AUTHENTIC FITNESS CORP, 10-K405, 1998-10-02

AUTHENTIC FITNESS CORP
10-K405, 1998-10-02
APPAREL & OTHER FINISHD PRODS OF FABRICS & SIMILAR MATL

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________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

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<S> <C>
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 4, 1998
OR

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

FOR THE TRANSITION PERIOD FROM________TO________
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COMMISSION FILE NUMBER: 1-11202

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AUTHENTIC FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C>
DELAWARE 95-4268251
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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6040 BANDINI BOULEVARD
COMMERCE, CALIFORNIA 90040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 726-1262
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------------ ------------------------
<S> <C>
Common Stock, par value $.001 per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [x]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 1998 was approximately $230,709,000.

The number of shares of Common Stock outstanding as of September 30, 1998
was 22,990,086.

Documents incorporated by reference: The definitive Proxy Statement of
Authentic Fitness Corporation, relating to the 1998 Annual Meeting of
Stockholders is incorporated by reference in Part III hereof.

________________________________________________________________________________

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PART I

ITEM 1. BUSINESS.

Authentic Fitness Corporation (the 'Company'), a Delaware corporation, was
organized in 1990. The Company designs, manufactures and markets swimwear, swim
accessories and active fitness apparel under the Speedo'r', Speedo'r' Authentic
Fitness'r', Catalina'r', Anne Cole'r', Cole of California'r', Oscar de la
Renta'r', Sunset Beach'r', Sandcastle'r' and Sporting Life'r' brand names; and
activewear and swimwear under the White Stag'r' brand name. In addition, the
Company operates 139 Speedo'r' Authentic Fitness'r' retail stores which sell
active fitness apparel in major metropolitan areas of the United States and
Canada. The Speedo'r', Designer Swimwear, Retail and White Stag'r' Divisions
accounted for 54%, 27%, 15% and 2%, respectively, of net revenues in fiscal
1998. On February 1, 1998, the Company entered into an exclusive worldwide
licensing agreement with The Polo/Lauren Company, L.P. and PRL USA, Inc. and a
design services agreement with Polo/Ralph Lauren Corporation for Ralph
Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand swimwear for
women and girls.

The Company has leveraged the strength of its brand names and reputation
for quality to (i) continue to develop its core business, (ii) expand its
product offerings into new categories and (iii) enter new channels of
distribution. Due to the successful implementation of these strategies, the
Company's net revenues increased to $367.5 million in fiscal 1998 from $85.5
million in fiscal 1991, a compound annual growth rate of 23.1%.

SPEEDO'r' DIVISION

The Speedo'r' brand name is preeminent in the competition swimwear market
with over a 60% market share in fiscal 1998 and is widely recognized for product
innovation, quality and performance. The Speedo'r' Division's product line
consists of women's and men's competition swimwear and swim accessories, men's
swimwear and coordinating t-shirts, women's fitness swimwear, Speedo'r'
Authentic Fitness'r' activewear and children's swimwear, all of which are
marketed under the Speedo'r' brand name. The Company's license to use the
Speedo'r' trademark and such other related trademarks was granted in perpetuity
subject to certain conditions by Speedo International, Ltd., the licensor of the
Speedo'r' brand name and is exclusive in the United States, its territories and
possessions, Canada, Mexico and the Caribbean Islands.

The Company's strategy for the Speedo'r' Division is to attract new
customers to its core competition swimwear lines, and to expand its dominance in
competition swimwear to other markets for fitness apparel such as aerobics,
recreational water sports and volleyball; thereby targeting customers for whom
performance, quality and authenticity are important product attributes and to
open new channels of distribution, including its growing chain of Speedo'r'
Authentic Fitness'r' retail stores.

Speedo'r' swimwear has been associated with swimming and diving champions
since the 1950's, when it was first worn by the Australian Olympic Swim Team. In
the 1996 Summer Olympics in Atlanta, 24 out of 26 of the U.S. swimming medals
were won by athletes wearing Speedo'r' suits. The Company has promotional
contracts with Olympic medalists and world champions including Amy Van Dyken,
Jenny Thompson, Lenny Krayzelburg, Brooke Bennett, Bill Pilczuk, Josh Davis,
Greg Louganis, Janet Evans and Summer Sanders, as well as top-ranked beach
volleyball players Sinjin Smith, Holly McPeak, Linda Hanley and 1996 Olympic
beach volleyball gold medalist Karch Kiraly. At the 1998 United States Swimming
National Championships held in Clovis, California, swimmers wearing Speedo'r'
suits won 88% of the gold medals awarded and 91% of all medals awarded. In
addition, over 90% of all competing swimmers at the meet wore Speedo'r'. At the
1998 Goodwill Games, Speedo'r' participated as the official swimwear and swim
accessory sponsor. In the swimming events, athletes competing in Speedo'r' suits
won 6 gold medals, 7 silver medals and 2 bronze medals. Overall, 86% of all U.S.
swimmers competed in Speedo'r', with 100% of all U.S. male divers competing in
Speedo'r', 100% of all U.S. triathletes and water polo players and 37% of all
U.S. beach volleyball players also competing in Speedo'r'. Since 1985, the
Company has been an official sponsor of the U.S. National Swim Federation, U.S.
Diving Federation and, since 1993, the U.S. Water Polo Federation as well as the
corresponding Canadian federations. The Company is also an official sponsor of
USA Triathlon. The Company has extended these sponsorships through the year 2000
ensuring that Speedo'r' competitive swimwear and Speedo'r' apparel will be worn
through the 2000 Summer Olympics in Sydney, Australia. Management

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believes these athletes and the U.S. and Canadian federations provide exposure
and publicity prior to and during the Olympic Games and other national and
international swim meets that benefits not only the Company's competition
swimwear but also the Company's other Speedo'r' swimwear and accessories, as
well as the Speedo'r' Authentic Fitness'r' line of active fitness apparel.

Speedo'r' is the official swimwear and activewear sponsor of the 1998 Miss
Teen USA, the 1999 Miss USA and the 1999 Miss Universe pageants.

COMPETITION SWIMWEAR

The Speedo'r' brand first established its reputation for high performance
in competition swimwear and Speedo'r' continues to be the dominant brand in
competition swimwear with over 60% market share in the United States and Canada.
The Company believes that it has achieved such preeminence by focusing on
technological advances which provide superior performance. Although the
competition swimwear line includes a wide variety of styles and designs, the
majority of its sales represent repeat business in a relatively constant core
group of basic body styles.

The Company's competition swimsuits are manufactured to provide outstanding
fit, thus reducing water drag and enhancing freedom of movement. The fabric used
in these swimsuits also resists degradation from the sun and pool chemicals
enabling Speedo'r' competition swimsuits to last longer and to maintain their
fit better than suits made with other Lycra'r' types. The Company has
consistently worked to develop technologically advanced fabrics to provide
superior performance, including the following: the S-2000 suit developed for the
1992 Summer Olympic Games, the revolutionary Speedo'r' Aquablade'TM' fabric
which creates less water drag than exposed skin and the Speedo'r' Aquablade'TM'
Vortex Generator swimsuit designed to reduce significant drag forces beneath the
water. Speedo'r' Aquablade'TM' suits and briefs were worn in the 1996 Summer
Olympics by 12 of the 16 gold medal winners and 33 of the 48 overall medal
winners in women's swimming events including gold medal winners Amy Van Dyken,
Angel Martino and Jenny Thompson. Two of the four world records set at the 1996
Summer Olympics were set by swimmers wearing Speedo'r' Aquablade'TM' suits. At
the 1998 United States Swimming National Championships, Lenny Krayzelburg won a
gold medal and set an American record wearing the Speedo'r' Aquablade'TM' Vortex
Generator swimsuit.

The competition swimwear line is sold primarily through sporting goods
stores and approximately 300 independent team dealers who interact with coaches
and managers of competitive and recreational swim programs.

The Company contracts domestically for the manufacture of substantially all
products in its competition swimwear line. Nylon, nylon Lycra'r' and cotton
Lycra'r', the principal raw materials for the competition swimwear line, as well
as the fitness swimwear line and certain Speedo'r' Authentic Fitness'r'
products, are sourced from and printed by a variety of domestic and
international mills and converters. The Company considers its relationships
with its present fabric sources and manufacturers to be good.

Net revenues for the competition swimwear line increased to $43.3 million
in fiscal 1998 from $19.9 million in fiscal 1991, a compound annual growth rate
of 11.7%.

ACTIVE FITNESS

The active fitness line includes both fitness swimwear for women and the
Speedo'r' Authentic Fitness'r' line of active fitness apparel for men and women.
The Company believes that the Speedo'r' brand's reputation for performance,
quality and authenticity provides a natural base from which to build into the
fitness apparel market.

The fitness line of swimsuits is designed for the growing number of women
who participate in swimming or water aerobics as part of their regular exercise
program. The sale of fitness swimsuits is complemented by the Company's complete
line of accessories designed for aquatic exercise.

The Company launched its highly successful Speedo'r' Authentic Fitness'r'
line of active fitness apparel in the fall of 1991. Currently, the line consists
primarily of cotton Lycra'r' products for women, such as leotards, unitards and
tights, all made with the same emphasis on styling and performance as the
Company's other Speedo'r' products. In addition, the Company sells coordinated
sportswear, including fleece and nylon warm-ups, jackets, shorts and pants for
men and women under the Speedo'r' Authentic

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Fitness'r' label. The Speedo'r' Authentic Fitness'r' line is designed to be both
functional for fitness work-outs and fashionable enough for everyday wear.
Styles are coordinated to mix and match and are available in a variety of
updated colors. Speedo'r' Authentic Fitness'r' products function for a wide
variety of fitness activities which range from aerobics and running to
volleyball and for a wide variety of fitness participants from once-a-week
health club members to triathletes.

The Company has benefited from increased awareness of the Speedo'r'
Authentic Fitness'r' line as a result of its promotional contracts with several
of the medalists who wore Speedo'r' swimwear products in the 1996 Summer
Olympics and a number of professional volleyball players and triathletes. The
Company has promotional contracts with Karch Kiraly who was a gold medal winner
at the 1996 Summer Olympics, Sinjin Smith, professional beach volleyball's
winningest player with 139 tournament victories, Holly McPeak, currently a
member of the No. 1 ranked U.S. team on the FIVB tour and Linda Hanley,
currently a member of the No. 2 ranked U.S. team on the FIVB tour. The Company
also has a promotional contract with Spencer Smith, a world champion triathlete.

The increased awareness of the Speedo'r' and Speedo'r' Authentic Fitness'r'
brands has allowed the Company to further expand its product line. In fiscal
1993, the Company introduced a line of swimwear, T-shirts and sportswear for
children. The Speedo'r' kids line has been highly successful generating net
revenues of $18.7 million in fiscal 1998, an increase of more than 21% from
fiscal 1997. In September 1996, the Company's Speedo'r' kids line was the winner
of the prestigious Earnie Award presented by Earnshaw Publications for
'Excellence in Design -- Swimwear'. The Company expects that this business will
continue to grow significantly in future years.

The Company's fitness swimwear is sold primarily through department,
sporting goods and specialty stores. The Speedo'r' Authentic Fitness'r' line of
active fitness apparel is currently sold primarily through the Company's
Speedo'r' Authentic Fitness'r' retail stores.

The fitness swimwear and Speedo'r' Authentic Fitness'r' lines are currently
sourced from and printed and manufactured by the same mills, converters and
sub-contractors as the competition swimwear line. Certain Speedo'r' Authentic
Fitness'r' styles are manufactured in Company owned manufacturing facilities.
The Company acquires the cotton, fleece and nylon used in some of its Speedo'r'
Authentic Fitness'r' products from a variety of domestic and international
sources and uses a variety of domestic sewing sub-contractors to produce them.
The Company considers its relationship with these suppliers and sub-contractors
to be good.

Net revenues for the fitness swimwear and related lines increased to $22.6
million in fiscal 1998 from $1.5 million in fiscal 1991, a compound annual
growth rate of 47.3%.

MEN'S SWIMWEAR

The Company's Speedo'r' brand watershorts were introduced in 1984 and are
one of the leading brands of men's and boy's branded swimwear in department and
specialty stores commanding a 14% market share for the 1998 selling season
according to The NPD Group, Inc. The Company's watershorts are designed for men
who participate in active sports and recreation in and out of the water. The
watershorts are made of cotton or nylon fabric and come in a wide variety of
color combinations, designs and lengths.

Since 1990, the Company has offered a collection of colorful Speedo'r'
T-shirts with bold graphics that coordinate with the color schemes and designs
used in Speedo'r' swimwear to provide an important complement to the swimwear
and Speedo'r' Authentic Fitness'r' lines. Stores which previously sold only
Speedo'r' swimwear may now display Speedo'r' T-shirts with such swimwear and
thus provide the consumer with the opportunity to purchase coordinated tops and
bottoms. The Company has also developed garments for use for a wide variety of
fitness activities which range from aerobics and running to triathlon and
cycling including shorts, pants and tops primarily made of cotton and nylon
knitted fabrics.

The Company's successful extensions of the men's swimwear line include the
introduction of the Speedo'r' Surf Runner'TM' nylon cross training watershorts,
which have become a key item in Speedo'r's activewear collection.

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The Company's Speedo'r' brand watershorts and T-shirts are sold primarily
through department, sporting goods and specialty stores and catalogs. The
Company purchases T-shirt blanks and prints them domestically. The watershorts
are sourced principally from a variety of international sources. The buying
agent for products that are sourced from the Far East is either ASCO
International Sourcing Limited or Soaring Force Limited (collectively, 'ASCO').
ASCO sources the manufacture of such products, inspects finished goods prior to
shipment, facilitates the shipment of goods from foreign ports and arranges for
the issuance of letters of credit to manufacturers for finished products. ASCO
is an affiliate of Pentland Ventures Ltd ('Pentland'), one of the Company's
principal stockholders.

Net revenues for men's swimwear, primarily watershorts and T-shirts
increased to $25.2 million in fiscal 1998 from $15.7 million in fiscal 1991, a
compound annual growth rate of 7.0%.

ACCESSORIES

Speedo'r' accessories represent a major and growing product classification
for the Company complementing the competition swimwear, aquatic fitness and
recreational watersports lines. The Company's Speedo'r' accessories include a
diverse range of products including swim goggles, swimming caps, nose clips,
masks, snorkels, ear plugs, kickboards, flotation devices, and aquatic exercise
gear including the Speedo'r' Aquatic Cross-Training Mitt'TM' which provides a
more effective and efficient full body workout while swimming. Accessories which
can be used by fitness participants out of the pool include duffel bags,
athletic bags, sandals and Speedo'r' Surf Walker'TM' and Beachers'r' footwear,
for use by the pool or at the beach.

The Company continues to develop innovative and functional accessories to
support the growing number of fitness swimmers participating in water aerobics
and lap swimming.

The mainstay of the Speedo'r' accessories line is swim goggles. Made from
polycarbonate plastic, the goggles come in varied shapes and tints and include
anti-fog, hypo-allergenic and prescription vision models. Management believes
that Speedo'r' is the number one brand of swim goggles sold in sporting goods
stores.

The swim goggle line is primarily manufactured by the Company to provide
more control over the manufacturing process and quick response to the needs of
the Company's customers. Latex and silicone swimming caps are sourced from the
Far East from manufacturers using specially-designed molds that the Company
either owns or has exclusive rights to use. Other products in the Speedo'r'
accessories line are sourced from a variety of domestic and international
sources. Swim goggles and other accessories are available in most department,
sporting goods and specialty stores which carry other Speedo'r' products.

Net revenues of the accessories line increased to $53.1 million in fiscal
1998 from $19.5 million in fiscal 1991, a compound annual growth rate of 15.4%.

