreement was $6,200.
In August 1996, the Company terminated a production agreement with the former
licensee in Canada prior to its expiration date. The cost to terminate the
production agreement was approximately $1,793.
 
NOTE 3 - SPECIAL CHARGE FOR ADVERTISING COSTS PREVIOUSLY DEFERRABLE
 
     In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-7, 'Reporting on Advertising Costs' ('SOP
93-7'). In accordance with SOP 93-7, certain advertising and promotion costs
previously deferred by the Company are expensed when the advertisement first
runs. As a result, in fiscal 1995 the Company recorded a charge for advertising
costs previously deferrable of $11,745 ($7,282 net of income tax benefits).
 
NOTE 4 - NON-RECURRING EXPENSE
 
     In 1996, the acquisition of the GJM businesses significantly added to the
Company's low cost manufacturing capacity and resulted in an immediate expansion
of product lines. As a result of this and the acquisition of Bodyslimmers and
Lejaby, the Company undertook a strategic review of its businesses and
manufacturing facilities. The Company recorded non-recurring charges aggregating
$138,540 ($88,804 net of income tax benefits) for actions taken as a result of
this review, including disposition of the Hathaway men's dress shirt business.
 
     In 1997, the acquisition of Designer Holdings introduced significant new
product lines and the Company incurred additional one-time charges related to
the merger and integration of this business together with the further
integration of the 1996 acquisitions and expansion of the consolidation and
realignment program initiated in 1996. These 1997 non-recurring items,
aggregating $130,804 ($81,061 net of income tax benefits) and the 1996 charges
are described below.
 
     The charges reported below include inventory markdowns directly
attributable to the decision to exit product lines and businesses as well as the
consolidation and realignment of facilities in both years. It is difficult to
distinguish inventory markdowns attributable to the decision to exit or realign
these activities from external market conditions. Accordingly, inventory
markdowns in 1996 and 1997 as well as gross margin losses incurred during fiscal
1996 and 1997 are included in cost of goods sold. Charges totaling $37,868 in
fiscal 1996 and $76,625 in fiscal 1997 are reflected within cost of goods sold
in the consolidated statement of income. All other charges totaling $100,672 in
fiscal 1996 and $54,179 in fiscal 1997 are reflected within selling,
administrative and general expenses.
 
1996 NON-RECURRING:
 
<TABLE>
<S>                                                                                            <C>
Loss related to the sale of the Hathaway business...........................................   $ 46,058
Charge for the consolidation and realignment of the Intimate Apparel
  Division..................................................................................     72,073
Other items, including merger termination costs.............................................     20,409
                                                                                               --------
                                                                                                138,540
Less: income tax benefits...................................................................    (49,736)
                                                                                               --------
                                                                                               $ 88,804
                                                                                               --------
                                                                                               --------
</TABLE>
 
                                      F-11
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
EXIT FROM THE HATHAWAY BUSINESS
 
     On May 6, 1996, after a careful evaluation of the Company's Hathaway men's
dress shirt operations, the Company announced that it had decided to cease
manufacturing and marketing this brand. On November 12, 1996 the Company sold to
an investor group, certain assets comprising the Hathaway dress shirt
manufacturing operations in Waterville, Maine and Prescott, Ontario including
certain inventory, property and equipment and other assets (the 'Hathaway
Assets'). The Company's Puerto Rico facility (not included in the sale) ended
production of Hathaway products in 1995 and necessary legal filings to cease
operations in the leased Puerto Rico plant were made in May 1996.
 
     Net revenues of the Hathaway business were $37,754 and $27,800 for the
years ended January 6, 1996 and January 4, 1997, respectively. Results of
operations for the years ended January 6, 1996 and January 4, 1997 generated a
pre-tax loss of approximately $4,641 and $8,669, respectively.
 
     Losses recorded in fiscal 1996 related to the Hathaway business are
summarized as follows:
 
<TABLE>
<S>                                                                                            <C>
Write-down of assets to fair value (including $13,800 of intangible assets and $1,000 in
  cost of goods sold).......................................................................   $ 32,420
Severance and other employee costs..........................................................      4,760
Legal and professional fees.................................................................        209
Losses incurred during fiscal 1996..........................................................      8,669
                                                                                               --------
Total charges...............................................................................     46,058
Less: income tax benefits...................................................................    (16,535)
                                                                                               --------
     Total net loss related to exit from the Hathaway business -- fiscal 1996...............   $ 29,523
                                                                                               --------
                                                                                               --------
</TABLE>
 
INTIMATE APPAREL DIVISION CONSOLIDATION AND REALIGNMENT
 
     In April 1996, the Company announced the consolidation and realignment of
certain of its intimate apparel manufacturing, distribution, selling and
administrative functions and facilities in the United States and Europe. The
consolidation and realignment resulted in a non-recurring charge in fiscal 1996
of $46,198, net of income tax benefits of $25,875. The closing of several
manufacturing facilities and consolidation of certain distribution operations
resulted in the Company incurring certain integration costs in its remaining
manufacturing facilities to reconfigure product assortments and retrain existing
personnel. The costs attendant to the realignment and retraining incurred in
fiscal 1996 amounted to approximately $16,100.
 
     In order to maximize the cost savings and efficiencies made available
through the consolidation of facilities and the additional volumes contemplated
as a result of the Lejaby, GJM and Bodyslimmers acquisitions, the Company
re-evaluated the viability of all product lines and styles. As a result, certain
products and styles were discontinued to permit the investment of working
capital in products and styles with greater returns. The liquidation of these
products resulted in mark down losses of approximately $18,070 in fiscal 1996.
 
                                      F-12
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     A summary of the total intimate apparel division consolidation and
realignment charge follows:
 
<TABLE>
<S>                                                                                            <C>
Fees and other expenses.....................................................................   $  2,840
Lease termination costs.....................................................................      6,042
Severance and other employee costs, net of pension curtailment gains........................     21,861
Realignment of manufacturing facilities and retraining costs................................     16,100
Disposition and write-down of discontinued inventory........................................     18,070
Manufacturing variances.....................................................................      7,160
                                                                                               --------
     Total charges..........................................................................     72,073
Less: Income tax benefits...................................................................    (25,875)
                                                                                               --------
     Net intimate apparel consolidation and realignment.....................................   $ 46,198
                                                                                               --------
                                                                                               --------
</TABLE>
 
OTHER
 
     Other non-recurring items of $13,083, net of income tax benefits of $7,326,
were incurred and paid in fiscal 1996.
 
     The addition of the GJM manufacturing and administrative organization
enabled the Company to begin manufacturing and direct sourcing certain products
which had been previously outsourced through a buying agent. This has resulted
in significant ongoing cost savings to the Company. The pre-tax cost of
terminating the existing agency contract was $2,693.
 
     The Company has recognized other opportunities for further cost savings by
consolidating certain administrative and sales functions in Europe following the
Lejaby acquisition. Actions taken in fiscal 1996, primarily reductions in
existing staff, resulted in a non-recurring pretax charge of $6,066.
 
     In order to achieve an early resolution of the insurance claims related to
the destruction of one of the Company's distribution centers as a result of the
1994 California earthquake, the Company accepted a cash settlement offer of
approximately $19,000 and wrote-off the remaining receivable of $6,082. The
Company also wrote off certain other claims of approximately $2,568. The write
off of these amounts resulted in a pre-tax charge of $8,650.
 
     In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996, the Company announced the termination of
the merger. The Company incurred legal, accounting and investment advisory fees
in connection with the proposed merger of $3,000.
 
1997 NON-RECURRING:
 
<TABLE>
<S>                                                                                            <C>
Merger related integration costs............................................................   $ 49,959
Consolidation and realignment...............................................................     59,499
Other items, including final disposition of Hathaway assets.................................     21,346
                                                                                               --------
                                                                                                130,804
Less: income tax benefits...................................................................    (49,743)
                                                                                               --------
                                                                                               $ 81,061
                                                                                               --------
                                                                                               --------
</TABLE>
 
MERGER RELATED INTEGRATION COSTS
 
     Designer Holdings and the Company previously operated retail outlets in
several common locations. The Company has elected to consolidate retail
operations in such locations into the larger existing Designer Holdings
facilities. As a result, the Company has provided for the anticipated lease
termination costs, write-off of related fixed assets and the close-out of store
inventories and surplus stocks not considered suitable for redirected marketing
efforts in the new store format. The Company
 
                                      F-13
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
has also taken steps to reduce the number of new Designer Holdings retail stores
previously planned. In addition, following the merger in December 1997, the
Company consolidated the credit and collection functions of the companies and
initiated a program of consolidating receivables from common customers, offering
favorable settlement of prior balances to accelerate collection efforts.
Additional allowances accepted under this program are expected to generate
substantial cash earlier than otherwise would be available. Under the Company's
redirected marketing strategy for Designer Holdings, it is anticipated that the
volume of future business with certain prior distribution outlets may be
significantly reduced.
 