DESIGNER SWIMWEAR DIVISION: CATALINA'r', ANNE COLE'r', COLE OF CALIFORNIA'r',
OSCAR DE LA RENTA'r', SANDCASTLE'r', SUNSET BEACH'r', SPORTING LIFE'r' AND WHITE
STAG'r'

The Designer Swimwear Division's product line consists of women's swimwear
under the nationally recognized brand names: Catalina'r', Anne Cole'r', Cole of
California'r', Oscar de la Renta'r', Sandcastle'r', Sunset Beach'r', White
Stag'r' and Sporting Life'r'. Each of the brands targets a specific consumer and
price point. Anne Cole'r' and Oscar de la Renta'r' are designer brands, Cole of
California'r', Sandcastle'r' and Sporting Life'r' are missy brands and Sunset
Beach'r' is a junior brand, all of which target the department and specialty
store market. The Catalina'r' and White Stag'r' brands target the mass
merchandise market. These brands have allowed the Company to expand its
distribution in department and specialty stores and to add new channels of
distribution, including mass merchandisers. Prior to the Catalina/Cole
Acquisition in 1993, the Company estimates that less than 10% of the Company's
total women's Speedo'r' swimwear sales were through department and specialty
stores. The Company seeks to grow its Designer Swimwear Division by expanding
the number of stores that carry its brands and increasing the presence of its
brands within each store location.

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swimwear for women and girls. Under the license, the Company will produce and
market swimsuits, bathing suits and coordinating cover-ups, tops and bottoms for
women and girls. First shipments under this licensing agreement are scheduled
for January 1999.

For the 1998 selling season, three of the Company's designer brand names
were top ten best sellers at retail according to The NPD Group, Inc. Anne
Cole'r' was the third best selling missy swimwear brand, Cole of California'r'
was the eighth best selling missy swimwear brand and Sunset Beach'r' was the
eighth best selling junior swimwear brand.

During fiscal 1994, the Company capitalized on the high level of consumer
recognition and mass appeal of the Catalina'r' brand by repositioning it to a
line of swimwear and active apparel for the mass merchandise market. The Company
entered into a license agreement with Wal-Mart Stores, Inc. ('Wal-Mart')
pursuant to which Wal-Mart has the right, on a non-exclusive basis, to source,
distribute and sell activewear under the Catalina'r' brand name and to purchase
from the Company Catalina'r' swimwear for distribution and sale in Wal-Mart
stores. In fiscal 1998, net revenues from this agreement under the Catalina'r'
brand were $25.3 million. Also in fiscal 1994, the Company entered into an
exclusive license agreement for a period of ten years with an option to renew
for successive additional ten year terms with The Warnaco Group, Inc., a related
party ('Warnaco'), pursuant to which Warnaco has the right to manufacture and
distribute men's and women's sportswear under the Catalina'r' brand name.
The Company recorded approximately $1.3 million of royalty income associated
with this agreement in fiscal 1998. See Note 13 of Notes to Consolidated
Financial Statements.

In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide license
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, sportswear and
beachwear and children's swimwear. Also in 1993, the Company entered into
a worldwide licensing agreement with Oscar de la Renta Licensing Corporation
for the design, manufacture and marketing of women's and girls' swimwear and
activewear under the Oscar de la Renta'r' brand name.

The Designer Swimwear Division's net revenues have increased 244% to $98.8
million since the Company purchased the designer brands from Taren in October
1993. Net revenues for the Designer Swimwear Division increased 10.7% to $98.8
million in fiscal 1998 from $89.3 million in fiscal 1997.

The White Stag'r' brand name, over 100 years old, is one of the most
recognized brand names in the United States. In 1992, the Company made a
strategic decision to capitalize on the awareness and potential mass appeal of
the White Stag'r' brand name by redirecting it to a line of activewear,
outerwear, swimwear and goggles for the mass merchandise market. In fiscal 1998,
the Company shipped approximately $7.3 million of men's and women's activewear
and swimwear under the White Stag'r' brand to Wal-Mart.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION

Speedo'r' Authentic Fitness'r' retail stores are designed to appeal to
participants in water and land-based fitness activities, and to offer a complete
line of Speedo'r' and Speedo'r' Authentic Fitness'r' products that sell
throughout the year. The stores are a model for innovative retailing of the
Company's products and a proving ground for new products and marketing and
merchandising techniques. In November 1992, the Company opened its first
Speedo'r' Authentic Fitness'r' retail store in Los Angeles; since then the
Company has opened 138 additional stores (through September 30, 1998) in major
metropolitan areas of the United States and Canada to bring the total number of
stores open to 139. During fiscal 1998, the Company opened six new stores while
closing two others. The Company expects to open ten additional stores in fiscal
1999. The stores average approximately 1,100 square feet in size. Capital
expenditures for each new store of average size are expected to be approximately
$200,000 and will require approximately $50,000 of working capital. The Company
believes that the success of the retail stores to date evidences substantial
consumer interest in new innovative channels of distribution for fitness
apparel.

Net revenues of the Retail Division increased 18.8% to $56.8 million in
fiscal 1998 from $47.8 million in fiscal 1997 and comparable store sales
increased 7.9% in fiscal 1998.

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INTERNATIONAL OPERATIONS

The Catalina/Cole Acquisition and the signing of the worldwide
license agreement for Ralph Lauren'r', Polo Sport Ralph Lauren'r' and Polo
Sport-RLX'r' are strategically intended to increase the Company's access
to international markets. Catalina'r', Cole of California'r' and Anne
Cole'r' products are sold directly to department and specialty stores
and through various license agreements throughout the world. Although
historically a small portion of the Company's business was international, the
Company believes that the strength of the Designer Swimwear brand names will
create an opportunity to increase its international presence over the next
several years. The Company's licensing agreements with Speedo International,
Ltd. geographically restrict the Company's international use of the Speedo'r'
and other brand names to the United States, its territories and possessions,
Canada, Mexico and the Caribbean Islands.

The Company has a Canadian subsidiary which engages in manufacturing, sales
and marketing activities. Net revenues of such Canadian operations contributed
$13.0 million of the Company's net revenues for fiscal 1998. With the exception
of the fluctuation of local currencies against the U.S. dollar, the Company does
not believe that the Canadian operations are subject to risks which are
significantly different from domestic operations.

IMPORTS AND IMPORT RESTRICTIONS

Although the Company imported approximately 65.5% of its finished products
in fiscal 1998, substantially all of its competition swimwear is sourced
domestically or manufactured in the Company's facilities in the U.S. from
Kentucky Textiles or its affiliate KT West, Inc. ("KT West") which
also provides other manufacturing services for the Company. The Company's
fashion swimwear for women is manufactured in the Company's facilities or is
sourced from domestic and international contractors. A portion of the Company's
manufacturing is performed by a related party (See Note 13 of the Notes to
Consolidated Financial Statements). Imports from certain countries are subject
to the constraints imposed by bilateral agreements between the United States and
substantially all of the countries from which the Company imports goods. These
agreements impose quotas that limit the quantity of certain types of goods,
including many of those imported by the Company, which can be imported into the
United States from those countries. Such agreements also allow the United States
to impose, under certain conditions, restraints on the importation of categories
of merchandise that, under the terms of the agreements, are not subject to
specified limits. The bilateral agreements through which quotas are imposed have
been negotiated under the framework established by the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Arrangement. Many quota
and tariff restrictions negotiated under the Multifiber Arrangement are being
phased out over periods of up to ten years under the World Trade Organization.

The Company's continued ability to source products that it imports may be
adversely affected by additional bilateral agreements, unilateral trade
restrictions, significant decreases in import quotas, the disruption of trade
from exporting countries as a result of political instability or the imposition
of additional duties, taxes and other charges on imports.

EMPLOYEES

The Company and its subsidiaries employed approximately 1,293 employees at
July 4, 1998, less than 1% of whom were represented by a labor union. The
Company considers its relationship with employees to be good and has not
experienced interruptions of operations due to labor disagreements.

CUSTOMERS

The Company has over 2,700 customers. In fiscal 1996, Wal-Mart accounted
for approximately 11% of the Company's net revenues.

COMPETITION

The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have substantially
greater resources than the Company.

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The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its brand names and its
strong presence and strong share of the market in the major sporting goods,
department and specialty store chains.

TRADEMARKS AND LICENSING AGREEMENTS

The Company has license agreements in perpetuity with Speedo International,
Ltd. which permit the Company to design, manufacture and market certain men's,
women's and children's apparel including swimwear, sportswear and a wide variety
of other products using the Speedo'r' trademark and certain other trademarks
including Speedo'r' Surf Walkers'TM' and Speedo'r' Authentic Fitness'r'. The
Company's license to use the Speedo'r' trademark and such other trademarks was
granted in perpetuity subject to certain conditions and is exclusive in the
United States, its territories and possessions, Canada, Mexico and the Caribbean
Islands. Speedo International, Ltd. retains the right to use or license such
brand names in other jurisdictions and actively uses or licenses such brand
names throughout the world outside of the Company's licensed areas. The
agreements provide for minimum royalty payments to be credited against future
royalty payments based on a percentage of net sales. Speedo International, Ltd.
has the right to approve any designs bearing the licensed trademark as defined
in the license agreements. The license agreements may be terminated, with
respect to a particular territory only in the event the Company does not pay
royalties for, or abandons, the trademark in such territory or in the event the
Company manufactures or is controlled by a company that manufactures
racing/competitive swimwear, swimwear caps or swimwear accessories, as
specifically defined in the license agreements, under a different trademark.
Speedo International, Ltd. is an affiliate of Pentland. In addition, the Company
has certain rights to sublicense the Speedo'r' trademark within the geographic
regions covered by the licenses.

In 1992, the Company entered into an agreement with Speedo Holdings B.V.,
and its successor, Speedo International, Ltd., granting certain irrevocable
rights to the Company relating to the use of the Authentic Fitness'r' name and
service mark, which rights are in addition to the rights under the license
agreements with Speedo International, Ltd.

In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide licensing
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, sportswear and
beachwear, and children's swimwear, subject to certain terms and conditions.
Under the license, the licensee is required to pay certain minimum guaranteed
annual royalties, to be credited against earned royalties, based on a percentage
of net sales. The licensor has the right to approve products bearing the
licensed trademark as defined in the agreement.

In 1993, the Company entered into a worldwide license agreement with
Oscar de la Renta Licensing Corporation for the design, manufacture and
marketing of women's and girls' swimwear and activewear under the Oscar de la
Renta'r' brand name. The agreement granting the exclusive right to use the Oscar
de la Renta'r' trademark is valid for a term up to and including March 31, 1999
and provides for the payment of certain minimum royalty payments to be credited
against earned royalty payments for each agreement year.

On February 1, 1998, the Company entered into an exclusive worldwide
licensing agreement with The Polo/Lauren Company, L.P. and PRL USA, Inc. and a
design services agreement with Polo/Ralph Lauren Corporation for Ralph
Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand swimwear for
women and girls. Under the license, the Company will produce and market
swimsuits, bathing suits and coordinating cover-ups, tops and bottoms for women
and girls. First shipments under this licensing agreement are scheduled for
January 1999.

The Company owns other trademarks, the most important of which are White
Stag'r', Catalina'r', Sunset Beach'r' and Cole of California'r'.

<PAGE>

<PAGE>
The Company licenses the White Stag'r' brand name to Warnaco in perpetuity
for women's and children's non-athletic sportswear pursuant to a licensing
agreement which is royalty free for so long as Warnaco is the licensee. In 1992,
the Company entered into a non-exclusive license agreement with Wal-Mart
pursuant to which Wal-Mart has the right to source, distribute and sell men's,
women's and children's activewear, skiwear and fashion swimwear under the White
Stag'r' brand name. The Company designs and develops products for Wal-Mart in
connection with this license agreement.

The Company licenses the Catalina'r', White Stag'r' and Cole of
California'r' brand names to several 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 monitors
product design, development, quality and merchandising of its licensees and
meets with individual licensees from time to time to assure compliance with the
Company's overall marketing, merchandising and design strategies. Royalties
derived from such licenses were approximately $0.7 million, $0.5 million and
$0.1 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. In
fiscal 1994, the Company entered into an exclusive license agreement with
Warnaco pursuant to which Warnaco has the right to manufacture and distribute
men's and women's sportswear under the Catalina'r' brand name. In fiscal 1995,
the Company entered into a sub-license agreement with Warnaco to manufacture and
market women's intimate apparel under the Speedo'r' name. The Company recognized
royalty income of approximately $1.4 million, $0.8 million and $0.8 million from
these agreements in fiscal 1998, fiscal 1997 and fiscal 1996, respectively (See
Note 13 of Notes to Consolidated Financial Statements).

The Company believes that only the trademarks mentioned herein are material
to the business of the Company.

BACKLOG

Backlog represents booked orders which, although terminable without
penalty, are believed by the Company to be firm. Because of the seasonality of
the Company's business, the Company's backlog varies over the course of the
year. Backlog usually peaks in November for swimwear. At September 30, 1998, the
Company's backlog was $114.3 million, an increase of 24% compared to the prior
year. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality.'

ITEM 2. PROPERTIES.

The principal executive offices of the Company are located at 6040 Bandini
Blvd., Commerce, California 90040 and are occupied pursuant to a lease which
expires in 2000. The Company also maintains executive offices at 90 Park Ave.,
New York, New York 10016 and 11111 Santa Monica Blvd., Los Angeles, CA 90025.
The 90 Park Ave. and 11111 Santa Monica Blvd. properties are occupied on month
to month leases from Warnaco.

The Company has manufacturing, distribution and administrative facilities
located in Sparks, Nevada (distribution facility), Los Angeles, California, (one
warehouse, administrative and manufacturing facility and two manufacturing
facilities), in Checotah, Oklahoma, (manufacturing facility), Vancouver, British
Columbia, Canada (manufacturing and distribution facility) and Montreal, Quebec,
Canada (distribution facility). Certain of the Company's manufacturing and
warehouse facilities are also used for administrative functions. All of the
Company's facilities are leased except the Checotah, Oklahoma facility, which
the Company owns. Lease terms expire from January 1999 to November 2003.

The Company leases 139 retail store locations in various cities in the
United States and Canada. The leases expire from 1998 to 2006.

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. No significant facility is materially under utilized.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, which is, individually or in the
aggregate, material to the business of the Company.

<PAGE>

<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

None

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company, their ages and their positions are
set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------

<S> <C> <C>
Linda J. Wachner................................... 52 Director, Chairman of the Board and Chief Executive
Officer
Christopher G. Staff............................... 56 President and Chief Operating Officer
Susan Guensch...................................... 38 President Speedo'r' Division
Michael P. McHugh.................................. 59 Senior Vice President and Chief Financial Officer
</TABLE>

Mrs. Linda J. Wachner has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its inception in May 1990. Mrs. Wachner
concurrently serves as and has been a Director, President and Chief Executive
Officer of The Warnaco Group, Inc. ('Warnaco') since August 1987, and the
Chairman of the Board of Warnaco since August 1991. Mrs. Wachner was a Director
and President of Warnaco 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., Applied Graphics Technologies, Inc. and
New York Stock Exchange, Inc.

Mr. Christopher G. Staff has been President and Chief Operating Officer of
the Company since February 1997. Mr. Staff served as President of the Speedo'r'
and White Stag'r'/Skiwear Divisions and Chief Operating Officer of the Company
from April 1992 until September 1994 and as President of the Company from May
1990 until April 1992. Mr. Staff also served as a Director of the Company from
May 1990 until September 1994. Mr. Staff served as President and Chief Executive
Officer of Van's, Inc. from September 1994 until June 1995 and as a consultant
to the apparel and sportswear industry from June 1995 until November 1996. Mr.
Staff rejoined the Company in November 1996.

Ms. Susan Guensch has been President of the Speedo'r' Division since July
1996. Ms. Guensch joined the Company in June 1984 as Assistant Merchandiser for
the Speedo'r' Division and since that time has served in various positions of
increasing responsibility with the Company and its predecessor.