     The consolidation of other administrative functions for the Company and
Designer Holdings, which is substantially complete, has resulted in workforce
reductions and closure of office facilities. Additional reductions and closures
are being considered to maximize savings.
 
     A summary of the merger related integration costs follows:
 
<TABLE>
<S>                                                                                            <C>
Consolidation of retail stores and credit and collections...................................   $ 40,120
Other merger related costs..................................................................      9,839
                                                                                               --------
                                                                                                 49,959
Less: income tax benefits...................................................................    (18,644)
                                                                                               --------
                                                                                               $ 31,315
                                                                                               --------
                                                                                               --------
</TABLE>
 
CONSOLIDATION AND REALIGNMENT
 
     The Company expanded the intimate apparel consolidation and realignment
program initiated in 1996 to include other products and facilities. In large
part this was necessitated or prompted by the increased production volumes and
demand experienced throughout the year. Accordingly, additional products and
styles were discontinued and slower moving inventory liquidated, incurring
markdown losses to accommodate the increased volumes of higher margin
merchandise. The consolidation of retail stores and related restocking plans was
also a factor.
 
     Further reconfiguration of manufacturing facilities and the merger of
Warner's Europe with Lejaby operations achieved a workforce reduction greater
than originally anticipated but delayed realization of anticipated efficiencies
and resulted in additional costs including severance and termination costs,
primarily expensed as incurred.
 
     A summary of consolidation and realignment costs follows:
 
<TABLE>
<S>                                                                                            <C>
Disposition and write-down of assets including discontinued inventory.......................   $ 34,846
Realignment of manufacturing facilities.....................................................     17,273
Severance and other employee costs..........................................................      7,380
                                                                                               --------
                                                                                                 59,499
Less: income tax benefits...................................................................    (22,907)
                                                                                               --------
                                                                                               $ 36,592
                                                                                               --------
                                                                                               --------
</TABLE>
 
OTHER
 
     The planned disposition of assets retained from the Hathaway sale was
achieved on terms less favorable than expected. In addition, insurance
recoveries related to a prior year customer bankruptcy were less than
anticipated. As a result of the above, charges incurred in 1997 exceeded
estimates previously accrued by $21,346 ($13,154 net of income tax benefits).
 
     In the aggregate, the non-cash portion of the 1997 non-recurring item is
$96,600 pre-tax and related primarily to the write-off of inventory, accounts
receivable and other assets. The cash portion of $34,200
 
                                      F-14
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
pre-tax relates to severance and other employee costs, remaining obligations
under leases and facility costs, of which $29,000 was incurred and paid in 1997
and $5,200 is expected to be paid in fiscal 1998. The reserve balance at January
3, 1998 was $31,028 which includes the 1996 reserve balance of $3,000, primarily
for lease termination costs less minor expenditures in 1997.
 
NOTE 5 - EXTRAORDINARY ITEM
 
     In October 1995, in conjunction with a refinancing of the Company's credit
agreements, as more fully described in Note 11, the Company recorded a non-cash
extraordinary charge of $3,120 (net of income tax benefits of $1,913) related to
the write-off of deferred financing costs under the Company's previous credit
agreement.
 
NOTE 6 - RELATED PARTY TRANSACTIONS
 
     In 1990, the Company sold its Activewear Division to a newly formed
company, Authentic Fitness Corporation ('Authentic Fitness'). Certain directors
and officers of the Company are also directors and officers of Authentic
Fitness. The Company originally maintained an equity interest in Authentic
Fitness equal to approximately 3.0% of the outstanding equity of Authentic
Fitness. The equity interest was sold in March 1995 pursuant to an option
granted at the time of the sale. From time to time, the Company and Authentic
Fitness jointly negotiate contracts and agreements with vendors and suppliers.
Authentic Fitness purchases certain occupancy services related to leased
facilities, computer services, laboratory testing, transportation and contract
production services from the Company. Total charges to Authentic Fitness for
these services were approximately $5,335, $5,446 and $5,607 for the years ended
January 6, 1996, January 4, 1997 and January 3, 1998, respectively. In fiscal
1997, the Company and Authentic Fitness settled outstanding balances of $2,875
resulting in an additional payment by the Company. For the fiscal year ended
January 3, 1998, the Company sold no inventory to Authentic Fitness for sale in
its outlet stores; such sales totaled $2,668 and $350 for the years ended
January 6, 1996 and January 4, 1997, respectively.
 
     The Company purchases certain design and occupancy services from Authentic
Fitness. Charges for design and occupancy services were approximately $2,206,
$1,244 and $1,299 for the years ended January 6, 1996, January 4, 1997 and
January 3, 1998, respectively. The Company purchases inventory from Authentic
Fitness for sale in the Company's outlet stores. Inventory purchases from
Authentic Fitness were $7,562, $15,531 and $16,201 for the years ended January
6, 1996, January 4, 1997 and January 3, 1998, respectively. In July 1996,
Authentic Fitness announced that it was exiting the outlet store business.
Pursuant to an agreement, leases relating to four outlet stores were assigned to
the Company and the Company purchased the existing Authentic Fitness outlet
store inventory for its net book value, which is included in the amount
previously mentioned.
 
     In June 1995, the Company and Authentic Fitness entered into a sub-license
agreement whereby the Company secured rights to design, manufacture and
distribute certain intimate apparel using the Speedo brand name. The Company
pays a royalty to Authentic Fitness for garments sold under the Speedo label.
The Company paid Authentic Fitness $1,000 for this sub-license. Royalty expense
under this agreement was approximately $78, $469 and $293 for the years ended
January 6, 1996, January 4, 1997 and January 3, 1998, respectively.
 
     A director and a stockholder of the Company is the sole stockholder,
President and a director of The Spectrum Group, Inc. ('Spectrum'). Spectrum and
the Company are parties to an agreement under which Spectrum provides consulting
services to the Company. The Spectrum consulting agreement was amended on May 9,
1991 to provide for annual fees of $350 or such higher amount, including
expenses, not to exceed $500 (plus cost of living increases) for a period of
five years. The
 
                                      F-15
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
contract has been extended through May 9, 1999. Amounts charged to expense
pursuant to these agreements were $500 in each of the three fiscal years ended
January 3, 1998.
 
     The Company believes that the terms of the relationships and transactions
described above are at least as favorable to the Company as could have been
obtained from an unaffiliated third party.
 
NOTE 7 - SEGMENT REPORTING
 
     The Company operates within one industry segment -- the design,
manufacturing and marketing of apparel. No one customer accounted for more than
10.0% of the Company's net revenues for any of the three years in the period
ended January 3, 1998. The Company operates in several geographic areas.
<TABLE>
<CAPTION>
                                                                         CANADA AND
         FOR THE YEAR ENDED JANUARY 6, 1996            UNITED STATES    LATIN AMERICA      EUROPE       CONSOLIDATED
----------------------------------------------------   -------------    -------------     --------      ------------
<S>                                                    <C>              <C>               <C>           <C>
Net revenues........................................    $   807,491        $57,820        $ 50,868       $  916,179
                                                       -------------    -------------     --------      ------------
                                                       -------------    -------------     --------      ------------
Operating profit....................................    $   142,673        $ 9,948        $  2,449       $  155,070
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
General corporate expense -- net....................                                                        (41,182)
Interest expense....................................                                                        (33,867)
                                                                                                        ------------
Income before extraordinary items and income
  taxes.............................................                                                     $   80,021
                                                                                                        ------------
                                                                                                        ------------
Identifiable assets at January 6, 1996..............    $   707,258        $43,093        $ 39,329       $  789,680
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
Corporate assets....................................                                                        151,407
                                                                                                        ------------
     Total Assets at January 6, 1996................                                                     $  941,087
                                                                                                        ------------
                                                                                                        ------------
 
<CAPTION>
         FOR THE YEAR ENDED JANUARY 4, 1997
----------------------------------------------------
<S>                                                    <C>              <C>               <C>           <C>
Net revenues........................................    $   902,572        $66,297        $ 94,954       $1,063,823
                                                       -------------    -------------     --------      ------------
                                                       -------------    -------------     --------      ------------
Operating profit....................................    $   149,632        $ 9,444        $ 15,375       $  174,451
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
General corporate expense -- net....................                                                       (148,476)
Interest expense....................................                                                        (32,435)
                                                                                                        ------------
Income (loss) before income taxes...................                                                     $   (6,460)
                                                                                                        ------------
                                                                                                        ------------
Identifiable assets at January 4, 1997..............    $   859,971        $32,810        $102,730       $  995,511
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
Corporate assets....................................                                                        147,433
                                                                                                        ------------
     Total Assets at January 4, 1997................                                                     $1,142,944
                                                                                                        ------------
                                                                                                        ------------
<CAPTION>
         FOR THE YEAR ENDED JANUARY 3, 1998
----------------------------------------------------
<S>                                                    <C>              <C>               <C>           <C>
Net revenues........................................    $ 1,158,893        $68,234        $208,603       $1,435,730
                                                       -------------    -------------     --------      ------------
                                                       -------------    -------------     --------      ------------
Operating profit....................................    $   171,583        $11,802        $ 43,351       $  226,736
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
General corporate expense -- net....................                                                       (143,946)
Interest expense....................................                                                        (45,873)
                                                                                                        ------------
Income before income taxes..........................                                                     $   36,917
                                                                                                        ------------
                                                                                                        ------------
Identifiable assets at January 3, 1998..............    $ 1,441,765        $41,338        $ 92,309       $1,575,412
                                                       -------------    -------------     --------
                                                       -------------    -------------     --------
Corporate assets....................................                                                        152,236
                                                                                                        ------------
     Total Assets at January 3, 1998................                                                     $1,727,648
                                                                                                        ------------
                                                                                                        ------------
</TABLE>
 
     Special charges related to SOP 93-7 of $11,745 in fiscal 1995 are included
in general corporate expense -- net. Non-recurring pre-tax charges of $138,540
and $130,804 in fiscal 1996 and 1997, respectively, related to certain
consolidation and restructuring actions announced in 1996, the merger and
integration of 1996 and 1997 acquisitions and the sale of the Hathaway dress
shirt operations in 1996 are included in general corporate expense -- net.
 
                                      F-16
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     Identifiable assets are those assets of the Company that are associated
with the operations in each geographic area. Corporate assets consist
principally of accounts receivable (other than trade), prepaid expenses,
property and equipment, deferred financing costs, deferred income tax assets and
other assets.
 
NOTE 8 - INCOME TAXES
 
     The following presents the United States and foreign components of income
from operations before income taxes and the related provision (benefit) for
United States federal and other income taxes:
 
<TABLE>
<CAPTION>
                                                                                     FOR THE YEAR ENDED
                                                                         ------------------------------------------
                                                                         JANUARY 6       JANUARY 4,      JANUARY 3,
                                                                            1996            1997            1998
                                                                         ----------      ----------      ----------
<S>                                                                      <C>             <C>             <C>
United States income (loss) from operations before income taxes and
  extraordinary item................................................      $ 75,542        $(24,659)       $  6,060
Foreign income before taxes.........................................         4,479          18,199          30,857
                                                                         ----------      ----------      ----------
Income (loss) before income taxes and extraordinary item............      $ 80,021        $ (6,460)       $ 36,917
                                                                         ----------      ----------      ----------
                                                                         ----------      ----------      ----------
 
Current Provision:
United States federal...............................................      $  1,790        $ --            $   (432)
State and Puerto Rico...............................................         6,013              60              77
Foreign.............................................................         1,923           1,161           6,480
                                                                         ----------      ----------      ----------
                                                                             9,726           1,221           6,125
                                                                         ----------      ----------      ----------
 
Deferred Provision (Benefit):
United States federal...............................................        23,792          (2,767)          6,687
State and Puerto Rico...............................................        (3,110)            102           1,073
Foreign.............................................................        --               3,223          --
                                                                         ----------      ----------      ----------
                                                                            20,682             558           7,760
                                                                         ----------      ----------      ----------
Total...............................................................      $ 30,408        $  1,779        $ 13,885
                                                                         ----------      ----------      ----------
                                                                         ----------      ----------      ----------
</TABLE>
 
     The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:
 
<TABLE>
<CAPTION>
                                                                                     FOR THE YEAR ENDED
                                                                         ------------------------------------------
                                                                         JANUARY 6       JANUARY 4,      JANUARY 3,
                                                                            1996            1997            1998
                                                                         ----------      ----------      ----------
<S>                                                                      <C>             <C>             <C>
Income (loss) from continuing operations before income taxes........      $ 80,021        $ (6,460)       $ 36,917
                                                                         ----------      ----------      ----------
                                                                         ----------      ----------      ----------
Provision for income taxes at the statutory rate....................      $ 28,007        $ (2,261)       $ 12,921
Foreign income taxes at rates in excess of (lower than) the U.S.
  statutory rate....................................................           300          (2,108)         (3,859)
State income taxes -- net of federal benefit........................         3,908             105             759
Non-deductible intangible amortization and disposals................         1,256           4,736           1,829
Other -- net........................................................           234           1,307           2,235
Current benefit of capital loss carryforward........................        (1,275)         --              --
Current benefit for U.S. NOL carryforward...........................        (2,022)         --              --
                                                                         ----------      ----------      ----------
Provision for income taxes..........................................      $ 30,408        $  1,779        $ 13,885
                                                                         ----------      ----------      ----------
                                                                         ----------      ----------      ----------
</TABLE>
 
     The Company has estimated United States net operating loss carryforwards of
approximately $79,616 which expire from 2004 through 2010.
 
                                      F-17
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     As a result of certain sales of the Company's common stock in 1991 and 1992
and other ownership changes occurring during the three-year period prior to
1991, a change of ownership occurred under Internal Revenue Code Section 382,
which effectively limits the rate at which the Company may utilize its net
operating loss carryforwards. Nevertheless, the Company expects that it will be
able to utilize substantially all of the net operating loss carryforwards it
would have used, absent any limitation.
 
     As of January 3, 1998 and January 4, 1997, the Company had total deferred
tax assets of $69,410 and $34,417, respectively, and deferred tax liabilities of
$86,610 and $18,036, respectively. Valuation allowances are not significant.
Significant deferred tax assets at January 3, 1998 and January 4, 1997 were for
operating costs not currently deductible for tax purposes, net operating loss
carryforwards and postretirement benefits and totaled $62,349 and $22,411,
respectively. Significant deferred tax liabilities at January 3, 1998 and
January 4, 1997 were for depreciation and amortization differences and totaled
$50,958 and $2,587, respectively. The change between January 4, 1997 and January
3, 1998 is primarily the result of recording the tax effect of differing tax and
accounting basis of net assets arising from the acquisition of Designer
Holdings. Other current assets include current taxes receivable of $14,395 and
deferred income taxes of $809 at January 3, 1998. At January 4, 1997, accrued
liabilities included deferred income taxes of $6,084.
 
NOTE 9 - EMPLOYEE RETIREMENT PLANS
 
  Pensions
 
     The Company has a defined benefit pension plan which covers substantially
all non-union domestic employees (the 'Plan'). The Plan is noncontributory and
benefits are based upon years of service and average earnings for the eight
highest consecutive calendar years of compensation (increasing to ten years in
1999 and fifteen years in 2004) during the years immediately preceding
retirement. Pension contributions are also made to foreign plans and directly to
union-sponsored plans.
 
     The funding policy for the Plan is to make, as a minimum contribution, the
equivalent of the minimum required by the Employee Retirement Income Security
Act of 1974.
 
     The periodic net pension cost (income) is comprised of the following:
 
<TABLE>
<CAPTION>
                                                                                     FOR THE YEAR ENDED
                                                                         ------------------------------------------
                                                                         JANUARY 6,      JANUARY 4,      JANUARY 3,
                                                                            1996            1997            1998
                                                                         ----------      ----------      ----------
<S>                                                                      <C>             <C>             <C>
Benefits earned.....................................................      $  1,676        $  1,552        $  1,296
Interest cost on projected benefits.................................         7,801           7,728           7,799
Actual return on investments........................................       (20,976)         (9,326)        (19,493)
Net amortization/deferral...........................................        13,271             (91)         10,110
Curtailment gain and other -- net...................................        --              (2,048)         --
                                                                         ----------      ----------      ----------
Net periodic pension cost (income) -- Company plan..................         1,772          (2,185)           (288)
Cost of other plans.................................................           539           1,054             839
                                                                         ----------      ----------      ----------
Net pension cost (income)...........................................      $  2,311        $ (1,131)       $    551
                                                                         ----------      ----------      ----------
                                                                         ----------      ----------      ----------
</TABLE>
 
     The Plan had assets in excess of projected benefit obligations at January
4, 1997 and assets approximately equal to projected benefit obligations at
January 3, 1998. Plan investments include fixed income securities and marketable
equity securities, including 71,800, 81,800 and 212,000 shares of the Company's
Class A Common Stock, which had a fair market value of $1,795, $2,423 and $6,652
at January 6, 1996, January 4, 1997 and January 3, 1998, respectively. The Plan
also owned 101,300, 112,500 and 112,500 shares of Authentic Fitness' common
stock, which had a fair market value of $2,102, $1,350 and $2,095 at January 6,
1996, January 4, 1997 and January 3, 1998, respectively.
 