Mr. Michael P. McHugh has been the Senior Vice President and Chief
Financial Officer of the Company since May 1998. Mr. McHugh served as Corporate
Vice President and Chief Financial Officer of J. Crew Group, Inc. from September
1986 to April 1998. From 1983 to 1986, Mr. McHugh was Vice President of Finance
and Chief Financial Officer of the Regina Company and from 1977 to 1983 was
Controller of Operations for Revlon, Inc. Mr. McHugh served as U.S. Controller
of Canada Dry Corporation from 1975 to 1977 and from 1968 to 1975 was with
Borden, Inc. holding various divisional positions including Controller, Group
Controller and Vice President of Finance and Administration.

<PAGE>

<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is listed on the New York Stock Exchange under
the symbol 'ASM'. 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>
PERIOD HIGH LOW
- -------------------------------------------------------------------------------- ------- ------

<S> <C> <C>
Fiscal 1996:
First quarter.............................................................. 23 3/8 16 1/8
Second quarter............................................................. 23 1/8 18 1/8
Third quarter.............................................................. 29 21
Fourth quarter............................................................. 28 17
Fiscal 1997:
First quarter.............................................................. 18 7/8 11
Second quarter............................................................. 12 1/8 10 3/8
Third quarter.............................................................. 16 1/8 11 1/2
Fourth quarter............................................................. 16 12 3/8
Fiscal 1998:
First quarter.............................................................. 15 3/4 11
Second quarter............................................................. 19 9/16 14 15/16
Third quarter.............................................................. 21 15 7/8
Fourth quarter............................................................. 18 7/8 14 3/8
Fiscal 1999:
First quarter through September 30, 1998................................... 15 3/4 10 1/2
</TABLE>

- ------------------

A recent last sales price for the shares of Common Stock as reported on the
New York Stock Exchange Composite Tape was 15 1/4 on September 30, 1998. On
September 30, 1998 there were 117 holders of Common Stock, based upon the
number of holders of record and the number of individual participants in certain
security position listings.

The Company paid its initial quarterly cash dividend of 1.25[c] per share
on October 2, 1995. Since that time the Company has declared twelve successive
quarterly cash dividends of 1.25[c] per share.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth for the periods indicated selected
consolidated financial data for Authentic Fitness Corporation. This information
should be read in conjunction with the consolidated financial statements
included elsewhere herein and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' The selected consolidated balance sheet
data for the Company as of July 2, 1994, July 1, 1995 and July 6, 1996 and the
selected consolidated financial data for the fiscal years ended July 2, 1994 and
July 1, 1995 are derived from audited consolidated financial statements not
included herein. The selected consolidated financial data for the Company for
the fiscal years ended July 6, 1996, July 5, 1997 and July 4, 1998 and as of
July 5, 1997 and July 4, 1998 are derived from audited consolidated financial
statements included elsewhere herein. The fiscal year ended July 6, 1996
included 53 weeks of operations. The additional week of operations is not
considered material to the results of operations of the Company.

<PAGE>

<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
JULY 2, JULY 1, JULY 6, JULY 5, JULY 4,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $178,567 $266,133 $309,609 $323,088 $367,484
Gross profit.............................. 63,710 97,696 75,398(b) 132,296 148,664
Selling, general and administrative
expenses................................ 32,902 52,578 91,723(b) 76,456 87,124
Non-recurring items....................... 5,658(a) -- 13,642(b) 3,354(c) 1,408(d)
Depreciation and amortization............. 4,338 6,549 15,462 9,824 10,351
-------- -------- -------- -------- --------
Income (loss) before interest, income
taxes and extraordinary items........... 20,812 38,569 (45,429) 42,662 49,781
Interest expense.......................... 4,400 6,977 11,547 13,554 14,253
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items..................... 16,412 31,592 (56,976) 29,108 35,528
Income taxes (benefit).................... 6,831 12,118 (17,623) 10,073 12,759
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items................................... 9,581 19,474 (39,353) 19,035 22,769
Extraordinary items....................... (1,591)(e) -- (1,497)(f) -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
stock................................... $ 7,990 $ 19,474 $(40,850) $ 19,035 $ 22,769
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends on common stock................. -- -- $ 964 $ 1,127 $ 1,149
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA:
Net income (loss):
Basic................................. $ 0.50 $ 1.10 $ (2.08) $ 0.85 $ 1.02
Diluted............................... $ 0.41 $ 0.90 $ (2.08) $ 0.85 $ 1.01
Weighted average number of shares of
common stock outstanding(g):
Basic................................. 15,827 17,779 19,607 22,362 22,310
Diluted............................... 19,724 21,712 19,607 22,514 22,510
PRODUCT LINE SUMMARY:
Net revenues:
Speedo'r'............................. $113,138 $143,991 $161,920 $171,856 $198,420
Designer Swimwear..................... 28,739 68,572 80,695 89,258 98,804
Authentic Fitness'r' Retail........... 4,620 20,418 38,135 47,786 56,764
White Stag'r'/Skiwear................. 32,070 33,152 28,859 14,188 7,299
Other................................. -- -- -- -- 6,197
-------- -------- -------- -------- --------
$178,567 $266,133 $309,609 $323,088 $367,484
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Percentage of net revenues:
Speedo'r'............................. 63.3% 54.1% 52.3% 53.2% 54.0%
Designer Swimwear..................... 16.1% 25.8% 26.1% 27.6% 26.9%
Authentic Fitness'r' Retail........... 2.6% 7.7% 12.3% 14.8% 15.4%
White Stag'r'/Skiwear................. 18.0% 12.4% 9.3% 4.4% 2.0%
Other................................. -- -- -- -- 1.7%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital....................... $ 54,580 $ 66,051 $ 50,373 $ 53,118 $ 69,097
Total assets.......................... 197,602 278,239 281,466 321,872 316,162
Long-term debt (excluding current
maturities)......................... 19,191 32,446 49,432 42,682 33,178
Stockholders' equity.................. 121,690 141,908 116,723 133,708 150,842
</TABLE>

- ------------

(a) Non-recurring expenses include bonuses paid to senior executives in
connection with the acquisition of Catalina/Cole and the disposition of
certain assets of $2.8 million, expenses and bonus related to the
modifications and extension of the Chairman's employment agreement of $1.2
million and the write-off of certain new product development and retail
division start-up costs of $1.7 million.

(b) The total non-recurring charges and other items (noted in Statement of
Operations) recorded in fiscal 1996 were $43.0 million after-tax or
$2.19 per diluted share.

(footnotes continued on next page)

<PAGE>

<PAGE>
(footnotes continued from previous page)

(c) Reflects excess distribution costs, not covered by insurance, of $2.2
million after-tax (or $0.10 per diluted share) as a result of the flood at
the Company's Sparks, Nevada facility in January 1997. See Note 12 of Notes
to Consolidated Financial Statements.

(d) Reflects costs incurred for plant consolidation and retail store closures
of $0.9 million after-tax (or $0.04 per diluted share). See Note 12 of
Notes to Consolidated Financial Statements.

(e) Reflects the write-off of deferred financing costs related to certain
indebtedness repaid with the proceeds of the Company's public offering in
December 1993 and the refinancing of the Company's revolving and term debt
in April 1994.

(f) Reflects the write-off of deferred financing costs related to certain
indebtedness and the refinancing of the Company's credit agreement in March
1996. See Note 16 of Notes to Consolidated Financial Statements.

(g) All share and per share amounts have been restated to reflect the
two-for-one stock split effective February 10, 1994 and the impact of
Statement of Financial Accounting Standards No. 128, 'Earnings Per Share',
adopted effective July 4, 1998.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The Company's strategy is to leverage its leading brand names by entering
new channels of distribution and expanding its product lines. Key elements of
this strategy include opening Company-owned Speedo'r' Authentic Fitness'r'
retail stores, expanding its product offerings through mass merchandisers and
entering international markets. The Company's accomplishments over the past five
years include (i) the successful transition of the Speedo'r' brand through line
extensions from a highly focused competitive swimwear brand to a complete active
fitness brand, (ii) the repositioning of White Stag'r' as an activewear,
outerwear and swimwear brand for the mass merchandise market, (iii) the opening
of 139 Company-owned Speedo'r' Authentic Fitness'r' retail stores through
September 30, 1998, which has resulted in a new channel of distribution for
Speedo'r' and Speedo'r' Authentic Fitness'r' products, (iv) the acquisition of
the Catalina'r', Cole of California'r' and Anne Cole'r' swimwear brands, and
the signing of the worldwide license in perpetuity for the Anne Cole'r'
trademark and (v) the signing of an exclusive worldwide license agreement
with the Polo/Lauren Company, L.P. and PRL USA, Inc. to produce and market
Ralph Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand
swimsuits, bathing suits and coordinating cover-ups, tops and bottoms for
women and girls.

Due primarily to the successful implementation of its business strategies,
the Company increased net revenues to $367.5 million in fiscal 1998 from $85.5
million in fiscal 1991, a compound annual growth rate of 23.1%.

RESULTS OF OPERATIONS

The table below summarizes certain operating information for the Company
for each of the last three fiscal years. The operating results for fiscal 1996
have been adjusted to segregate losses and expenses associated with exiting the
skiwear and outlet store businesses, the special bad debt loss, other reserves
and the terminated merger with Warnaco from the other operations of the Company.
This supplemental information should be read in conjunction with the
consolidated financial statements and notes thereto provided elsewhere herein.
The Company has also separately identified the impact of certain incremental
inventory and accounts receivable reserves on the results of operations for
fiscal 1996.

<PAGE>

<PAGE>
STATEMENT OF OPERATIONS
(SELECTED DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
JULY 6, % OF NET JULY 5, % OF NET JULY 4, % OF NET
1996 REVENUES 1997 REVENUES 1998 REVENUES
------- -------- ------- -------- ------- --------
(IN MILLIONS)

<S> <C> <C> <C> <C> <C> <C>
Net revenues.................. $ 309.6 100.0% $ 323.1 100.0% $ 367.5 100.0%
Gross profit -- as adjusted
for items below............. 97.3 31.4% 132.3 40.9% 148.7 40.5%
Selling, administrative and
general expenses -- as
adjusted for items below.... 83.6 27.0% 76.5 23.7% 87.1 23.7%
Depreciation and
amortization................ 7.3 9.8 10.4

Income before extraordinary
items -- as adjusted for
items below................. $ 2.2 $ 21.2 $ 23.7
Other items:
Plant and retail store
closures.................... -- -- 1.4
Excess distribution costs
related to the flood not
covered by insurance........ -- 3.4 --
Special bad debt loss......... 11.6 -- --
Merger costs.................. 2.0 -- --
Exit costs related to
Skiwear..................... 15.5 -- --
Exit costs related to outlet
stores...................... 12.4 -- --
Inventory and accounts
receivable and other
reserves.................... 18.7 -- --
Income taxes (benefit)........ (17.2) 1.2 0.5
------- ------- -------
Net income (loss)............. $ (40.8) $ 19.0 $ 22.8
------- ------- -------
------- ------- -------
</TABLE>

COMPARISON OF FISCAL 1998 TO FISCAL 1997

Net revenues increased 13.7% in fiscal 1998 to $367.5 million from $323.1
million in fiscal 1997. The increase in net revenues was attributable to an
increase in Speedo'r' net revenues of 15.5%, an increase in Designer Swimwear
net revenues of 10.7% and an increase in Speedo'r' Authentic Fitness'r' Retail
Stores Division net revenues of 18.8%. White Stag'r'/Skiwear net revenues
decreased $6.9 million in fiscal 1998 as a result of the Company's strategic
decision to discontinue its skiwear business in May 1996. The increase in
Speedo'r' net revenues reflects an increased volume in all lines with
significant increases in fitness swimwear, accessories, and goggles. The
increase in Designer Swimwear net revenues reflects significant increases in
Cole of California'r', and private label. The increase in Speedo'r' Authentic
Fitness'r' Retail Stores Division net revenue is the result of a comparable
store sales increase of 7.9% and the opening of six new stores, partially offset
by the closing of two stores.

On January 18, 1998, one of the Company's three distribution centers,
located in Los Angeles, California suffered a fire. The building was damaged and
certain inventory stored in the distribution center was damaged or destroyed.
The Company is fully insured for any inventory lost as well as profits lost due
to business interruption and other incurred expenses. The Company recorded a
$36.8 million receivable from the insurance company related to this claim. As of
July 4, 1998, the Company had received $24.5 million from the insurance company
against such claim receivable leaving an outstanding claim receivable of $12.3
million. The Company is currently finalizing its claim for profits lost due to
business interruption.

Gross profit in fiscal 1998 increased to $148.7 million from $132.3 million
in fiscal 1997. Gross profit as a percentage of net revenues was 40.5% in fiscal
1998 compared to 40.9% in fiscal 1997. The decrease in gross profit as a
percentage of net revenues is primarily the result of markdowns relating to the
Company's strategic decision to sell certain slow moving inventory ahead of the
market in the third quarter of fiscal 1998 and other promotional selling during
the fourth quarter of fiscal 1998 which resulted in a lowering of year-end
inventory of 26.1% versus fiscal 1997. Partially offsetting the impact of
markdowns in fiscal 1998 was the production of approximately 6.6 million
swimsuits off-shore at lower costs, an increase of 32% over the 5 million
produced in fiscal 1997. Gross profit as a percentage of net revenues for fiscal
1998 also reflects $17.2 million of reimbursements from the Company's insurance

<PAGE>

<PAGE>
carrier related to lost gross profit from the previously mentioned distribution
center fire. Adjusting for the insurance reimbursement, gross profit as a
percentage of net revenues would have been 37.5% for fiscal 1998.

Selling, general and administrative expenses for fiscal 1998 increased to
$87.1 million from $76.5 million in fiscal 1997. Selling, general and
administrative expenses as a percentage of net revenues for both fiscal 1998 and
fiscal 1997 were at 23.7%. Marketing expenses as a percentage of net revenues
decreased 3.2% in fiscal 1998 as a result of the Olympic Games promotions in
fiscal 1997. The decrease as a percentage of net revenues was off-set by the
full year impact of the fiscal 1997 opening of 52 new Speedo'r' Authentic
Fitness'r' retail stores impacting fiscal 1998 and the six new stores opened
in fiscal 1998.

Depreciation and amortization expenses increased to $10.4 million in fiscal
1998 from $9.8 million in fiscal 1997. The increase in depreciation and
amortization expenses primarily reflects the amortization of leasehold
improvements related to the full year impact of the fiscal 1997 opening of 52
new Speedo'r' Authentic Fitness'r' retail stores impacting fiscal 1998 and the
six new stores opened in fiscal 1998.

Interest expense increased to $14.3 million in fiscal 1998 from $13.6
million in fiscal 1997. As a percentage of net revenues interest expense in
fiscal 1998 decreased to 3.9% of net revenues compared to 4.2% of net revenues
in fiscal 1997. The increase in interest expense in fiscal 1998 primarily
reflects the borrowing to fund the expansion of the Company's Speedo'r'
Authentic Fitness'r' retail stores and the related increase in working capital.
The Company's borrowing rate for fiscal 1998 automatically decreased to LIBOR
plus 1% from LIBOR plus 1.5% at the end of fiscal 1997 pursuant to the terms of
the Company's credit agreement.

The Company's effective income tax rate for fiscal 1998 was 35.9% compared
to 34.6% in fiscal 1997. The difference between the Company's effective income
tax rate and the statutory income tax rate of 35% reflects the impact of state
income taxes offset by the benefit of reversing the valuation allowance recorded
by the Company in fiscal 1996 related to net operating loss carryforwards.