                                      F-18
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The following table sets forth the Plan's funded status and amounts
recognized in the balance sheet:
 
<TABLE>
<CAPTION>
                                                                                             FOR THE YEAR ENDED
                                                                                         --------------------------
                                                                                         JANUARY 4,      JANUARY 3,
                                                                                            1997            1998
                                                                                         ----------      ----------
 
<S>                                                                                      <C>             <C>
Plan assets at fair value...........................................................      $ 104,267       $ 115,330
                                                                                         ----------      ----------
                                                                                         ----------      ----------
Actuarial present value of benefit obligation:
     Vested.........................................................................         94,452         106,640
     Non-vested.....................................................................          1,542           1,954
                                                                                         ----------      ----------
Accumulated benefit obligation......................................................         95,994         108,594
Effect of projected future salary increases.........................................          4,785           6,900
                                                                                         ----------      ----------
Projected benefit obligation........................................................        100,779         115,494
                                                                                         ----------      ----------
Plan assets (in excess of) less than projected benefit obligation...................         (3,488)            164
Unrecognized prior service cost.....................................................            422             347
Unrecognized net gain...............................................................          4,426             558
                                                                                         ----------      ----------
Amounts accrued for employee retirement Plan........................................      $   1,360       $   1,069
                                                                                         ----------      ----------
                                                                                         ----------      ----------
</TABLE>
 
     As of January 3, 1998, the discount rate was 7.5%. As of January 4, 1997,
the discount rate was 8.0%. The actuarial assumption for long-term rate of
return on plan assets is 9.0% for fiscal 1996 and 1997. The actuarial assumption
for increases in salary levels are based on employee's attained age and years of
service and range from 4.8% to 12.0% per annum.
 
OTHER POSTRETIREMENT BENEFITS
 
     In addition to providing pension benefits, the Company has defined benefit
health care and life insurance plans that provide postretirement benefits to
retired employees and former directors. The plans are contributory, with retiree
contributions adjusted annually, and contain cost-sharing features including
deductibles and co-insurance. The Company does not fund postretirement benefits.
 
     The net periodic postretirement benefit cost is comprised of the following:
 
<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED
                                                     ------------------------------------------
                                                     JANUARY 6,      JANUARY 4,      JANUARY 3,
                                                        1996            1997            1998
                                                     ----------      ----------      ----------
 
<S>                                                  <C>             <C>             <C>
Service cost....................................       $  109          $   68           $ 91
Interest cost...................................          599             601            672
Net amortization/deferral.......................         (220)           (187)           (20)
Curtailment gain................................        --               (171)         --
                                                     ----------      ----------      ----------
Net periodic postretirement benefit cost........       $  488          $  311           $743
                                                     ----------      ----------      ----------
                                                     ----------      ----------      ----------
</TABLE>
 
                                      F-19
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The following sets forth the status of the plans and amounts recognized in
the balance sheets at January 4, 1997 and January 3, 1998:
 
<TABLE>
<CAPTION>
                                                                     JANUARY 4,      JANUARY 3,
                                                                        1997            1998
                                                                     ----------      ----------
 
<S>                                                                  <C>             <C>
Accumulated postretirement benefit obligation:
     Retirees...................................................       $6,979          $7,968
     Actives, fully eligible....................................          129             264
     Actives, not fully eligible................................          551             760
Unrecognized net gain from experience differences and changes in
  assumptions...................................................        1,667             475
                                                                     ----------      ----------
Amount accrued for postretirement benefit costs.................       $9,326          $9,467
                                                                     ----------      ----------
                                                                     ----------      ----------
</TABLE>
 
     The weighted average annual assumed rate of increase in the per capita
costs of covered benefits (health care cost trend rate) for the year ended
January 6, 1996 was 11.0% for years 1 through 3, 9.0% for years 4 through 8, and
5.0% for years thereafter. The weighted average annual assumed rate of increase
in the per capita costs of covered benefits (health care cost trend rate) for
the year ended January 4, 1997 was 9.0% for years 1 through 4, and 5.0%
thereafter. The weighted average annual assumed rate of increase in the per
capita costs of covered benefits (health care cost trend rate) for the year
ended January 3, 1998 was 9% for years 1 through 3, and 5.0% for years
thereafter. A 1.0% increase in the trend rate assumption would have increased
the periodic postretirement benefit cost by approximately $34, $47 and $47 for
the years ended January 6, 1996, January 4, 1997 and January 3, 1998,
respectively. To reflect the curtailment under FAS 106 resulting primarily from
the restructuring and realignment of the Intimate Apparel Division, a discount
rate of 8.25% was used at a measurement date of July 1, 1996. As of the end of
the 1996 measurement period, the discount rate was decreased to 8.0%. As of
January 3, 1998, the discount rate was 7.5%. The rate is consistent with the
discount rate used in valuing the Company's pension plan.
 
     The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
legal limits allowed. Beginning July 1, 1995, the Company contributes common
stock in amounts equal to 15.0% of the first 6.0% of employee contributions to
the defined contribution plan. The maximum Company contribution on behalf of any
employee is $1,350 in one year. Employees vest in the Company contribution over
four years. Company contributions to the defined contribution plan totaled $125,
$300 and $281 for the years ended January 6, 1996, January 4, 1997 and January
3, 1998, respectively.
 
NOTE 10 - INVENTORIES
 
     Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                                                         JANUARY 4,      JANUARY 3,
                                                                                            1997            1998
                                                                                         ----------      ----------
 
<S>                                                                                      <C>             <C>
Finished goods......................................................................      $ 227,929       $ 340,246
Work in process.....................................................................         76,445         107,495
Raw materials.......................................................................         82,944          78,444
                                                                                         ----------      ----------
                                                                                          $ 387,318       $ 526,185
                                                                                         ----------      ----------
                                                                                         ----------      ----------
</TABLE>
 
                                      F-20
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
NOTE 11 - DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                                         JANUARY 4,      JANUARY 3,
                                                                                            1997            1998
                                                                                         ----------      ----------
 
<S>                                                                                      <C>             <C>
Revolving credit facility...........................................................      $  --           $ 291,109
Term Note due 1995-1999.............................................................        175,000          --
Term Note due 1997-2001.............................................................         70,560          60,727
Capital lease obligations...........................................................          3,265           2,884
Other...............................................................................         16,261           7,393
                                                                                         ----------      ----------
                                                                                            265,086         362,113
Less: amounts due within one year...................................................         49,281           7,850
                                                                                         ----------      ----------
                                                                                          $ 215,805       $ 354,263
                                                                                         ----------      ----------
                                                                                         ----------      ----------
</TABLE>
 
     Approximate maturities of long-term debt as of January 3, 1998 are as
follows:
 
<TABLE>
<CAPTION>
YEAR                                                              AMOUNT
--------------------------------------------------------------   --------
 
<S>                                                              <C>
1998..........................................................   $  7,850
1999..........................................................     10,083
2000..........................................................      9,103
2001..........................................................     43,603
2002..........................................................    291,304
2003 and thereafter...........................................        170
</TABLE>
 
     In October 1995, the Company entered into Bank Credit Agreements ('1995
Bank Credit Agreements') with substantially the same lenders as those in the
Company's previous bank credit agreement. The 1995 Bank Credit Agreements had
provided for a term loan of $200,000, a five year revolving loan in the amount
of $250,000 and a 364 day revolving loan in the amount of $100,000 ('1995
Revolving Credit Facilities'). The 364 day revolving loan was extended for an
additional 364 days in fiscal 1996 and was extendable for additional 364 day
periods. Amounts outstanding under the 1995 Bank Credit Agreements bore interest
at the Bank's base lending rate, or at LIBOR plus 0.4250%. In addition, the 1995
Bank Credit Agreements allowed the Company to place amounts borrowed under the
$250,000 Credit Agreement for bid with participating credit institutions. The
Company had the right to accept or reject any bids offered by the participating
institutions. Amounts drawn under the 1995 Revolving Credit Facilities were not
limited to any borrowing base and were essentially unsecured. The Company was
required to pay a commitment fee (included in interest expense) on unused
portions of the 1995 Revolving Credit Facilities equal to 0.1750% per annum.
 
     Also in 1995, the Company entered into a $200,000 credit agreement with its
banks which provided the Company with a credit facility for the issuance of
commercial letters of credit ('1995 L/C Facility'). The 1995 L/C Facility
replaced a previous facility with the same lenders in an aggregate amount of
$80,000 (subsequently increased to $100,000). In addition to providing for the
issue of trade letters of credit, the 1995 L/C Facility provided that the
Company could borrow, for a period of 90 days (subsequently increased to 120
days), the amounts due under maturing trade letters of credit ('120 Day Trade
Drafts'). Total amounts outstanding under the 1995 L/C Facility, including the
face amount of trade letters of credit and 120 Day Trade Drafts, could not
exceed $200,000 in the aggregate. The total amount of 120 Day Trade Drafts
outstanding could not exceed $100,000 at any time. Amounts outstanding under 120
Day Trade Drafts accrue interest at the bank's base rate or at LIBOR plus
0.4250%. The interest rate payable on outstanding 120 Day Trade Drafts decreased
as the Company's implied senior debt rating improved. The Company was required
to pay a commitment fee on the unused portion of the 1995 L/C Facility equal to
0.125% per annum of the average unused portion of
 
                                      F-21
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
the 1995 L/C Facility. The Company classifies 120 Day Trade Drafts with trade
accounts payable. The amount of 120 Day Trade Drafts outstanding at January 4,
1997 was $64,902.
 
     In July and August 1996, the Company entered into credit agreements related
to the purchase of Lejaby with several of the members of its existing bank group
('1996 Bank Credit Agreements'). The terms of the 1996 Bank Credit Agreements
are substantially the same as those of the 1995 Bank Credit Agreement and
include a term loan facility of 370 million French Francs and revolving loan
facilities of 120 million French Francs. The term and revolving loans mature on
December 31, 2001. Borrowings under the term loan and revolving loan facility
bear interest at LIBOR plus .45%. The term loan is being repaid in annual
installments which began in July 1997, with a final installment due on December
31, 2001. As of January 3, 1998, the Company had approximately $20,400 of
additional credit available under the revolving loan portion of the 1996 Bank
Credit Agreement.
 
     In August and November 1997, the Company entered into Bank Credit
Agreements ('1997 Bank Credit Agreements') with substantially the same lenders
as those in the 1995 Bank Credit Agreements. The 1997 Bank Credit Agreements
provide for a five year revolving credit facility in the amount of $600,000 (the
'Five Year Facility'), a 364 day credit facility in the amount of $200,000 (the
'364 Day Credit Facility,' and together with the Five Year Facility, '1997
Revolving Credit Facilities') and a $300,000 Trade Letter of Credit Facility
('1997 L/C Facility'). The 1997 L/C Facility provides for the issuance of
commercial letters of credit and allows the Company to borrow, for periods of
120 days, the amounts due under maturing letters of credit. The 1997 Bank Credit
Agreements replace the 1995 Bank Credit Agreements with improved terms and
conditions which include a lower borrowing rate, an extension of maturities and
revised debt covenants. The 364 day period is extendable for additional 364 day
periods. Amounts outstanding under the 1997 Bank Credit Agreements bear interest
at the Bank's base lending rate or at the Eurodollar rate plus 0.375%.
Facilities are not limited to any borrowing base and are essentially unsecured.
The rate of interest payable on amounts outstanding under the 1997 Bank Credit
Agreements and the commitment fee payable on the unused portion of the
facilities decreases as the Company's implied senior debt rating improves.
 
     As of January 4, 1997, the Company had two interest rate swap agreements in
place which were used to convert variable interest rate borrowings of $156,500
to fixed interest rates. Borrowings of $150,000 were fixed at 5.67% until
maturity in October 1998. Also, borrowings of $6,500 were fixed at 6.60% until
maturity in July 2006. As of January 3, 1998, the Company has two additional
similar interest rate swap agreements in place, bringing the total amount of
borrowings converted to fixed interest rates to $356,500. The two new swap
agreements include borrowings of $125,000 fixed at 5.76% and borrowings of
$75,000 fixed at 5.79%, both maturing in September 2002. The counterparties to
all of the Company's interest rate swap agreements are banks who are lenders in
the 1997 Bank Credit Agreements. Differences between the fixed interest rate on
each swap and the three month LIBOR interest rate are settled quarterly between
the Company and each counterparty. The Company made payments under its interest
rate swap agreements totalling $524 and $32 in the years ended January 4, 1997
and January 3, 1998, respectively.
 
     The Company is required to pay a commitment fee on the average unused
portion of the Five Year Facility equal to 0.125% per annum, the 364 Day
Credit Facility equal to 0.100% per annum and the 1997 L/C Facility equal to
0.100% per annum. The Company classifies 120 Day Trade Drafts with trade
accounts payable. As of January 3, 1998, the amount of 120 Day Trade Drafts
outstanding was $111,172.
 
     The 1997 Bank Credit Agreements contain various covenants involving
additional debt, liens on Company property, mergers, investments in other
entities, asset sales and other items. These Agreements also require the Company
to meet certain financial tests, which as of January 3, 1998, were as follows:
(1) leverage ratio of .55 to 1, and, (2) interest coverage ratio of 3 to 1. The
Company was in compliance with all of the covenants under the 1997 and 1995 Bank
Credit Agreements for the three fiscal years ended January 3, 1998.
 
                                      F-22
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The Company believes that the fair market value of its outstanding variable
rate debt is approximately equal to the outstanding principal amount thereof as
(i) substantially all of the Company's debt bears interest at floating rates
(market) and (ii) there are no prepayment premiums required by any of the
Company's material debt agreements.
 
     The Company's average interest rate on all its outstanding debt was
approximately 6.06% and 5.92% at January 4, 1997 and January 3, 1998,
respectively.
 
     The Company issues stand-by and commercial letters of credit guaranteeing
the Company's performance under certain purchase agreements. Certain obligations
for letters of credit reduce amounts available under the 1997 Bank Credit
Agreements. At January 4, 1997 and January 3, 1998, the Company had outstanding
letters of credit totaling approximately $42,590 and $64,037, respectively, of
which $5,031 and $4,483, respectively, reduced amounts available under the
applicable Revolving Credit Facility.
 
     At January 3, 1998, the Company had $504,408 and $129,274 of additional
credit available under the 1997 Revolving Credit Facilities and the 1997 L/C
Facility, respectively.
 
     The Company and certain of its foreign subsidiaries have entered into
credit agreements that provide for revolving lines of credit ('Foreign Credit
Facilities'). At January 3, 1998, the total amount of the Foreign Credit
Facilities was approximately $71,300, of which approximately $45,300 was
available.
 
NOTE 12 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
 
     In 1996, Designer Holdings issued 2.4 million Company-obligated mandatorily
redeemable convertible preferred securities of a wholly owned subsidiary (the
'Preferred Securities') for aggregate gross proceeds of $120,000. The Preferred
Securities represent preferred undivided beneficial interests in the assets of
Designer Finance Trust ('Trust'), a statutory business trust formed under the
laws of the State of Delaware in 1996. Designer Holdings owns all of the common
securities representing undivided beneficial interests of the assets of the
Trust. Accordingly, the Trust is included in the consolidated financial
statements of the Company. The Trust exists for the sole purpose of (i) issuing
the Preferred Securities and common securities (together with the Preferred
Securities, the 'Trust Securities'), (ii) investing the gross proceeds of the
Trust Securities in 6% Convertible Subordinated Debentures of Designer Holdings
due 2016 ('Convertible Debentures') and (iii) engaging in only those other
activities necessary or incidental thereto. The Company indirectly owns 100% of
the voting common securities of the Trust which is equal to 3% of the Trust's
total capital.
 
     Each Preferred Security is convertible at the option of the holder thereof
into 0.6888 of a share of Common Stock, par value $.01 per share, of the
Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at
an effective conversion price of $72.59 per share of common stock, subject to
adjustments in certain circumstances.
 
     The holders of the Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which are the sole assets of the Trust. Such
distributions are included in interest expense.
 
     The Company has the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral does not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods.
 