COMPARISON OF FISCAL 1997 TO FISCAL 1996

On January 1, 1997, one of the Company's three distribution centers,
located in Sparks, Nevada, was flooded destroying certain inventory owned by the
Company. The Company is insured for such losses as well as for profits lost due
to business interruption. As of July 5, 1997, the Company had recorded a $25.0
million claim receivable from the insurance company representing the cost of
inventory damaged in the flood, lost profit on orders that were not shipped due
to the flood and other covered expenses. In addition, in the fourth quarter of
fiscal 1997, the Company incurred $3.4 million of distribution and other
expenses in excess of amounts covered by insurance, which have been identified
as a non-recurring expense. As of July 5, 1997, the Company had received $15.5
million from the insurance company against its insurance claim, leaving an
outstanding claim receivable of $9.5 million. In fiscal 1998, in order to
achieve an early resolution of the insurance claim, the Company accepted a cash
settlement offer on the outstanding claim receivable of approximately $8.8
million and wrote-off the remaining receivable of $0.7 million.

Net revenues increased 4.4% in fiscal 1997 to $323.1 million from $309.6
million in fiscal 1996. This increase was accomplished despite revenues lost in
the second half of fiscal 1997 due to the previously discussed Sparks flood as
well as the loss of revenues generated by the discontinued skiwear and outlet
store businesses. Adjusting for the impact of these items, the Company estimates
that net revenues would have increased approximately 20% over fiscal 1996. The
increase in net revenues reflects an increase in Speedo'r' net revenues of 6.1%,
an increase in Designer Swimwear net revenues of 10.6% and an increase in
Speedo'r' Authentic Fitness'r' Retail Stores Division net revenues of 25.3%.
White Stag'r'/Skiwear net revenues decreased over $14 million primarily due the
Company's strategic decision to discontinue its skiwear business in May 1996.
The increase in Speedo'r' net revenues primarily reflects an increase in
accessories, including Speedo'r' kids accessories, of 69%, goggles of 16% and
fitness swimwear of 32%. The increase in Designer Swimwear net revenues reflects
increases in Sunset Beach'r' of 19.7%, Cole of California'r' of 75.9%, Anne
Cole'r' of 8.6%. Catalina'r' shipments to Wal-Mart increased 5.5%. Speedo'r'
Authentic Fitness'r' Retail Stores Division net revenues increased 25.3%
reflecting the opening of 52 stores during fiscal 1997.

<PAGE>

<PAGE>
Gross profit in fiscal 1997 increased to $132.3 million from $75.4 million
in fiscal 1996. Gross profit as a percentage of net revenues were 40.9% in
fiscal 1997 compared to 24.4% in fiscal 1996. Gross profit for fiscal 1996
includes the impact of gross profit losses attributable to the discontinued
skiwear and outlet store businesses and certain incremental inventory reserve
adjustments. Fiscal 1996 gross profit before the impact of these items was $97.3
million or 31.4% of net revenues. The increase in gross profit in fiscal 1997
compared to fiscal 1996 reflects a more favorable sales mix, the Company's
strategic decision to move production of approximately 5 million swimsuits
off-shore and the higher mix of Speedo'r' Authentic Fitness'r' Retail Stores
Division sales which produce a higher gross profit margin than the wholesale
divisions. The increase in gross profit as a percentage of net revenues in
fiscal 1997 compared to fiscal 1996 reflects the favorable impact of
discontinuing the outlet and skiwear operations, more favorable sales mix and
favorable variances associated with off-shore sourcing, as noted above. Gross
profit as a percentage of net revenues for fiscal 1997 also reflects the benefit
of $8.7 million of reimbursements from the Company's insurance carrier related
to losses from the Sparks, Nevada flood without the offsetting cost of goods
sold. Adjusting for this item, gross profit as a percentage of net revenues was
39.3% for fiscal 1997.

Selling, general and administrative expenses for fiscal 1997 decreased to
$76.5 million (23.7% of net revenues) from $91.7 million in fiscal 1996.
Selling, general and administrative expenses for fiscal 1996 include the impact
of the decision to exit the skiwear and outlet store businesses and certain
incremental accounts receivable and other allowances recorded by the Company in
fiscal 1996. Selling, general and administrative expenses, before the impact of
these items was $83.6 million (27.0% of net revenues). The decrease in selling,
general and administrative expenses in fiscal 1997 compared to fiscal 1996
primarily reflects a gain of approximately $3 million related to the sale of
certain barter credits in the second quarter of fiscal 1997 as well as cost
saving measures implemented by the Company in the first quarter of fiscal 1997.

Depreciation and amortization expenses decreased to $9.8 million in fiscal
1997 from $15.5 million in fiscal 1996. Depreciation and amortization expense
for fiscal 1996 includes the write-off of goodwill and intangible assets related
to the discontinued skiwear and outlet store businesses. Depreciation and
amortization expense was $7.3 million before the write-off. The increase in
depreciation and amortization expense primarily reflects the amortization of
leasehold improvements related to the increase in the number of Speedo'r'
Authentic Fitness'r' retail stores compared to fiscal 1996.

Interest expense increased to $13.6 million in fiscal 1997 compared to
$11.5 million in fiscal 1996. The increase in interest expense in fiscal 1997
compared to fiscal 1996 primarily reflects the borrowing to fund the expansion
of the Company's Speedo'r' Authentic Fitness'r' retail stores and the related
increase in working capital.

The Company's effective income tax rate for fiscal 1997 was 34.6% compared
to 31% in fiscal 1996. The difference between the Company's effective income tax
rate and the statutory income tax rate of 35% reflects the impact of state
income taxes offset by the benefit of reversing the valuation allowance recorded
by the Company in fiscal 1996 related to net operating loss carryforwards.

Net income in fiscal 1997 was $19.0 million compared to a net loss of
$(40.8) million in fiscal 1996. The increase in net income of over $59 million
reflects the increase in gross profit and lower selling, general and
administrative expenses partially offset by the higher interest expense and
income taxes, all as noted above. The net loss in fiscal 1996 reflects the
impact of the special bad debt loss, terminated merger costs, losses related to
discontinuing the skiwear and outlet store businesses and additional reserves
and adjustments.

CAPITAL RESOURCES AND LIQUIDITY

On September 6, 1996, the Company entered into a $200 million Credit
Agreement with GE Capital, The Bank of Nova Scotia, Societe Generale and Union
Bank of California (the '$200 Million Credit Agreement'). The $200 Million
Credit Agreement is for a term of five years and provides for a term loan (the
'Term Loan') in the amount of $50 million and a revolving loan facility (the
'Revolving Loan') in the amount of $150 million. Borrowing under the $200
Million Credit Agreement accrued interest at the lenders' base rate or at LIBOR
plus 1.5-2.0% during fiscal 1997 but decreased to LIBOR

<PAGE>

<PAGE>
plus 1.0% in the first quarter of fiscal 1998. The rate of interest payable on
outstanding borrowing will be automatically reduced, to as low as LIBOR plus
.75%, as the Company's EBITDA to Debt ratio improves to 2.5 to 1.

The $200 Million Credit Agreement as amended, allows the Company to
purchase up to $50 million of its Common Stock. The Company's Board of Directors
has authorized a stock repurchase program which currently allows the Company to
buy up to $50 million of its outstanding Common Stock. As of September 30, 1998,
the Company had purchased approximately 2.4 million shares of the Company's
Common Stock at an aggregate cost of approximately $34.8 million.

On October 2, 1995, the Company paid its first quarterly cash dividend of
1 1/4[c] per share, equivalent to an annual rate of 5[c] per share. The Company
has declared twelve successive quarterly cash dividends. The Company believes
that its stock repurchase program as well as the regular quarterly cash dividend
demonstrates the Company's ongoing commitment to increase stockholder value.

The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional retail stores. The Company currently has
139 stores open and expects to open approximately ten additional stores during
fiscal 1999. The cost of leasehold improvements, fixtures and the additional
working capital associated with the opening of an average new store is expected
to be approximately $250,000.

The Company's liquidity requirements have historically arisen primarily
from its debt service requirements and the funding of the Company's 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 third quarter and the beginning of the fourth quarter
of the fiscal year. The Company typically generates nearly all 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.

The Company meets its seasonal working capital needs by utilizing amounts
available under its revolving line of credit. The Company has amended and
increased its lines of credit primarily to support the growth of its swimwear
divisions and to fund the roll-out of the Company's Speedo'r' Authentic
Fitness'r' retail stores.

Cash provided by (used in) operating activities was $33.4 million, $17.8
million and $(40.2) million in fiscal 1998, 1997, and fiscal 1996, respectively.
The increase in cash flow from operating activities in fiscal 1998 compared to
fiscal 1997 of $15.6 million primarily reflects a decrease in inventory of $22.6
million in fiscal 1998 due to improved inventory controls, primarily in raw
materials, an increase in net income in fiscal 1998 of $3.7 million and a
decrease in accounts payable of $10.1 million due to reduced inventory purchases
in the last months of fiscal 1998. Accounts receivable increased by $22.3
million primarily reflecting increased fourth quarter sales in fiscal 1998
compared to fiscal 1997. The increase in cash flow from operating activities in
fiscal 1997 compared to fiscal 1996 of $58.0 million primarily reflects the
increase of over $59 million in net income in fiscal 1997 compared to fiscal
1996 and income tax refunds received in fiscal 1997 from the carryback of the
Company's fiscal 1996 net loss. Inventory increased $21.7 million in fiscal 1997
primarily related to the expansion of the Company's Speedo'r' Authentic
Fitness'r' Retail Stores Division and an increase in raw material and work in
process to support expected sales increases in fiscal 1998. Accounts receivable
increased primarily reflecting the insurance claim receivable of $9.5 million
and higher sales in the last month of fiscal 1997 compared to fiscal 1996.
Accounts payable and accrued liabilities increased by $14.8 million reflecting
the purchase of raw material, as noted above.

Cash used in investing activities was $7.5 million, $15.1 million and $16.4
million for fiscal 1998, fiscal 1997 and fiscal 1996, respectively. Cash used in
investing activities for fiscal 1998 primarily reflects capital expenditures of
$6.7 million related to computer equipment and systems, the opening of six
Speedo'r' Authentic Fitness'r' retail stores and an increase in intangible
assets. Cash used in investing activities for fiscal 1997 primarily reflects
capital expenditures of $16.9 million, primarily related to leasehold
improvements and other costs associated with the opening of 52 Speedo'r'
Authentic Fitness'r' retail stores and an increase in intangible and other
assets partially offset by the proceeds from the sale of other assets of $8.5
million. Cash used in investing activities in fiscal 1996 primarily reflects
capital

<PAGE>

<PAGE>
expenditures and increases in other assets, primarily related to the expansion
of the Company's Speedo'r' Authentic Fitness'r' retail stores.

Cash provided by (used in) financing activities was $(26.5) million, $(3.0)
million and $57.4 million for fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. Cash used in financing activities for fiscal 1998 primarily
reflects repayments under the revolving credit facility of $13.8 million,
repayment of the term loan of $6.9 million and purchase of treasury stock of
$7.0 million. Cash used in financing activities for fiscal 1997 primarily
reflects repayments of debt (including the pay down of the Revolving Loan),
repurchase of the Series A Warrant, dividend payments and the payment of
deferred debt issue costs offset by the proceeds from the Term Loan. In fiscal
1996 the Company sold 2.5 million shares of its Common Stock in an underwritten
public offering which generated $50.8 million of cash flow from financing
activities. In fiscal 1996 the Company purchased one-half of a warrant
representing 1,809,179 shares of Common Stock from GE Capital, the funds for
which were provided by an increase in long-term debt. In addition, the Company
repaid certain debt obligations by borrowing amounts available under its
revolving credit agreement.

The Company's Revolving Loan balance was approximately $84.5 million as of
September 30, 1998. The Company's Term Loan balance was $41.3 million on
September 30, 1998.

The Company believes that funds available under its current $200 Million
Credit Agreement, as noted above, combined with cash flow to be generated from
future operations will be sufficient for the operations of the Company,
including debt service, dividend payments and costs associated with the
expansion of its Speedo'r' Authentic Fitness'r' retail stores for at least the
next twelve months. Although the Company believes that its current credit
agreement and cash flow to be generated from future operations will also be
sufficient for its long-term operations (periods beyond the next twelve months),
circumstances may arise that would require the Company to seek additional
financing. In those circumstances the Company expects to evaluate potential
additional sources of funds, for example, sales of additional common stock and
expanded or additional bank credit facilities.

YEAR 2000 COMPLIANCE

Comprehensive plans for achieving Year 2000 compliance were finalized
during fiscal 1998, and implementation work was under way at year-end. All
required systems modifications are expected to be completed in fiscal 1999.
Also during fiscal 1999, attention will continue to be focused on compliance
attainment efforts of vendors and others, including key system interfaces with
customers and suppliers. Notwithstanding the efforts described above, the
Company could potentially experience disruptions to some aspects of its various
activities and operations as a result of non-compliant systems utilized by
unrelated business entities. Contingency plans are therefore under development
to mitigate the extent of such potential disruption to business operations.
The total estimated cost to the Company for enhanced hardware and software
applications and to achieve Year 2000 compliant systems is expected to require
expenditures, primarily capital, of approximately $9.0 million over the next
three years.

FISCAL 1999 ACTIONS

In April 1998, the FASB approved a Statement of Position (SOP), '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 but earlier adoption is encouraged and the Company has elected
to implement the SOP beginning with the first quarter of fiscal 1999. The impact
of this change in accounting policy to write-off costs previously deferred and
amortized is a non-cash pre-tax charge of $4.1 million.

On October 2, 1998, the Company announced plans to discontinue sourcing
from KT West from the Company's owned Checotah, Oklahoma facility and to
consolidate sourcing from the Company's leased Montebello, California facility
into the Company's Commerce, California facility. This decision is part of the
Company's continued strategy to secure the most efficient sourcing of its
products. A pre-tax charge of $3.3 million primarily related to the above is
anticipated, including $2.2 million in non-cash

<PAGE>

<PAGE>
asset write-offs, $0.6 million in connection with contractual obligations to KT
West and severance costs, and $0.5 million in other costs.

In the aggregate, the above actions will result in a charge of $7.4 million
in the first quarter of fiscal 1999 or $4.5 million, net of tax.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This Report includes 'forward-looking statements' within the meaning of
Section 27A of the 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 Company's operations are seasonal. In fiscal 1998, approximately 70% of
the Company's net revenues were generated in the second half of the fiscal year
and substantially all of the Company's cash flow from operating activities is
generated in the fourth quarter of the fiscal year.

The following table summarizes the net revenues of the Company for each of
the quarters in fiscal 1997 and fiscal 1998:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
OCT 4, JAN 4, APRIL 5, JULY 5, OCT 4, JAN 3, APRIL 14, JULY 4,
1996 1997 1997 1997 1997 1998 1998 1998
------ ------ -------- ------- ------ ------ --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................... $ 38.7 $ 70.4 $105.0 $ 109.0 $ 37.0 $ 72.7 $ 127.9 $ 129.9
</TABLE>

The Speedo'r' Division produces a variety of products during the year and
is seasonal in nature with 72% of net revenues realized in the second half of
fiscal 1998. The Designer Swimwear Division is seasonal in nature, with most
customer orders placed in the July through December period and product is
shipped to customers starting in November. In fiscal 1998, 77% of net revenues
for the Designer Swimwear Division were realized in the second half of the year.

INFLATION

The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States and Canada have had a
significant effect on its net revenues or its profitability. In the past, the
Company has been able to offset such effects by increasing prices or by
instituting improvements in efficiency.

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 evaluating the application of the new statements.
The adoption of these statements will have no significant impact on
the Company's consolidated financial position, liquidity, cash flows or results
of operations.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging

<PAGE>

<PAGE>
Activities'. SFAS No. 133 is effective for financial statements for fiscal years
beginning after June 15, 1999. The Company is evaluating the application of the
new statement and the impact on the Company's consolidated financial position,
liquidity, cash flows and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 an interest rate swap
agreement with a financial institution to limit exposure to interest rate
volatility. 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 ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 10 is herein incorporated by reference
from page 9 of Item 4 of Part I included herein and the Proxy Statement of the
Company, relating to the 1998 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is herein incorporated by reference
from the Proxy Statement of the Company, 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 Company, 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 Company, relating to the 1998 Annual Meeting of
Stockholders.