                                      F-23
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The Preferred Securities are mandatorily redeemable upon the maturity of
the Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
 
     The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities ('Guarantee'). In addition, the
Company has entered into a supplemental indenture pursuant to which it has
assumed, as a joint and several obligor with Designer Holdings, liability for
the payment of principal, premium, if any, and interest on the Convertible
Debentures, as well as the obligation to deliver shares of Common Stock, par
value $.01 per share, of the Company upon conversion of the Preferred Securities
as described above. The Guarantee, when taken together with the Company's
obligations in respect of the Convertible Debentures provides a full and
unconditional guarantee of amounts due on the Preferred Securities.
 
     As a result of the acquisition of Designer Holdings by the Company, the
Preferred Securities were adjusted to their estimated fair value at the date of
acquisition of $100,500, resulting in a decrease in their recorded value of
approximately $19,500. This decrease is being amortized, using the effective
interest rate method to maturity of the Preferred Securities. As of January 3,
1998, the unamortized balance is $19,242.
 
NOTE 13 - SUMMARIZED FINANCIAL INFORMATION
 
     The following is summarized financial information of the Company's
wholly-owned subsidiary, Designer Holdings as of December 31, 1996 and January
3, 1998 and for each of the three fiscal years ended January 3, 1998,
respectively.
 
     Balance sheet summary:
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,      JANUARY 3,
                                                                                          1996             1998
                                                                                      ------------      ----------
 
<S>                                                                                   <C>               <C>
Current assets...................................................................       $270,819         $ 129,285
Noncurrent assets................................................................        136,140           497,557
Current liabilities..............................................................         51,454           104,458
Noncurrent liabilities...........................................................         49,583            59,800
Redeemable preferred securities..................................................        120,000           100,758
Stockholders' equity.............................................................        185,922           361,826
</TABLE>
 
     Income statement summary:
 
<TABLE>
<CAPTION>
                                                               FOR THE YEAR
                                                                  ENDED                 NINE MONTHS     THREE MONTHS
                                                               DECEMBER 31,                ENDED           ENDED
                                                       ----------------------------    SEPTEMBER 30,     JANUARY 3,
                                                         1995(a)         1996(a)           1997             1998
                                                       ------------    ------------    -------------    ------------
 
<S>                                                    <C>             <C>             <C>              <C>
Net revenues........................................     $462,122        $480,360        $ 365,049        $158,276
Cost of goods sold..................................      358,613         339,249          262,759         115,958
Net income before extraordinary item................       11,063          27,502              274           8,430
Net income (loss)...................................       11,063          25,246             (633)          8,430
</TABLE>
 
------------
 
 (a) Certain amounts for the years ended December 31, 1996 and 1995 have been
     reclassified to cost of goods sold to conform to the current year
     presentation.
 
                                      F-24
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The summarized balance sheet information as of December 31, 1996 is
presented on a historical basis and does not reflect the effect of the
acquisition by the Company. The summarized balance sheet information as of
January 3, 1998 reflects the effect of the acquisition by the Company.
Stockholders equity represents the purchase price paid plus earnings for the
period since acquisition.
 
     The income statement information for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997 is presented on a historical
basis and does not reflect the effect of the acquisition by the Company.
 
     The above information is not indicative of the future operating results
primarily due to the integration of the operations of Designer Holdings with the
operations of the Company, the redirected marketing efforts in the new store
format and redirected marketing strategy. For further information regarding the
acquisition of Designer Holdings by the Company including pro forma information,
see Note 2 of the Notes to the Consolidated Financial Statements.
 
NOTE 14 - CAPITAL STOCK
 
     On June 30, 1995 the Company paid its first quarterly dividend on its
Common Stock. Total dividends paid during the years ended January 6, 1996,
January 4, 1997 and January 3, 1998 were $5,868, $14,532 and $16,220,
respectively.
 
     In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock
Purchase Plan'). The Stock Purchase Plan provides for sales of up to 4,800,000
shares of Class A Common Stock of the Company to certain key employees. At
January 4, 1997 and January 3, 1998, 4,521,300 shares were issued and
outstanding pursuant to grants under the Stock Purchase Plan. The Stock Purchase
Plan is administered by the Employee Stock Purchase Plan Administrative
Committee of the Board of Directors which has full authority to determine the
number of shares granted or sold, vesting requirements, voting requirements and
conditions of any stock purchase agreement between the Company and a key
employee.
 
     All shares were sold at amounts determined to be equal to the fair market
value of the shares. In addition, certain employees elected to pay for the
shares granted by executing a promissory note payable to the Company. Notes
totaling $6,041 and $5,972 were outstanding at January 4, 1997 and January 3,
1998, respectively. The note maturities range from five to ten years. Notes
receivable from employees are deducted from stockholders' equity and are
principally owed by officers and directors of the Company.
 
     In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of
Class A Common Stock to cover grants to be made under the plan. The Option Plan
is administered by a committee of the Board of Directors of the Company which
determines the number of stock options to be granted under the Option Plan, and
the terms and conditions of such grants. The Option Plan provides for the
granting of qualified stock options within the meaning of Internal Revenue Code
Section 422 and non-qualified stock options. In addition, the Option Plan limits
the amount of qualified stock options that may become exercisable by any
individual during a calendar year and limits the vesting period for options
awarded under the Option Plan.
 
     On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan'). The Stock Plan provides for the
issuance of up to 2,000,000 shares of common stock of the Company through awards
of stock options, stock appreciation rights, performance awards, restricted
stock units and stock unit awards. On May 12, 1994, the stockholders approved an
amendment to the Stock Plan whereby the number of shares issuable under the
Stock Plan is automatically increased each year by 3% of the number of
outstanding shares of Class A Common Stock of the Company as of the beginning of
each fiscal year. The total number of shares available for
 
                                      F-25
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
issuance under the Stock Plan as of January 3, 1998, was 1,601,387. The
Compensation Committee of the Board of Directors has the sole and complete
authority to make awards under the Stock Plan and to determine the specific
terms and conditions of such awards, except that the exercise price of any stock
option award may not be less than the fair market value of the Company's Common
Stock at the date of the grant.
 
     In accordance with the provisions of the Stock Plan, the Company granted
190,700 and 137,135 shares of restricted stock to certain employees, including
certain officers of the Company, during the years ending January 4, 1997 and
January 3, 1998, respectively. The restricted shares vest over four years. The
fair market value of the restricted shares was $5,578 and $4,082 at the dates of
grant, respectively. The Company will recognize compensation expense equal to
the fair value of the restricted shares over the vesting period. Compensation
expense for the years ended January 6, 1996, January 4, 1997 and January 3, 1998
was $580, $2,502 and $3,322, respectively. During 1997, 18,250 of non-vested
restricted shares were canceled resulting in a reduction in unearned
compensation of $481. Unearned stock compensation at January 4, 1997 and January
3, 1998 was $9,456 and $9,734, respectively, and is deducted from stockholders'
equity.
 
     In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides
for awards of non-qualified stock options to directors of the Company who are
not employees of the Company. Options granted under the Director Plan are
exercisable in whole or in part until the earlier of ten years from the date of
the grant or one year from the date on which an optionee ceases to be a Director
eligible for grants. Options are granted at the fair market value of the
Company's Common Stock at the date of the grant. The Director Plan provides for
the automatic grant of options to purchase (i) 30,000 shares of Common Stock
upon a Director's election to the Company's Board of Directors and (ii) 10,000
shares of Common Stock immediately following each annual shareholders' meeting
as of the date of such meeting.
 
     In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan'). The plan provides for
the issuance of stock options up to the number of shares of common stock held in
treasury. The 1997 Plan is administered by a committee of the Board of Directors
of the Company which determines the number of stock options to be granted under
the 1997 Plan, and the terms and conditions of such grants. The 1997 Plan
provides for the granting of qualified stock options within the meaning of
Internal Revenue Code Section 422, non-qualified stock options and restricted
stock. In addition, the Plan limits the amount of qualified stock options that
may become exercisable by any individual during a calendar year and limits the
vesting period for options awarded under the 1997 Plan. During 1997, options for
626,972 shares were granted.
 