<PAGE>

<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>

(a) 1. Consolidated Financial Statements of Authentic Fitness Corporation

Report of Independent Accountants, PricewaterhouseCoopers LLP.

Report of Independent Auditors, Ernst & Young LLP.
Consolidated Balance Sheets as of July 5, 1997 and July 4, 1998.
Consolidated Statements of Operations for the Years Ended July 6, 1996, July 5, 1997 and July 4, 1998.
Consolidated Statements of Stockholders' Equity for the Years Ended July 6, 1996, July 5, 1997 and July 4, 1998.
Consolidated Statements of Cash Flows for the Years Ended July 6, 1996, July 5, 1997 and July 4, 1998.
Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts and Reserves

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>

<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant, as amended. (Incorporated
herein by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended July 5, 1997).
3.2 Bylaws of the Registrant (Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended July 3, 1993).
10.1 Management Stock Subscription Agreement dated May 11, 1990 among the registrant and the
Management Participants listed therein (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.2 Amendment to Management Stock Subscription Agreement dated as of June 1, 1992 among the
registrant and the Management Participants listed therein (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 3,
1993).
10.3 Registration Rights Agreement dated as of May 14, 1990 among the registrant and the
Management Participants listed therein (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.4 Amendment to Registration Rights Agreement dated as of June 1, 1992 among the
registrant, Warnaco Inc., Pentland Ventures Ltd. and the Management Participants listed
therein (Incorporated herein by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 3, 1993).
10.5 Series A Warrant for 633,200 shares of Class A Common Stock of the Registrant
(3,618,358 shares of Class A Common Stock as adjusted for subsequent stock splits)
issued to General Electric Capital Corporation (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.6 Amendment to Series A Warrant dated as of June 1, 1992 between the registrant and
General Electric Capital Corporation (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 3, 1993).
</TABLE>

<PAGE>

<TABLE>
<S> <C>
10.7'D' License Agreement dated May 10, 1990 among Speedo International Limited, Speedo
International B.V., Warnaco Inc. and Warnaco International Inc. and related assignments
to Authentic Fitness Products, Inc. (formerly S Acquisition Corp.) (United States, its
territories and possessions, and Canada) (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.8'D' License Agreement dated May 10, 1990 among Speedo Knitting Mills Pty. Limited, Warnaco
Inc. and Warnaco International Inc. and related assignments to Authentic Fitness
Products, Inc. (formerly S Acquisition Corp.) (Mexico and the Caribbean Islands)
(Incorporated herein by reference to the Company's Registration Statement on Form S-1,
No. 33-47907).
10.9 Buying Agency Agreement dated as of May 14, 1990 among Authentic Fitness Products, Inc.
(formerly S Acquisition Corp.), 171173 Canada Inc., Asco International Sourcing Limited
and Soaring Force Limited (Incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 33-47907).
10.10 Amendment to Buying Agency Agreement dated as of June 1, 1992 among Authentic Fitness
Products, Inc. (formerly S Acquisition Corp.), 171173 Canada Inc., Asco International
Sourcing Limited and Soaring Force Limited (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.11 Employment Agreement ('Employment Agreement') dated as of July 2, 1992 between the
registrant and Linda J. Wachner (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 3, 1993).
10.12 First Amendment to Employment Agreement (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1994).
10.13 Incentive Compensation Plan (Incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 33-47907).
10.14 1990 Key Management Stock Option Plan (Incorporated herein by reference to the
Company's Registration Statement on Form S-1, No. 33-47907).
10.15 1992 Long Term Stock Incentive Plan (Incorporated herein by reference to the Company's
Annual report on Form 10-K for the fiscal year ended July 1, 1995).
10.16 1993 Stock Option Plan for Non-Employee Directors (Incorporated herein by reference to
the Company's Registration Statement on Form S-3 No. 33-71540).
10.17 1998 Stock Option Plan.
10.18 Form of Indemnification Agreements between the Registrant and its directors and
executive officers (Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-47907).
10.19 $200,000,000 Credit Agreement Dated as of September 6, 1996 among Authentic Fitness
Products, Inc., as Borrower, and Authentic Fitness Corporation and The Bank of Nova
Scotia and General Electric Capital Corporation as Agents, and The Bank of Nova Scotia,
as Administrative Agent, Swing Line Bank and Fronting Bank, and General Electric
Capital Corporation as Documentation Agent and Collateral Agent (Incorporated herein by
reference to the Company's Annual report on Form 10-K for the fiscal year ended July 6,
1996).
</TABLE>

<PAGE>

<TABLE>
<S> <C>
10.20 Restated Credit Agreement, dated as of March 18, 1998, among Authentic Fitness
Products, Inc. as Borrower and Authentic Fitness Corporation, The Financial
Institutions named as Lenders and The Bank of Nova Scotia and General Electric Capital
Corporation as Agents, and The Bank of Nova Scotia as Administrative Agent, Paying
Agent, Swing Line Bank and Fronting Bank, and General Electric Capital Corporation as
Documentation Agent and Collateral Agent and Societe Generale, as Co-Agent
(Incorporated herein by reference to the Company's Report on Form 10-Q for the
quarterly period ended April 4, 1998).
10.21 Amended and Restated Stockholders Agreement dated as of June 1, 1992 among the
registrant, Pentland Ventures Ltd., General Electric Capital Corporation, Warnaco Inc.
and the Management Participants listed therein (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993).
21.1 Subsidiaries of the registrant (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 2, 1994).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>

- ------------

'D' Confidential treatment granted.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Registrant in the last quarter of
fiscal 1998.

<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 on the 2nd day of
October 1998.

AUTHENTIC FITNESS CORPORATION

By: /S/ LINDA J. WACHNER
___________________________________
Linda J. Wachner
Chairman 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 of Directors; Chief October 2, 1998
- ------------------------------------------ Executive Officer (Principal Executive
(LINDA J. WACHNER) Officer)

/s/ MICHAEL P. MCHUGH Senior Vice President and Chief Financial October 2, 1998
- ------------------------------------------ Officer (Principal Financial and Accounting
(MICHAEL P. MCHUGH) Officer)

/s/ STANLEY S. ARKIN Director October 2, 1998
- ------------------------------------------
(STANLEY S. ARKIN)

/s/ STUART D. BUCHALTER Director October 2, 1998
- ------------------------------------------
(STUART D. BUCHALTER)

/s/ JOSEPH A. CALIFANO, JR. Director October 2, 1998
- ------------------------------------------
(JOSEPH A. CALIFANO, JR.)

/s/ WILLIAM S. FINKELSTEIN Director October 2, 1998
- ------------------------------------------
(WILLIAM S. FINKELSTEIN)

/s/ ROBERT D. WALTER Director October 2, 1998
- ------------------------------------------
(ROBERT D. WALTER)
</TABLE>

<PAGE>

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Authentic Fitness Corporation

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1 and 2 on page 20 present fairly, in all material
respects, the financial position of Authentic Fitness Corporation and its
subsidiaries at July 4, 1998 and July 5, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
July 4, 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. The consolidated financial statements of Authentic Fitness Corporation
and its subsidiaries for the fiscal year ended July 6, 1996 were audited by
other independent accountants whose report dated October 2, 1996 expressed an
unqualified opinion on those statements.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
August 20, 1998

F-1

<PAGE>

<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Authentic Fitness Corporation

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended July 6, 1996. Our audit
also included the financial statement schedule listed in the Index at Item 14(a)
for the year ended July 6, 1996. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Authentic Fitness Corporation's
consolidated results of its operations and its cash flow for the year ended
July 6, 1996, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for the year ended
July 6, 1996, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.

ERNST & YOUNG LLP

Los Angeles, California
October 2, 1996

F-2

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

<TABLE>
<CAPTION>
JULY 5, JULY 4,
1997 1998
-------- --------

<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................. $ 1,246 $ 638
Accounts receivable -- net of allowances of $6,871 -- 1997 and $4,864 -- 1998
(includes insurance claim receivable of $9,500 -- 1997 and $12,276 -- 1998)......... 85,240 114,710
Accounts receivable from affiliates.................................................. 14,443 7,250
Inventories.......................................................................... 86,467 63,910
Other current assets................................................................. 6,119 8,080
-------- --------
Total current assets............................................................ 193,515 194,588
Property, plant and equipment, net (Note 4)............................................... 52,566 50,417
Other assets, net (Note 5)................................................................ 75,791 71,157
-------- --------
$321,872 $316,162
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Borrowing under revolving credit facility............................................ $ 75,776 $ 61,963
Current maturities of long-term debt................................................. 6,751 9,324
Accounts payable..................................................................... 27,227 23,429
Payable to affiliates................................................................ 22,937 16,604
Other accrued expenses............................................................... 5,911 6,636
Accrued income taxes................................................................. 1,795 4,386
Deferred income taxes................................................................ -- 3,149
-------- --------
Total current liabilities....................................................... 140,397 125,491
Long-term debt............................................................................ 42,682 33,178
Deferred income taxes..................................................................... 5,085 6,651
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized; none outstanding...... -- --
Common Stock, $.001 par value, shares authorized 60,000,000; outstanding
22,419,730 -- 1997 and 22,990,086 -- 1998............................................... 23 23
Additional paid-in capital........................................................... 160,186 163,164
Cumulative translation adjustment.................................................... (741) (1,173)
Accumulated deficit.................................................................. (23,906) (2,286)
Treasury stock, at cost.............................................................. (1,854) (8,886)
-------- --------
Total stockholders' equity...................................................... 133,708 150,842
-------- --------
$321,872 $316,162
-------- --------
-------- --------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
---------- ---------- ----------

<S> <C> <C> <C>
Net revenues.............................................................. $309,609 $323,088 $367,484
Cost of goods sold........................................................ 234,211 190,792 218,820
---------- ---------- ----------
Gross profit.............................................................. 75,398 132,296 148,664
Selling, general and administrative expenses.............................. 91,723 76,456 87,124
Plant and retail store closures........................................... -- -- 1,408
Excess distribution costs................................................. -- 3,354 --
Herman's special bad debt loss............................................ 11,642 -- --
Merger termination costs.................................................. 2,000 -- --
Depreciation and amortization............................................. 15,462 9,824 10,351
---------- ---------- ----------
Income (loss) before interest and income taxes............................ (45,429) 42,662 49,781
Interest expense.......................................................... 11,547 13,554 14,253
---------- ---------- ----------
Income (loss) before income taxes......................................... (56,976) 29,108 35,528
Provision (benefit) for income taxes...................................... (17,623) 10,073 12,759
---------- ---------- ----------
Income (loss) before extraordinary items.................................. (39,353) 19,035 22,769
Extraordinary item, net of income tax benefit of $705 -- 1996............. (1,497) -- --
---------- ---------- ----------
Net income (loss)......................................................... $(40,850) $ 19,035 $ 22,769
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per common share:
Income (loss) before extraordinary items............................. $ (2.00) $ 0.85 $ 1.02
Extraordinary items.................................................. (0.08) -- --
---------- ---------- ----------
Basic earnings (loss) per common share.................................... $ (2.08) $ 0.85 $ 1.02
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items............................. $ (2.00) $ 0.85 $ 1.01
Extraordinary items.................................................. (0.08) -- --
---------- ---------- ----------
Diluted earnings (loss) per common share.................................. $ (2.08) $ 0.85 $ 1.01
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares of common stock outstanding:
Basic................................................................ 19,607,410 22,362,350 22,310,089
---------- ---------- ----------
---------- ---------- ----------
Diluted.............................................................. 19,607,410 22,513,513 22,509,736
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

<TABLE>
<CAPTION>
RETAINED
SHARES OF ADDITIONAL CUMULATIVE EARNINGS/ TREASURY TOTAL
COMMON COMMON PAID IN TRANSLATION ACCUMULATED STOCK, STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT DEFICIT AT COST EQUITY
---------- ------ ---------- ----------- --------- --------- -------------

<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995..... 17,789,104 $ 18 $ 112,078 $ (740) $ 30,552 $ -- $ 141,908
Exercise of options......... 235,617 -- 2,291 2,291
Sale of Common Stock, net of
expenses of $3,258........ 2,500,000 3 50,802 50,805
Repurchase of portion of
Series A Warrant.......... -- -- (5,932) (30,552) (36,484)
Dividends declared.......... (964) (964)
Change in cumulative
translation adjustment.... 17 17
Net loss.................... (40,850) (40,850)
---------- ------ ---------- ----------- --------- --------- -------------
Balance at July 6, 1996..... 20,524,721 21 159,239 (723) (41,814) -- 116,723
Exercise of options......... 86,000 -- 949 949
Dividends declared.......... (1,127) (1,127)
Exercise of Series A
Warrant................... 1,809,009 2 (2) --
Change in cumulative
translation adjustment.... (18) (18)
Purchase of 125,000 shares
of treasury stock......... -- -- (1,854) (1,854)
Net income.................. 19,035 19,035
---------- ------ ---------- ----------- --------- --------- -------------
Balance at July 5, 1997..... 22,419,730 23 160,186 (741) (23,906) (1,854) 133,708
Exercise of options......... 570,356 -- 2,978 2,978
Dividends declared.......... (1,149) (1,149)
Change in cumulative
translation adjustment.... (432) (432)
Purchase of 430,700 shares
of treasury stock......... -- -- (7,032) (7,032)
Net income.................. 22,769 22,769
---------- ------ ---------- ----------- --------- --------- -------------
Balance at July 4, 1998..... 22,990,086 $ 23 $ 163,164 $ (1,173) $ (2,286) $ (8,886) $ 150,842
---------- ------ ---------- ----------- --------- --------- -------------
---------- ------ ---------- ----------- --------- --------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
-------- -------- --------

<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $(40,850) $ 19,035 $ 22,769
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for uncollectible accounts receivable.......................... 26,368 20,135 27,188
Depreciation and amortization............................................ 15,462 9,824 10,351
Amortization of deferred financing costs................................. 359 1,208 1,454
Amortization of other assets............................................. -- -- 2,607
Gain on disposal of other assets, net.................................... -- (2,439) --
Income taxes............................................................. (18,328) 4,665 4,715
Extraordinary item....................................................... 2,202 -- --
Changes in assets and liabilities:
Accounts receivable...................................................... (24,549) (40,540) (49,465)
Inventories.............................................................. 8,226 (21,690) 22,557
Other current assets..................................................... (2,518) 4,035 (1,961)
Accrued income taxes..................................................... (5,724) 11,352 2,619
Accounts payable......................................................... (4,175) 14,482 (10,131)
Other accrued expenses................................................... 3,209 (2,240) 725
Other.................................................................... 69 -- --
-------- -------- --------
Net cash provided by (used in) operating activities........................... (40,249) 17,827 33,428
Cash flows from investing activities:
Proceeds from the sale of other assets................................... -- 8,500 --
Purchases of fixed assets................................................ (12,668) (16,901) (6,716)
Purchase of intangible assets and other assets........................... -- (7,154) (2,012)
Other, net............................................................... (3,739) 451 1,220
-------- -------- --------
Net cash used in investing activities......................................... (16,407) (15,104) (7,508)
Cash flows from financing activities:
Net borrowing (repayments) under revolving credit facility............... 81,427 (42,438) (13,813)
Net proceeds from the sale of Common Stock and exercise of options....... 53,102 955 2,978
Issuance's of long-term debt............................................. 38,500 50,274 --
Payment of deferred financing fees....................................... (2,139) (5,669) (581)
Repayments of debt....................................................... (76,059) (3,117) (6,931)
Dividends................................................................ (964) (1,127) (1,149)
Purchase of treasury stock............................................... -- (1,854) (7,032)
Purchase of Series A Warrant............................................. (36,484) -- --
-------- -------- --------
Net cash provided by (used in) financing activities........................... 57,383 (2,976) (26,528)
-------- -------- --------
Net increase (decrease) in cash............................................... 727 (253) (608)
Cash -- beginning of year..................................................... 772 1,499 1,246
-------- -------- --------
Cash -- end of year........................................................... $ 1,499 $ 1,246 $ 638
-------- -------- --------
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest................................................... $ 11,850 $ 12,239 $ 13,027
Cash paid (refunds received) for income taxes, net....................... $ 7,458 $ (6,163) $ 5,453
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)

Supplemental disclosures of non-cash operating, investing and financing
activities:

During the years ended July 6, 1996 and July 5, 1997 the Company entered
into capital leases for new equipment and recorded capital lease obligations for
the cost of the new equipment of $600,000 and $274,000, respectively. No capital
leases were entered into during the year ended July 4, 1998.