                                      F-26
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     Options granted, exercised, canceled and outstanding under the Option Plan,
the Stock Plan, the Director Plan and the 1997 Plan at January 3, 1998 are
summarized below:
 
<TABLE>
<CAPTION>
                                                                               PRICE RANGE     SHARES
                                                                               -----------    ---------
 
<S>                                                                            <C>            <C>
Outstanding January 7, 1995.................................................   13.13-18.31    3,497,000
Options granted.............................................................   15.75-18.50    2,255,000
Options exercised...........................................................   15.81-18.31     (100,500)
Options canceled............................................................   15.81-18.31     (369,000)
                                                                                              ---------
Outstanding January 6, 1996.................................................   13.13-18.50    5,282,500
Options granted.............................................................   22.38-29.25    1,962,000
Options exercised...........................................................   13.25-17.32     (417,500)
Options canceled............................................................   13.25-24.38     (136,000)
                                                                                              ---------
Outstanding January 4, 1997.................................................   13.13-29.25    6,691,000
Options granted(1)..........................................................   18.33-33.31    2,611,500
Options exercised...........................................................   13.13-24.38     (251,259)
Options canceled............................................................   13.13-24.38     (233,366)
                                                                                              ---------
Outstanding January 3, 1998.................................................   13.13-33.19    8,817,875
                                                                                              ---------
                                                                                              ---------
</TABLE>
 
------------------
 
(1) Includes options on 80,000 shares at $18.33 per share in connection with the
    acquisition by the Company of Designer Holdings.
 
     Of the outstanding options at January 3, 1998, 4,127,594 were exercisable
at a weighted average exercise price of $17.76 per share. Options are
exercisable for a period of ten years from date of grant and vest when granted
in the case of the Director Plan and from the grant date to four years for the
Stock Plan, Option Plan and 1997 Plan. Options expire from February 14, 2002 to
December 12, 2007.
 
     The Company has reserved 1,861,112 shares of Class A Common Stock for
issuance under the Director Plan, Stock Plan and Option Plan as of January 3,
1998. In addition, there are 839,319 shares of Class A common stock in treasury
stock available for issuance under the 1997 Plan.
 
     The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense has been
recognized.
 
     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, 'Accounting for Stock Based Compensation' (SFAS No.
123), which also requires that the pro forma information be determined as if the
Company had accounted for its employee stock options granted subsequent to
January 7, 1995 under the fair-value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
 
<TABLE>
<CAPTION>
                                                                      JANUARY 6,    JANUARY 4,    JANUARY 3,
                                                                         1996          1997          1998
                                                                      ----------    ----------    ----------
 
<S>                                                                   <C>           <C>           <C>
Risk-free interest rate............................................      7.14%         5.47%         6.20%
Dividend yield.....................................................      1.70%         1.15%         1.08%
Expected volatility of market price of Company's Common Stock......       .3143         .3189         .3197
Expected option life...............................................   5 years       5 years       5 years
</TABLE>
 
                                      F-27
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The Company's pro forma information is as follows:
 
<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED
                                                                      --------------------------------------
                                                                      JANUARY 6,    JANUARY 4,    JANUARY 3,
                                                                         1996          1997          1998
                                                                      ----------    ----------    ----------
 
<S>                                                                   <C>           <C>           <C>
Pro forma net income (loss)........................................    $ 42,145      $(14,947)     $ 18,230
Pro forma basic income (loss) per share............................    $   0.95      $  (0.29)     $   0.34
Pro forma diluted income (loss) per share..........................    $   0.93      $  (0.29)     $   0.33
</TABLE>
 
     These pro forma effects may not be representative of the effects on future
years because of the prospective application required by SFAS No. 123, and the
fact that options vest over several years and new grants generally are made each
year.
 
<TABLE>
<CAPTION>
                                                                                 NUMBER OF SHARES
                                                                      --------------------------------------
                                                                      JANUARY 6,    JANUARY 4,    JANUARY 3,
                                                                         1996          1997          1998
                                                                      ----------    ----------    ----------
 
<S>                                                                   <C>           <C>           <C>
Treasury Stock:
Balance at beginning of year.......................................     286,600       286,600        536,600
Common stock reacquired............................................      --           250,000        839,319
                                                                      ----------    ----------    ----------
Balance at end of year.............................................     286,600       536,600      1,375,919
                                                                      ----------    ----------    ----------
                                                                      ----------    ----------    ----------
</TABLE>
 
     On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2.4 million shares, and on
February 19, 1998, the Company's Board of Directors authorized the repurchase of
an additional 10.0 million shares. During fiscal 1996 and 1997, the Company
repurchased 250,000 and 839,319 shares of its common stock under the repurchase
programs at a cost of $7,030 and $26,537, respectively.
 
     As part of the repurchase program, in 1997 the Company has entered into
put-call option combinations. Each put option entitles the third-party holder to
sell shares of Warnaco common stock to the Company at a specified price. Each
call option entitles the Company to buy shares of Warnaco common stock at a
specified price. During 1997, 140,350 shares were repurchased under this program
and are included in treasury stock, at a cost of $4,475. Net cash settlement
payments of $1,620 were also made under this program and are included in
additional paid-in capital. At January 3, 1998, the Company had put-call
option combinations outstanding on approximately 1.3 million shares at an
average forward price per share of $31.66. These option arrangements expire
between March 1998 and September 1998. At expiration, the Company has the choice
of settling these arrangements through physical settlement (purchase of shares),
in cash or in net shares. If these arrangements were settled on a net cash
basis at their expiration dates, based on the January 2, 1998 market price
for the Company's common stock of $31.25, the Company would be obligated to
pay $539.
 
                                      F-28
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
NOTE 15 - EARNINGS (LOSS) PER SHARE
 
     The following table sets forth the computation of basic and diluted
earnings per share:
 
<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED
                                                                      --------------------------------------
                                                                      JANUARY 6,    JANUARY 7,    JANUARY 3,
                                                                         1996          1997          1998
                                                                      ----------    ----------    ----------
 
<S>                                                                   <C>           <C>           <C>
Numerator for basic and diluted earnings per share -- income (loss)
  before extraordinary item........................................    $ 49,613      $ (8,239)     $ 23,032
                                                                      ----------    ----------    ----------
                                                                      ----------    ----------    ----------
Denominator for basic earnings per share -- weighted average
  shares...........................................................      44,215        51,308        52,814
                                                                      ----------    ----------    ----------
Effect of dilutive securities:
     Employee stock options........................................         932        --             1,613
     Restricted stock shares.......................................         131        --               394
                                                                      ----------    ----------    ----------
Dilutive potential common shares...................................       1,063        --             2,007
                                                                      ----------    ----------    ----------
Denominator for diluted earnings per share -- weighted average
  adjusted shares..................................................      45,278        51,308        54,821
                                                                      ----------    ----------    ----------
                                                                      ----------    ----------    ----------
Basic earnings (loss) per share before extraordinary item..........    $   1.12      $   (.16)     $   0.44
                                                                      ----------    ----------    ----------
                                                                      ----------    ----------    ----------
Diluted earnings (loss) per share before extraordinary item........    $   1.10      $   (.16)     $   0.42
                                                                      ----------    ----------    ----------
                                                                      ----------    ----------    ----------
</TABLE>
 
     Options to purchase 1,900,556 shares of common stock at prices ranging from
$30.38 to $33.31 per share were outstanding during fiscal 1997 but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire from February to August, 2007, were still outstanding
at the end of fiscal 1997.
 
     Incremental shares issuable on the assumed conversion of the Preferred
Securities (1,653,177 shares) were not included in the computation of diluted
earnings per share as the impact would have been antidilutive.
 
NOTE 16 - COMMITMENTS AND CONTINGENCIES
 
     Leases:
 
     During 1997, the Company sold certain fixed assets for net book value of
approximately $33,223. The assets are being leased back from the purchaser,
under the terms of an operating lease, over a six-year period.
 
     Rental expense was $16,545, $19,923 and $24,492 for the years ended January
6, 1996, January 4, 1997 and January 3, 1998, respectively.
 
                                      F-29
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     The following is a schedule of future minimum rental payments required
under operating leases with terms in excess of one year, as of January 3, 1998:
 
<TABLE>
<CAPTION>
                                                                                     RENTAL PAYMENTS
                                                                                 ------------------------
                                                                                 REAL ESTATE    EQUIPMENT
                                                                                 -----------    ---------
 
<S>                                                                              <C>            <C>
1998..........................................................................     $20,153       $12,864
1999..........................................................................      15,345        11,217
2000..........................................................................      12,166        10,928
2001..........................................................................      10,488         8,809
2002..........................................................................       8,829         8,634
2003 and thereafter...........................................................      31,022        10,874
</TABLE>
 
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS
 
     The following summarizes the unaudited quarterly results of operations of
the Company for the years ended January 4, 1997 and January 3, 1998.
 