The accompanying notes are an integral part of these consolidated financial
statements.

F-7

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and presentation. The accompanying consolidated
financial statements include the accounts of the Company and all subsidiaries
for the fiscal years ended July 6, 1996, July 5, 1997 and July 4, 1998. The 1996
fiscal year included 53 weeks of operations, the additional week of operations
is not considered material to the operations of the Company. All significant
intercompany accounts and transactions have been eliminated. Certain amounts
have been reclassified to conform to the current year presentation.

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 the 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.

Currency translation. For operations outside of the U.S. that prepare
financial statements in currencies other than the U.S. dollar, the Company
translates income statement amounts at average exchange rates for the year and
translates assets and liabilities at year-end exchange rates. The translation
adjustments are presented as a separate component of stockholders' equity.

Inventories. Inventories are stated at the lower of cost, determined on a
first-in first-out basis, or market.

Advertising expenses. Advertising costs, primarily print advertising, are
expensed when the advertisement is first shown. Advertising expense for the
years ended July 6, 1996, July 5, 1997 and July 4, 1998 were approximately
$18,885,000, $20,432,000 and $12,909,000, respectively.

Prepaid expenses. Design, sample and certain selling costs (primarily
product books) for the upcoming season are deferred and amortized using the
straight-line method over the season to which they pertain.

Pre-opening and start-up costs. The Company defers certain start-up costs
and pre-operating costs associated with new manufacturing facilities, certain
new businesses and certain costs associated with the opening of new retail
stores. Start-up costs associated with new manufacturing facilities and new
businesses are amortized using the straight-line method over 36 months.
Pre-opening costs associated with new retail stores are amortized using the
straight-line method over 12 to 18 months.

Capitalized leases. The Company has financed the purchase of certain
machinery and equipment using capitalized leases. Assets related to capitalized
leases are stated at cost and are classified with fixed assets; the related
capitalized lease obligations are classified with long-term debt.

Depreciation. Depreciation of property, plant and equipment is provided
using the straight-line method over the assets' estimated useful lives, ranging
from 3 to 20 years, and in the case of leasehold improvements and capital lease
assets, over the shorter of the lives of the assets or the lease term.

Intangible assets. Amortization of licenses and trademarks is provided
using the straight-line method over the economic lives of the assets, which is
principally 20 years. Excess of cost over net assets acquired is amortized using
the straight-line method over 40 years. The Company periodically reviews the
carrying value of intangible assets for recoverability based on future
undiscounted cash flow.

Deferred financing costs. Deferred financing costs are amortized over the
life of the related debt using the interest method.

Income taxes. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.

Revenue recognition. Revenue is recognized when goods are shipped or sold
to customers. Returns and allowances are provided for at the time of sale.

F-8

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of credit risk. The Company sells its products to department
stores, sporting goods stores, mass merchandisers and specialty outlets
primarily in the United States and Canada. 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, except
with respect to Herman's Sporting Goods, Inc. ('Herman's') which filed for
bankruptcy on April 26, 1996 and on May 2, 1996 announced their liquidation.
(See Note 12 of Notes to Consolidated Financial Statements). In 1996 and 1998,
individual customers accounted for 11% and 10%, respectively of the Company's
net revenues. In 1997, no customer accounted for 10% of the Company's net
revenues.

Earnings Per Share. In February 1997, the Financial Accounting Standards
Board ('FASB') issued Statement of Financial Accounting Standards ('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. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding in each year. Diluted earnings per share is computed by
dividing income available to common stockholders plus income associated with
dilutive securities by the weighted average number of common shares outstanding
plus any potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock in each year.
The Company adopted SFAS No. 128 in the second quarter of fiscal 1998. All
earnings per share amounts for all periods presented have been restated to
conform to the SFAS No. 128 requirements.

Stock Based Compensation. Compensation cost attributable to stock option
and similar plans is recognized based on the difference, if any, between the
closing market price of the stock on the date of grant over the exercise price
of the option. The Company has not issued any stock options with an exercise
price less than the closing market price of the stock on the date of grant.

Accounting changes. In June 1998, the FASB issued SFAS No. 133, 'Accounting
for Derivative Instruments and Hedging Activities'. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 1999. The
Company is studying the application of the new statement to evaluate disclosure
requirements and the impact on the Company's consolidated financial position,
liquidity, cash flows and results of operations.

In April 1998, the FASB approved the 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
beginning in the first quarter of fiscal 1999. Based upon amounts capitalized at
July 4, 1998, net of amortization, the impact of implementing the SOP will
result in a non-cash pre-tax charge of $4.1 million.

2 - INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
JULY 5, JULY 4,
1997 1998
------- -------

<S> <C> <C>
Raw materials and work in process....................................... $28,796 $17,754
Finished goods.......................................................... 57,671 46,156
------- -------
$86,467 $63,910
------- -------
------- -------
</TABLE>

F-9

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 - PREPAID EXPENSES AND OTHER ASSETS

Prepaid design, sample and certain selling costs (primarily product books)
relating to upcoming seasons which are included in prepaid expenses amounted to
$3,193,000 and $4,097,000 at July 5, 1997 and July 4, 1998, respectively.

Pre-opening costs, net of accumulated amortization, associated with the
Company's retail stores were $2,081,000 and $1,449,000 at July 5, 1997 and July
4, 1998, respectively. Amortization expense related to pre-opening costs was
$937,000, $617,000 and $285,000 for the years ended July 6, 1996, July 5, 1997
and July 4, 1998, respectively.

Start-up costs, net of accumulated amortization, associated with opening
new manufacturing facilities and new product lines were $3,789,000 and
$2,679,000 at July 5, 1997 and July 4, 1998, respectively.

4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost and consists of the
following (in thousands):

<TABLE>
<CAPTION>
JULY 5, JULY 4,
1997 1998
------- -------

<S> <C> <C>
Land.................................................................... $ 238 $ 238
Buildings and improvements.............................................. 1,038 1,038
Machinery and equipment................................................. 16,648 20,912
Leasehold improvements.................................................. 34,447 34,546
Furniture and fixtures.................................................. 17,804 16,972
------- -------
70,175 73,706
Accumulated depreciation................................................ (17,609) (23,289)
------- -------
$52,566 $50,417
------- -------
------- -------
</TABLE>

Depreciation expense was $5,340,000, $6,644,000 and $7,190,000 for the
years ended July 6, 1996, July 5, 1997 and July 4, 1998, respectively. During
the years ended July 6, 1996, July 5, 1997 and July 4, 1998 the Company
capitalized approximately $146,000, $177,000 and $84,000 of interest costs
related to the construction of certain fixed assets.

5 - OTHER ASSETS

As of July 4, 1998, other assets consists of deferred financing costs of
$4,582,000 (net of accumulated amortization of $5,663,000), licenses, trademarks
and other assets of $37,586,000 (net of accumulated amortization of $22,542,000)
and excess of cost over net assets acquired of $28,989,000 (net of accumulated
amortization of $11,293,000). As of July 5, 1997, other assets consists of
deferred financing costs of $5,455,000 (net of accumulated amortization of
$4,209,000), licenses, trademarks and other assets of $40,480,000 (net of
accumulated amortization of $23,793,000) and excess of cost over net assets
acquired of $29,856,000 (net of accumulated amortization $10,426,000).

6 - DEBT

On September 6, 1996, the Company entered into a $200 Million Credit
Agreement (the '$200 Million Credit Agreement'), with GE Capital, The Bank of
Nova Scotia, Societe Generale and Union Bank of California. The $200 Million
Credit Agreement is for a term of five years expiring September 1, 2001.
Borrowing under the $200 Million Credit Agreement accrued interest at the
lenders base rate or at LIBOR plus 1.5-2.0%. In September 1997 the Company's
interest rate on outstanding borrowing under the $200 Million Credit Agreement
was automatically reduced to LIBOR plus 1.00%

F-10

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6 - DEBT (CONTINUED)
(approximately 6.7% at July 4, 1998). On December 12, 1997, the Company amended
its $200 Million Credit Agreement such that the Company's ability under the
terms of the $200 Million Credit facility to purchase its own Common Stock was
immediately increased from $10,000,000 to $20,000,000 and further increased to
$30,000,000 when the Company achieved $60,000,000 in EBITDA and an EBITDA to
debt ratio of 2.75 to 1. See Note 7 of Notes to Consolidated Financial
Statements. On March 18, 1998, after a syndication of the Company's $200 million
credit facility was oversubscribed, the Company and its banks agreed to increase
the amount of credit available under the Company's revolving loan (the
'Revolving Loan') from $150 million to $165 million ('Restated Credit
Agreement') while maintaining the Company's outstanding balance of $45 million
on its term loan (the 'Term Loan'). The terms of the Company's Restated Credit
Agreement are the same as those of the $200 Million Credit Agreement. The
Company is also required to pay a commitment fee on the unused portion of the
Revolving Loan on the average daily unused revolving loan commitment. Commitment
fees are included in interest expense and amounted to $282,000, $283,000 and
$381,000 for the years ended July 6, 1996, July 5, 1997 and July 4, 1998,
respectively.

The rate of interest payable on outstanding borrowing under the $200
Million Credit Agreement will be automatically reduced as the Company's debt to
EBITDA ratio improves and can be reduced to as low as LIBOR plus .75%. The
commitment fee payable on the unused revolving loan commitment will also be
automatically reduced as the Company's debt to EBITDA ratio improves and can be
reduced to as low as .25% per annum.

Borrowing under the $200 Million Credit Agreement is secured by
substantially all of the assets of the Company. The collateral will be
automatically released when the Company achieves an investment grade implied
senior debt rating, as determined by certain credit rating agencies. In
addition, the $200 Million Credit Agreement contains various restrictions and
covenants and requires the Company maintain certain financial ratios relating to
interest and lease coverage, minimum adjusted net worth, maximum total debt to
EBITDA and minimum EBITDA and limits the amount of capital expenditures the
Company may incur in any one fiscal year. The Company was in compliance with all
its covenants at July 4, 1998.

On June 4, 1998, the Company entered into an interest rate swap agreement
with a bank that is a lender in the Restated Credit Agreement. The agreement
allows the Company to convert variable rate borrowings with a notional amount of
$75,000,000 to a fixed rate interest rate. Borrowings under the swap agreement
are fixed at 4.99% until maturity in September 2001. As of July 4, 1998, the
variable rate under the Company's Restated Credit Agreement of LIBOR plus 1.00%
is approximately 6.7%. Differences between the fixed interest rate and the
variable interest rate are settled quarterly. No payments were due under the
interest rate swap agreement for the year ended July 4, 1998.

A summary of the terms of the Company's previous credit agreements follows.
All of the Company's previous credit agreements were secured by substantially
all of the Company's assets, required the Company to meet certain financial
tests and ratios and contained various restrictions and covenants.

On September 13, 1995, the Company amended its Credit Agreement ('Amended
Credit Agreement'). The Amended Credit Agreement provided for an additional term
loan ('Bridge Loan') of $75 million. The Company borrowed $36,183,580 of the
amount available under the Bridge Loan and repurchased a portion of the Series A
Warrant, see Note 8 of Notes to Consolidated Financial Statements. Borrowing
under the Amended Credit Agreement accrued interest at LIBOR plus 1.75% or at
the managing agent's base rate plus .75%. Amounts outstanding under the Bridge
Loan were repaid in full from the proceeds of the Company's public offering of
Common Stock which was completed in October 1995, see Note 7 of Notes to
Consolidated Financial Statements.

F-11

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6 - DEBT (CONTINUED)
On March 26, 1996, the Company entered into a $250 million Amended and
Restated Credit Agreement (the '$250 Million Credit Agreement'). The $250
Million Credit Agreement provided the Company with a $250 million revolving line
of credit and replaced the Amended Credit Agreement. Amounts outstanding under
the $250 Million Credit Agreement accrued interest at the Bank's base rate or at
LIBOR plus .75% (approximately 6.4% at July 6, 1996).

The weighted averaged interest rate on borrowings outstanding was 7.7% per
annum and 6.7% per annum at July 5, 1997 and July 4, 1998, respectively.

The Term Loan is payable in nine semi-annual installments commencing on
June 30, 1997 with a final installment of $7,500,000 due on September 1, 2001.
The current portion of the Term Loan as of July 4, 1998 is $8,750,000.
Maturities of the Term Loan at July 4, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
---- -------
<S> <C>
1999........................................................... $ 8,750
2000........................................................... 11,250
2001........................................................... 13,750
2002........................................................... 7,500
</TABLE>

The Company has entered into various lease agreements to finance the
purchase of certain computer and other equipment. The leases are generally
payable in 36-60 monthly installments, mature from September 1998 through
December 2002 and bear interest at rates ranging from approximately 7% to 11%
per annum. The leases are secured by the financed equipment. The outstanding
principal amount of the leases at July 5, 1997 and July 4, 1998 was $1,933,000
and $1,252,000, respectively.

In April 1995, the Company entered into an agreement ('Collar Agreement')
with a bank. The terms of the Collar Agreement provided that the Company's
interest rate on $40,000,000 of debt would not fall below 6.25% or rise above
7.25% unless the prevailing LIBOR rate rose above 9% in which case the Company's
interest rate would have been LIBOR plus 1.50% as defined under the $200 Million
Credit Agreement, as noted above. The cost to the Company of entering the
agreement was $116,000 and was amortized over the life of the agreement using
the straight-line method. The additional interest expense to the Company for the
year ended July 5, 1997 related to the Collar Agreement was approximately
$46,000. The Collar Agreement matured on February 24, 1997. Interest
payments/receipts on the Collar Agreement were made quarterly.

Costs incurred to secure debt financing of the Company have been classified
as deferred financing costs. These costs are amortized over the life of the
related debt instrument using the interest method. Amortization of deferred
financing costs amounted to $359,000, $1,208,000 and $1,454,000 for the years
ended July 6, 1996, July 5, 1997 and July 4, 1998, respectively.

The Company's lender issues letters of credit guaranteeing the Company's
performance under certain trade purchase agreements. The letters of credit are
issued under the terms of the Company's credit facility. Total letters of credit
outstanding were $935,000 and $1,484,000 at July 5, 1997 and July 4, 1998,
respectively.

In connection with the refinancing of the Company's Credit Agreement in
March 1996, the Company recognized an extraordinary loss on the write-off of
deferred financing costs due to the early extinguishment of debt of $1,497,000,
net of income tax benefits of $705,000 in the third quarter of fiscal 1996.

F-12

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 - CAPITAL STOCK

On October 2, 1995 the Company paid its first quarterly dividend on its
Common Stock. Total dividends paid during the years ended July 6, 1996, July 5,
1997 and July 4, 1998 were $964,000, $1,127,000 and $1,149,000, respectively.

In connection with the purchase of the assets of the Activewear Division of
Warnaco and the initial capitalization of the Company, the Company granted to a
major stockholder the option to purchase Class A Common Stock of the Company
should the investor's ownership of issued and outstanding Common Stock fall
below 50%. The investor was entitled to purchase unissued Common Stock of the
Company (at fair value) sufficient to increase the investor's ownership of
Common Stock of the Company to more than 50% of all issued and outstanding
Common Stock. The Company and the major stockholder revised, upon the closing of
the Initial Public Offering of the Company's common stock ('IPO'), the option
agreement, which had allowed the major stockholder to purchase shares to
maintain its 50% interest at all times, to an option, for as long as the major
stockholder owns 20% or more of the outstanding Common Stock of the Company to
maintain its percentage interest in the outstanding Common Stock of the Company
in the event of certain issuance's of Common Stock by the Company. As of July 4,
1998, the major stockholder held approximately 22% of the Company's outstanding
Common Stock.

On October 17, 1995 the Company sold 2,500,000 shares of its Common Stock
in an underwritten public offering at a sales price of $21.625 per share. Net
proceeds from the offering were approximately $50,805,000 (after underwriting
discounts and expenses of $3,258,000). Proceeds from the offering were used to
repay the amounts outstanding under the Bridge Loan and to repay amounts
outstanding under the Company's term loan.

The Company's Board of Directors has authorized a stock repurchase program
which currently allows the Company to buy up to $50,000,000 of its outstanding
Common Stock. As of July 4, 1998 the Company had purchased 555,700 shares of its
Common Stock amounting to $8,886,000.

As part of the Company's repurchase program the Company has entered into
equity option arrangements to purchase Authentic Fitness Corporation Common
Stock. At July 4, 1998, the Company had options outstanding on approximately
579,000 shares for a total value of approximately $11,179,000. If these
arrangements were settled on a net cash basis at their expiration dates of
September 4, 1998 through December 22, 1998, based upon the July 2, 1998
market price for the Company's common stock of $15.94, the Company would
be obligated to pay approximately $1,945,000. Any movement in market price
of $1 would increase or decrease this obligation by $579,000.

8 - WARRANTS

At May 14, 1990, the Company issued a warrant for the purchase of 3,618,358
shares (Series A Warrant) of its Common Stock for a nominal exercise price per
share. On September 13, 1995 the Company purchased from GE Capital one-half of
the shares available for purchase under the Series A Warrant for $36,183,580 or
$20 per share (representing 1,809,179 shares). This purchase was funded from the
proceeds of the Bridge Loan.

During the first quarter of fiscal 1997, GE Capital exercised the remaining
portion of the Series A Warrant and acquired 1,809,009 shares of the Company's
Common Stock.

9 - STOCK OPTIONS

The 1990 Key Management Stock Purchase Option Plan (the 'Option Plan')
provided for the granting of options to key employees to purchase the Company's
Common Stock at an exercise price of $.00875 per share. Options to purchase
286,668 shares of Common Stock were granted under the plan. At July 4, 1998
options to purchase 16,150 shares were outstanding which are exercisable. The
Company

F-13

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9 - STOCK OPTIONS (CONTINUED)
has 16,150 shares of Common Stock reserved for future issuance for the exercise
of Key Management Options.

The 1992 Long Term Incentive Plan (the 'Stock Plan') was adopted by the
Board of Directors on May 7, 1992. In November 1994, the stockholders approved
an amendment to the Stock Plan whereby the number of options available for grant
under the Stock Plan increases by an amount equal to 3% of the outstanding
shares of Common Stock of the Company on the first day of each fiscal year. As a
result, 771,266 options were available for grant under the Stock Plan as of July
4, 1998.

In November 1993, the stockholders approved and the Company adopted the
1993 Stock Option Plan for Non-Employee Directors ('Directors Plan'). The
Directors Plan provides for awards of non-qualified stock options to Directors
of the Company who are not employees of the Company or its affiliates and who
have not, within one year, received any other award under any plan of the
Company or its affiliates. Options granted under the Directors Plan shall be
exercisable in whole or in part at all times during the period beginning on the
date of grant until the earlier of (i) ten years from the date of grant or (ii)
one year from the date on which an optionee ceases to be an eligible Director.
Options are granted at the fair market value of the Company's Common Stock at
the date of the grant. The Directors Plan provides for the automatic grant of
options to purchase (i) 15,000 shares of Common Stock upon a Director's election
to the Company's Board of Directors and (ii) 5,000 shares of Common Stock
immediately following each annual shareholders' meeting as of the date of such
meeting.

In May 1998, the Company's Board of Directors approved the adoption of The
Authentic Fitness Corporation 1998 Stock Option Plan ('1998 Plan'). The plan
provides for the issuance of stock options up to the number of shares of common
stock held in treasury. The 1998 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 1998 Plan, and the terms and conditions of such grants.
The 1998 Plan provides for the granting of non-qualified stock options and
restricted stock. During fiscal 1998, no options were granted under the 1998
Plan.

Options granted, exercised, cancelled and outstanding under the Stock Plan,
the Directors Plan and the 1998 Plan at July 4, 1998 are summarized below:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------

<S> <C> <C>
Outstanding July 1, 1995............................................... 1,742,000 $12.42
Options granted........................................................ 1,284,000 20.41
Options exercised...................................................... (235,617) 9.72
Options cancelled...................................................... (142,364) 13.81
----------
Outstanding July 6, 1996............................................... 2,648,019 16.49
Options granted........................................................ 970,000 13.13
Options exercised...................................................... (66,000) 8.94
Options cancelled...................................................... (489,667) 19.14
----------
Outstanding July 5, 1997............................................... 3,062,352 15.16
Options granted........................................................ 2,161,900 18.53
Options exercised...................................................... (570,356) 12.54
Options cancelled...................................................... (1,403,568) 13.73
----------
Outstanding July 4, 1998............................................... 3,250,328 18.47
----------
----------
</TABLE>

Options are exercisable for a period of ten years from date of grant and
vest when granted in the case of the Directors Plan and from the grant date to
three years for the Option Plan, Stock Plan and 1998 Plan. Options expire from
August 14, 2002 to May 7, 2008.

The Company has reserved 4,052,744 shares of Class A Common Stock for
issuance under the Option Plan, Stock Plan and Directors Plan as of July 4,
1998. In addition, there are 555,700 shares of Class A Common Stock in treasury
stock available for issuance under the 1998 Plan.

F-14

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9 - STOCK OPTIONS (CONTINUED)

The following table summarizes information about stock options outstanding at
July 4, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JULY 4, CONTRACTUAL EXERCISE AT JULY 4, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- ---------------------------------------- ----------- ----------- --------- ----------- ---------

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 July
1, 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>
JULY 6, JULY 5, JULY 4,
1996 1997 1998
------- ------- -------

<S> <C> <C> <C>
Risk-free interest rate................................................ 6.32% 6.04% 5.84%
Dividend yield......................................................... 0.02% 0.38% 0.28%
Expected volatility of market price of company's Common Stock.......... 0.5368 0.5313 0.4217
Expected option life................................................... 4 years 4 years 4 years
</TABLE>

The Company's pro forma information is as follows:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
-------- -------- --------

<S> <C> <C> <C>
Pro forma net income (loss)......................................... $(45,196) $ 16,549 $ 11,995
Pro forma basic income (loss) per share............................. $ (2.31) $ 0.74 $ 0.54
Pro forma diluted income (loss) per share........................... $ (2.31) $ 0.74 $ 0.53
</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. The weighted-average fair value of options granted during fiscal 1996,
fiscal 1997 and fiscal 1998 for which the exercise price equals the market price
on the grant date was $6.00, $10.21 and $7.36, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

F-15

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 - EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
-------- ------- -------

<S> <C> <C> <C>
Numerator for basic and diluted earnings per share --
Income (loss) before extraordinary item............................. $(39,353) $19,035 $22,769
-------- ------- -------
-------- ------- -------
Denominator for basic earnings per share --
Weighted average shares............................................. 19,607 22,362 22,310
-------- ------- -------
Effect of dilutive securities:
Employee stock options........................................... -- 152 200
-------- ------- -------
Denominator for diluted earnings per share --
Weighted average adjusted shares.................................... 19,607 22,514 22,510
-------- ------- -------
-------- ------- -------
Basic earnings (loss) per share before extraordinary item............. $ (2.00) $ 0.85 $ 1.02
-------- ------- -------
-------- ------- -------
Diluted earnings (loss) per share before extraordinary item........... $ (2.00) $ 0.85 $ 1.01
-------- ------- -------
-------- ------- -------
</TABLE>

Options to purchase 2,226,900 shares of common stock at prices ranging from
$17.19 to $20.88 per share were outstanding during fiscal 1998 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 August 2005 to May 2008 were still outstanding at
the end of fiscal 1998.

11 - COMMITMENTS AND CONTINGENCIES

Rent expense, including rent paid to Warnaco (See Note 13 of Notes to
Consolidated Financial Statements) was $10,200,000, $13,341,000 and $15,438,000
for the years ended July 6, 1996, July 5, 1997 and July 4, 1998, respectively.

Future minimum lease payments, required under non-cancelable operating
leases with terms in excess of one year are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL
YEAR TOTAL
---- ------
<S> <C>
1999............................................................. $9,322
2000............................................................. 6,493
2001............................................................. 4,246
2002............................................................. 2,595
2003............................................................. 2,243
2004 and thereafter.............................................. 2,755
</TABLE>

12 - NON-RECURRING EXPENSES

Herman's Sporting Goods, Inc. ('Herman's') filed for bankruptcy on April
26, 1996 and on May 2, 1996 announced their liquidation. As a result, the
Company recorded a special bad debt loss of $11,642,000 ($8,033,000 net of
income tax benefits) related to the write-off of uncollectible accounts
receivable and the write-down in the value of Herman's common stock received as
a distribution to creditors as part of the settlement from Herman's March 1993
bankruptcy. The special bad debt loss is net of gross recoveries from the
Company's credit insurance policy of approximately $4,600,000.

F-16

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12 - NON-RECURRING EXPENSES (CONTINUED)

The Company incurred certain legal, investment banking and other fees in
connection with a proposed merger between the Company and Warnaco which was
terminated in July 1996. These costs, amounting to approximately $2,000,000
($1,380,000 net of income tax benefits), have been included as a non-recurring
item in the Statement of Operations in fiscal 1996.

On January 1, 1997, one of the Company's three distribution centers,
located in Sparks Nevada, was flooded destroying certain inventory owned by the
Company. The Company is insured for such losses as well as for profits lost due
to business interruption. As of July 5, 1997, the Company had recorded a $25
million claim receivable from the insurance company related to this claim for
the cost of inventory damaged in the flood, lost profit on orders that were lost
due to the flood and other incurred expenses. As of July 5, 1997 the Company had
received $15.5 million from the insurance company against such claim receivable,
leaving an outstanding claim receivable of $9.5 million. In fiscal 1998, in
order to achieve an early resolution of the insurance claim the Company accepted
a cash settlement offer on the outstanding claim receivable of approximately
$8.8 million and wrote-off the remaining receivable of $0.7 million. In the
fourth quarter of fiscal 1997, the Company incurred certain flood related
distribution expenses in excess of amounts covered by insurance amounting to
$3,354,000 ($2,162,000 net of income tax benefits) which have been included as a
non-recurring item in the Statement of Operations in fiscal 1997.

During the first quarter of fiscal 1998 the Company closed its twenty
Speedo'r' Authentic Fitness'r' retail stores located in Bally's Fitness Centers
and consolidated its three California manufacturing facilities into two
facilities. The total costs associated with these actions was approximately
$1,408,000 ($859,000 net of income tax benefits) and has been included as a
non-recurring item in the Statement of Operations.

On January 18, 1998 a fire damaged or destroyed certain inventory stored in
one of the Company's three distribution centers which is located in Los Angeles,
California. The Company is fully insured for any inventory lost as well as
profits lost due to business interruption and other incurred expenses. As of
July 4, 1998, the Company had recorded a $36.8 million claim receivable from the
insurance company related to this claim for the cost of inventory damaged or
destroyed in the fire, lost profit on orders that were lost due to the fire and
other incurred expenses. As of July 4, 1998 the Company had received $24.5
million from the insurance company against such claim receivable, leaving an
outstanding claim receivable of $12.3 million.

13 - RELATED PARTY TRANSACTIONS

In 1990, the Company purchased the Activewear Division of The Warnaco
Group, Inc. ('Warnaco'). Certain directors and officers of the Company are also
directors and officers of Warnaco. From time to time, the Company and Warnaco
jointly negotiate contracts and agreements with vendors and suppliers. The
Company purchases certain services from Warnaco including contract
manufacturing, occupancy services related to leased facilities, computer
service, laboratory testing, transportation and other services. Additionally,
the Company sells certain inventory to Warnaco and provides certain design
services to Warnaco.

The Company also has sales to subsidiaries of a major stockholder
('Subsidiaries'). An affiliate of a major stockholder of the Company
('Affiliate') acts as buying agent for certain merchandise purchased by the
Company from international suppliers and the Company pays royalties to a
subsidiary of a major stockholder ('Subsidiary').

In May 1996 the Company made a strategic decision to close its closeout
outlet stores. In July 1996, the Company closed several of its closeout outlet
stores, transferred the leases on the remaining stores to Warnaco and sold the
existing store inventory to Warnaco.

F-17

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13 - RELATED PARTY TRANSACTIONS (CONTINUED)

GE Capital is a shareholder of the Company and a party to the Company's
credit agreement. During fiscal 1998, the Company paid interest to GE Capital
for amounts borrowed under the terms of its credit facility.

During the second quarter of fiscal 1997, the Company realized a gain of
approximately $3 million from the sale of certain barter assets to the issuing
barter company. The barter assets had an original face value of $12.3 million of
which approximately $2.8 million had been utilized by the Company through
December 1996 and an adjusted net book value of approximately $5.5 million. The
Company received $8.5 million from the sale. The sale of the barter assets was
negotiated by certain officers and directors of the Company who also serve as
officers and directors of Warnaco.

The following summarizes related party transactions included in the
Consolidated Statements of Operations (in thousands):

<TABLE>
<CAPTION>
JULY 6, JULY 5, JULY 4,
1996 1997 1998
------- ------- -------

<S> <C> <C> <C>
Expenses for Warnaco services (excluding rent expense)................. $ 2,727 $ 7,110 $ 9,739
Rent expense -- Warnaco................................................ 979 726 612
Product sales and other income -- Warnaco(1)........................... 4,302 28,726 9,254
Product sales -- Subsidiaries.......................................... 1,251 573 141
Interest expense relating to balance owed to Affiliate................. 928 665 975
Gross purchases through Affiliate...................................... 23,457 21,385 26,512
Royalty expenses -- Subsidiary......................................... 6,177 5,705 6,959
Fees paid to Affiliate for buying agent services....................... 1,557 1,419 1,759
Interest expense related to credit agreement........................... -- 3,861 4,217
</TABLE>

- ------------

(1) The year ended July 5, 1997 includes revenues from the transfer of outlet
store assets of approximately $13 million.

14 - BENEFIT PLAN

The Company has a 401(k) defined contribution profit sharing plan ('Plan'),
which covers all eligible, non-union domestic employees of the Company. The
Company contributes amounts equal to 15% of employee contributions up to a
maximum of 6% of employee's eligible compensation. Company contributions to the
Plan were approximately $114,000, $91,000 and $67,000 for the years ended July
6, 1996, July 5, 1997 and July 4, 1998, respectively.