<TABLE>
<CAPTION>
                                                                             YEAR ENDED JANUARY 4, 1997
                                                                    --------------------------------------------
                                                                     FIRST       SECOND      THIRD       FOURTH
                                                                    QUARTER     QUARTER     QUARTER     QUARTER
                                                                    --------    --------    --------    --------
 
<S>                                                                 <C>         <C>         <C>         <C>
Net revenues.....................................................   $206,480    $222,805    $292,010    $342,528
Gross profit.....................................................     72,909      47,237      90,374     117,187
Net income (loss)................................................     15,218     (55,482)      5,811      26,214
 
Basic net income (loss) per common share(1)......................   $   0.30    $  (1.08)   $   0.11    $   0.51
                                                                    --------    --------    --------    --------
                                                                    --------    --------    --------    --------
Diluted net income (loss) per common share(1)....................   $   0.29    $  (1.08)   $   0.11    $   0.49
                                                                    --------    --------    --------    --------
                                                                    --------    --------    --------    --------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                             YEAR ENDED JANUARY 4, 1998
                                                                    --------------------------------------------
                                                                     FIRST       SECOND      THIRD       FOURTH
                                                                    QUARTER     QUARTER     QUARTER     QUARTER
                                                                    --------    --------    --------    --------
 
<S>                                                                 <C>         <C>         <C>         <C>
Net revenues.....................................................   $251,526    $290,204    $333,413    $560,587
Gross profit.....................................................     92,742      99,305     124,003     116,171
Net income (loss)................................................     18,126      17,155      32,081     (44,330)
 
Basic net income (loss) per common share(2)......................   $   0.35    $   0.33    $   0.62    $  (0.77)
                                                                    --------    --------    --------    --------
                                                                    --------    --------    --------    --------
Diluted net income (loss) per common share(2)....................   $   0.34    $   0.32    $   0.60    $  (0.77)
                                                                    --------    --------    --------    --------
                                                                    --------    --------    --------    --------
</TABLE>
 
(1) Includes the results of Designer Holdings acquired during the fourth quarter
    of 1997.
 
(2) The fiscal 1996 and first three quarters of fiscal 1997 earnings per share
    amounts have been restated to comply with SFAS No. 128.
 
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
 
     Revolving, term loans and other borrowings. The carrying amounts of the
Company's outstanding balances under its various Bank Credit Agreements and
other outstanding debt approximate the fair value because the interest rate on
the outstanding borrowings is variable and there are no prepayment penalties.
 
                                      F-30
 <PAGE>
<PAGE>
                            THE WARNACO GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
 
     Redeemable preferred securities. These securities are publically traded on
the New York Stock Exchange. The fair market value was determined based on the
closing price on January 2, 1998, the last trading date prior to the end of the
fiscal year.
 
     Interest rate swap agreements. The Company has entered into interest rate
swap agreements which have the effect of converting a portion of the Company's
outstanding variable rate debt into fixed rate debt. The fair value of the
Company's agreements to fix the interest rate on $356,500 of its outstanding
debt is based upon quotes from brokers and represents the cash requirement if
the existing agreements had been settled at year end.
 
     Letters of credit. Letters of credit collateralize the Company's
obligations to third parties and have terms ranging from 30 days to one year.
The face amount of the letters of credit are a reasonable estimate of the fair
value since the value for each is fixed over its relatively short maturity.
 
     Equity option arrangements. These arrangements can be settled, at the
Company's option, by the purchase of shares, on a net basis in shares of the
Company's common stock or on a net cash basis. To the extent that the market
price of the Company's common stock on the settlement date is higher or lower
than the forward purchase price, the net differential can be paid or received by
the Company.
 
     Foreign currency transactions. During 1997, the Company entered into
various foreign currency forward and option contracts which were used as hedges
for various commercial transactions. As of January 3, 1998, the Company did not
have any open foreign currency forward or option contracts.
 
     The carrying amounts and fair value of the Company's financial instruments
as of January 4, 1997 and January 3, 1998, are as follows:
 
<TABLE>
<CAPTION>
                                                                      JANUARY 4, 1997         JANUARY 3, 1998
                                                                    --------------------    --------------------
                                                                    CARRYING      FAIR      CARRYING      FAIR
                                                                     AMOUNT      VALUE       AMOUNT      VALUE
                                                                    --------    --------    --------    --------
 
<S>                                                                 <C>         <C>         <C>         <C>
Revolving loans..................................................   $166,145    $166,145    $303,860    $303,860
Term loans.......................................................    245,560     245,560      60,727      60,727
Other long term debt.............................................     19,526      19,526      10,277      10,277
Redeemable preferred securities..................................      --          --        100,758     100,800
Interest rate swaps..............................................      --            261       --         (4,716)
Letters of credit................................................     42,590      42,590      64,037      64,037
Equity option arrangement........................................      --          --          --           (539)
</TABLE>
 
NOTE 19 - CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                                                         FOR THE YEAR ENDED
                                                                               --------------------------------------
                                                                               JANUARY 6,    JANUARY 4,    JANUARY 3,
                                                                                  1996          1997          1998
                                                                               ----------    ----------    ----------
 
<S>                                                                            <C>           <C>           <C>
Cash paid during the year for:
     Interest...............................................................    $ 32,667      $ 32,008     $   42,931
     Income taxes, net of refunds received..................................       4,168         8,672         13,578
Supplemental Non-Cash Investing and Financing Activities:
  Details of acquisitions:
     Fair value of assets acquired..........................................      --          $176,497     $  607,400
     Liabilities assumed....................................................      --           (78,200)      (254,000)
     Stock issued...........................................................      --            --           (353,400)
                                                                               ----------    ----------    ----------
     Cash paid..............................................................      --            98,297         --
     Less cash acquired.....................................................      --           (12,649)       (55,800)
                                                                               ----------    ----------    ----------
     Net cash paid (acquired)...............................................      --          $ 85,648     $  (55,800)
                                                                               ----------    ----------    ----------
                                                                               ----------    ----------    ----------
</TABLE>
 
                                      F-31
<PAGE>
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors of
The Warnaco Group, Inc.
 
Our audits of the consolidated financial statements referred to in our report
dated February 20, 1998 appearing on page F-1 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form
10-K as of and for the three years ended January 3, 1998. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
 
PRICE WATERHOUSE LLP
New York, New York
February 20, 1998
 
                                      S-1
<PAGE>
<PAGE>
                                                                     SCHEDULE II
 
                             THE WARNACO GROUP, INC
                   VALUATION & QUALIFYING ACCOUNTS & RESERVES
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                             BALANCE AT     ADDITIONS
                                             BEGINNING     CHARGED TO
                                                 OF         COSTS AND                                    BALANCE AT
DESCRIPTION                                     YEAR       EXPENSES(1)      DEDUCTIONS(2)    OTHER(3)    END OF YEAR
------------------------------------------   ----------    -----------      -------------    --------    -----------
 
<S>                                          <C>           <C>              <C>              <C>         <C>
Year Ended January 6, 1996
  Receivable allowances...................    $  5,033       $ 2,327           $ 2,225        $--          $ 5,135
                                             ----------    -----------      -------------    --------    -----------
                                             ----------    -----------      -------------    --------    -----------
Year Ended January 4, 1997
  Receivable allowances...................    $  5,135       $ 3,458           $   649        $3,393       $11,337
                                             ----------    -----------      -------------    --------    -----------
                                             ----------    -----------      -------------    --------    -----------
Year Ended January 3, 1998
  Receivable allowances...................    $ 11,337       $32,284(4)        $ 5,482        $7,985       $46,124
                                             ----------    -----------      -------------    --------    -----------
                                             ----------    -----------      -------------    --------    -----------
  Inventory reserves......................    $ --           $19,333(4)        $11,152        $1,236       $ 9,417
                                             ----------    -----------      -------------    --------    -----------
                                             ----------    -----------      -------------    --------    -----------
</TABLE>
 
------------------
 
(1) Allowances are primarily charged to income as incurred. The allowance is
    adjusted at the end of each period, by a charge or credit to income, for the
    estimated discounts and allowances applicable to the accounts receivable
    then outstanding.
 
(2) Amounts written-off, net of recoveries.
 
(3) Reserves related to assets acquired in fiscal 1996 and 1997, respectively.
 
(4) Includes non-recurring expense charged in fiscal 1997.
 
The above reserves are deducted from the related assets in the consolidated
balance sheets. Current presentation includes amounts for cash discounts and
other allowances, aside from allowances for doubtful accounts previously
disclosed.
  


                              STATEMENT OF DIFFERENCES
                              ------------------------

The registered trademark symbol shall be expressed as.......... 'r'



                                      S-2






<PAGE>