F-18

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15 - INCOME TAXES

The components of deferred taxes and liabilities as of July 5, 1997 and
July 4, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
JULY 5, JULY 4,
1997 1998
-------- --------

<S> <C> <C>
Deferred tax assets (and valuation allowances):
Inventory and accounts receivable reserves................................. $ 2,876 $ 1,954
Book amortization of trademarks, licenses and other intangible assets...... 9,435 7,283
Tax credit carryforwards................................................... 2,673 2,394
Net operating loss carryforward............................................ 19 66
Other deferred tax assets.................................................. 3,718 1,723
Valuation allowances....................................................... (458) --
-------- --------
Deferred tax assets -- net............................................ 18,263 13,420
Deferred tax liabilities:
Tax over book depreciation................................................. (3,659) (4,130)
Acquisition related accruals............................................... (2,391) (2,391)
Tax amortization of trademarks, licenses and other intangible assets....... (8,292) (7,908)
Pre-opening costs.......................................................... (869) (587)
Prepaid costs.............................................................. (975) (1,302)
Software development costs................................................. (2,174) (1,048)
Other deferred tax liabilities............................................. (4,988) (5,854)
-------- --------
Deferred tax liabilities.............................................. (23,348) (23,220)
-------- --------
Net deferred tax liability............................................ $ (5,085) $ (9,800)
-------- --------
-------- --------
</TABLE>

Valuation allowances are recorded to account for uncertainties related to
the ultimate realization of net operating loss, capital loss, contribution and
foreign tax credit carry-forwards and the ultimate realization of tax deductions
for intangible amortization. The valuation allowance decreased $5,415,000 and
$458,000 for the fiscal years ended July 5, 1997 and July 4, 1998, respectively.

The provision for income taxes included in the Consolidated Statements of
Operations amounts to (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
-------- ------- -------

<S> <C> <C> <C>
Current:
U.S. Federal..................................................... $ (9,995) $ 3,857 $ 5,988
State............................................................ (1,227) 1,040 1,603
Foreign.......................................................... (99) 511 453
-------- ------- -------
(11,321) 5,408 8,044
-------- ------- -------
Deferred:
U.S. Federal..................................................... (6,483) 4,541 3,752
State............................................................ (632) 100 943
Foreign.......................................................... 108 24 20
-------- ------- -------
(7,007) 4,665 4,715
-------- ------- -------
Total....................................................... $(18,328) $10,073 $12,759
-------- ------- -------
-------- ------- -------
</TABLE>

As of July 4, 1998, the Company had net operating loss carry-forwards for
state income tax purposes of $2,943,000 which expire in various years up to
2011. For federal income tax purposes, the

F-19

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15 - INCOME TAXES (CONTINUED)
Company has contribution carry-forwards of $2,686,000 which expire in various
years up to 2002 and federal alternative minimum tax credits of $1,802,000 which
can be carried forward indefinitely.

The following represents the reconciliation of the tax provision rate to
the U.S. Federal income statutory tax rate:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
JULY 6, JULY 5, JULY 4,
1996 1997 1998
------- ------- -------

<S> <C> <C> <C>
Statutory rate............................................................... (35.0)% 35.0% 35.0%
State rate................................................................... (1.1) 7.0 4.7
Foreign tax rate in excess of U.S. statutory rate............................ -- 0.8 0.1
Deduction for foreign taxes.................................................. -- -- (4.4)
Intangible amortization...................................................... 0.3 0.7 0.5
Other........................................................................ -- 5.0 1.3
Valuation allowances......................................................... 5.2 (13.2) (1.3)
Inventory contribution....................................................... (0.6) (0.7) --
------- ------- -------
Tax provision rate........................................................... (31.2)% 34.6% 35.9%
------- ------- -------
------- ------- -------
</TABLE>

16 - EXTRAORDINARY ITEMS

Due to early extinguishment of debt the Company wrote off the deferred
financing costs of $2,202,000 related to the Company's credit facility in March
1996. The extraordinary item of $1,497,000, net of income tax benefits of
$705,000 was recorded in the third quarter of fiscal 1996.

17 - 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 and term loan. The fair value of the Company's outstanding
balances under its Credit Agreement are valued based on rates available to the
Company for debt with similar terms and maturities.

Interest rate swap agreement. The Company has entered into an interest rate
swap agreement which has 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 agreement to fix the interest rate on $75,000,000 of its outstanding
debt is based upon quotes from brokers and represents the cash requirement if
the existing agreement 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 thirty 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.

F-20

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The carrying amounts and fair value of the Company's financial instruments
are as follows (in thousands):

<TABLE>
<CAPTION>
JULY 5, 1997 JULY 4, 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------

<S> <C> <C> <C> <C>
Revolving Loan.............................................. $ 75,776 $75,776 $ 61,963 $61,963
Term Loan................................................... 47,500 47,500 41,250 41,250
Interest rate swap.......................................... -- -- -- 17
Letters of credit........................................... 935 935 1,484 1,484
</TABLE>

18 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following summarizes the unaudited quarterly financial results of the
Company for the fiscal years ended July 5, 1997 and July 4, 1998 (in thousands
except share data):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 5, 1997 QTR QTR QTR QTR
- ----------------------------------------------- -------- ------- -------- --------

<S> <C> <C> <C> <C>
Net revenues................................... $ 38,665 $70,443 $104,952 $109,028
Gross profit................................... 11,203 26,572 46,588 47,933
Net income (loss).............................. (11,541) 4,637 13,936 12,003
Basic net income (loss) per common share(1).... $ (0.52) $ 0.21 $ 0.62 $ 0.54
-------- ------- -------- --------
-------- ------- -------- --------
Diluted net income (loss) per common
share(1)..................................... $ (0.52) $ 0.21 $ 0.62 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 4, 1998 QTR QTR QTR QTR
- ----------------------------------------------- -------- ------- -------- --------

<S> <C> <C> <C> <C>
Net revenues................................... $ 36,970 $72,652 $127,935 $129,927
Gross profit................................... 13,070 32,441 53,648 49,505
Net income (loss).............................. (6,849) 3,660 13,954 12,004
Basic net income (loss) per common share(1).... $ (0.31) $ 0.17 $ 0.63 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------
Diluted net income (loss) per common
share(1)..................................... $ (0.31) $ 0.16 $ 0.62 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>

- ------------------

(1) The fiscal 1997 and first quarter fiscal 1998 earnings per share amounts
have been restated to comply with SFAS No. 128.

F-21

<PAGE>

<PAGE>
AUTHENTIC FITNESS CORPORATION
SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES(1) DEDUCTIONS(2) END OF YEAR
- ------------------------------------------------------------ --------- ---------- ------------- -----------

<S> <C> <C> <C> <C>
Accounts Receivable Allowances:
Year ended July 6, 1996..................................... $ 4,119 $ 26,368 ($21,126) $ 9,361
--------- ---------- ------------- -----------
--------- ---------- ------------- -----------
Year ended July 5, 1997..................................... $ 9,361 $ 20,135 ($22,625) $ 6,871
--------- ---------- ------------- -----------
--------- ---------- ------------- -----------
Year ended July 4, 1998..................................... $ 6,871 $ 27,188 ($29,195) $ 4,864
--------- ---------- ------------- -----------
--------- ---------- ------------- -----------
</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) Uncollectible accounts written-off, net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.

S-1

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

The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
The dagger symbol shall be expressed as................................ 'D'

<PAGE>

AUTHENTIC FITNESS CORPORATION

1998 STOCK PLAN

SECTION 1. PURPOSE. The purposes of the Authentic Fitness
Corporation 1998 Stock Plan are to promote the interests of Authentic Fitness
Corporation and its stockholders by (i) attracting and retaining exceptional
executive personnel and other key employees of, and advisors and consultants to,
the Company and its Affiliates, as defined below; (ii) motivating such
employees, advisors and consultants by means of performance-related incentives
to achieve longer-range performance goals; and (iii) enabling such employees,
advisors and consultants to participate in the long-term growth and financial
success of the Company.

SECTION 2. DEFINITIONS. As used in the Plan, the following terms
shall have the meanings set forth below:

"Affiliate" shall mean (i) any entity that, directly or indirectly,
is controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.

"Award" shall mean any Option or Restricted Stock Award.

"Award Agreement" shall mean the written agreement, contract, or
other instrument or document evidencing an Award, which may, but need not, be
executed or acknowledged by a Participant.

"Board" shall mean the Board of Directors of the Company.

"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

"Committee" shall mean that committee of the Board designated by
the Board to administer the Company's incentive plans.

"Company" shall mean Authentic Fitness Corporation, together with
any successor thereto.

"Employee" shall mean (i) an employee of the Company or of any
Affiliate and (ii) an advisor or consultant to the Company or to any Affiliate.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

"Fair Market Value" shall mean the fair market value of the
property or other item being valued, as determined by the Committee in its sole
discretion.

"Option" shall mean a right to purchase Shares from the Company.

"Participant" shall mean any Employee selected by the Committee to
receive an Award under the Plan.

<PAGE>

"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.

"Plan" shall mean the Authentic Fitness Corporation 1998 Stock
Plan.

"Restoration Option" shall mean an Option granted pursuant to
Section 6(e) of the Plan.

"Restricted Stock" shall mean any Share granted under Section 7 of the
Plan.

"Shares" shall mean shares of the Common Stock, par value $.001 per
share, of the Company, or such other securities of the Company as may be
designated by the Committee from time to time.

"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.

SECTION 3. ADMINISTRATION. The Plan shall be administered by the
Committee. Subject to the terms of applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority to: (i) designate Participants;
(ii) determine the type of Award to be granted to an eligible Employee; (iii)
determine the number of Shares to be covered by Awards; (iv) determine the terms
and conditions of any Award, including, without limitation, the conditions under
which the Shares received by an Employee upon exercise or vesting of any Award
may be subject to forfeiture; (v) determine whether, to what extent, and under
what circumstances Awards may be settled or exercised in cash, Shares, other
securities or other property, or cancelled, forfeited, or suspended and the
method or methods by which Awards may be settled, exercised, cancelled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances Shares payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award granted under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan.

Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Award, any shareholder and any Employee.

<PAGE>

SECTION 4. SHARES AVAILABLE FOR AWARDS.

(a) Shares Available. Subject to adjustment as provided in Section
4(b), the number of Shares with respect to which Awards may be granted under the
Plan shall not exceed the number of Shares held from time to time in the
treasury. If, after the effective date of the Plan, any Shares covered by an
Award granted under the Plan are forfeited, or if any Shares are forfeited and
returned to the Company following the exercise or vesting of any Award, or if an
Award otherwise terminates or is cancelled without the delivery of Shares, then
the Shares covered by such Award, or the Shares forfeited, or the number of
Shares otherwise counted against the aggregate number of Shares with respect to
which Awards may be granted, to the extent of any such settlement, forfeiture,
termination or cancellation, shall again be, or shall become, Shares with
respect to which Awards may be granted. In the event that (i) an Option is
exercised through the delivery of Shares or (ii) a Participant shall deliver
Shares in satisfaction of any withholding obligation relating to the exercise or
vesting of any Award, the number of Shares available for Awards under the Plan
shall be increased by the number of Shares surrendered.

(b) Adjustments. In the event that the Committee determines that
any dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust any or all of (i) the number of Shares with
respect to which Awards may be granted, in aggregate or to any individual, (ii)
the number of Shares subject to outstanding Awards, and (iii) the exercise price
with respect to any Option or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding Award.

(c) Substitute Awards. Any Shares underlying Substitute Awards
shall not, except in the case of Shares with respect to which Substitute Awards
are granted to Employees who are officers or directors of the Company for
purposes of Section 16 of the Exchange Act or any successor section thereto, be
counted against the Shares available for Awards under the Plan.

(d) Sources of Shares Deliverable Under Awards. Any Shares
delivered pursuant to the exercise or vesting of an Award shall be treasury
Shares.

SECTION 5. ELIGIBILITY. Any Employee, including any officer or
employee-director of the Company or any Affiliate, shall be eligible to be
designated a Participant.

<PAGE>

SECTION 6. STOCK OPTIONS.

(a) Grant. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom
Options shall be granted, the number of Shares to be covered by each Option, the
exercise price therefor and the conditions and limitations applicable to the
exercise of the Option. The Committee shall have the authority to grant only
Options that are not intended to be "incentive stock options" within the meaning
of Section 422 of the Code.

Option is granted, which price shall not be less than 100% of the
per Share Fair Market Value on the date of grant.

(b) Exercise. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Option Agreement or thereafter. The
Committee may impose such conditions with respect to the exercise of Options,
including, without limitation, any relating to the application of federal or
state securities laws, as it may deem necessary or advisable.

(c) Payment. No Shares shall be delivered pursuant to any exercise
of an Option until payment in full of the exercise price therefor is received by
the Company. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest),
or by a combination of the foregoing, provided that the combined value of all
cash and cash equivalents and the Fair Market Value of any such Shares so
tendered to the Company as of the date of such tender is at least equal to such
exercise price.

(d) Restoration Options. In the event that any Participant delivers
Shares in payment of the exercise price of an Option granted hereunder, the
Committee shall have the authority to grant or provide for the automatic grant
of a Restoration Option to such Participant, subject to Section 4(a). The grant
of a Restoration Option shall be subject to the satisfaction of such conditions
or criteria as the Committee in its sole discretion shall establish from time to
time. A Restoration Option shall entitle the holder thereof to purchase a number
of Shares equal to the number of such Shares so delivered upon exercise of the
original Option and, in the discretion of the Committee, the number of Shares,
if any, tendered to the Company to satisfy any withholding tax liability arising
in connection with the exercise of the original Option. A Restoration Option
shall have a per share exercise price of not less than 100% of the per Share
Fair Market Value on the date of grant of such Restoration Option, a term not
longer than the remaining term of the original Option at the time of exercise
thereof, and such other terms and conditions as the Committee in its sole
discretion shall determine.

SECTION 7. RESTRICTED STOCK.

(a) Grant. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom Shares
of Restricted Stock shall be granted, the number of Shares of Restricted Stock
to be granted to each Participant, the duration of

<PAGE>

the period during which, and the conditions under which, the Restricted Stock
may be forfeited to the Company, and the other terms and conditions of such
Awards.

(b) Transfer Restrictions. Shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered, except as provided
in the Plan or the applicable Award Agreements. Certificates issued in respect
of Shares of Restricted Stock shall be registered in the name of the Participant
and deposited by such Participant, together with a stock power endorsed in
blank, with the Company. Upon the lapse of the restrictions applicable to such
Shares of Restricted Stock, the Company shall deliver such certificates to the
Participant or the Participant's legal representative.

(c) Dividends During Restricted Period. Dividends paid on any
Shares of Restricted Stock may be paid directly to the Participant, or may be
reinvested in additional Shares of Restricted Stock, as determined by the
Committee in its sole discretion.

SECTION 8. AMENDMENT AND TERMINATION.

(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act for which or with which the Board deems it necessary
or desirable to qualify or comply. Notwithstanding anything to the contrary
herein, the Committee may amend the Plan in such manner as may be necessary so
as to have the Plan conform with local rules and regulations in any jurisdiction
outside the United States.

(b) Amendments to Awards. The Committee may waive any conditions or
rights under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted, prospectively or retroactively;
provided that any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would impair the rights of any
Participant or any holder or beneficiary of any Award theretofore granted shall
not to that extent be effective without consent of the affected Participant,
holder or beneficiary.

(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in recognition
of unusual or nonrecurring events (including, without limitation, the events
described in Section 4(b) hereof) affecting the Company, any Affiliate, or the
financial statements of the Company or any Affiliate, or of changes in
applicable laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.

(d) Cancellation. Any provision of this Plan or any Award Agreement
to the contrary notwithstanding, the Committee may cause any Award granted
hereunder to be cancelled in

<PAGE>

consideration of a cash payment made to the holder of such cancelled Award equal
in value to the Fair Market Value of such cancelled Award.

SECTION 9. GENERAL PROVISIONS.

(a) Nontransferability.

i) Each Award, and each right under any Award, shall be exercisable only
by the Participant during the Participant's lifetime, or, if permissible
under applicable law, by the Participant's guardian or legal
representative or by a transferee receiving such Award pursuant to a
qualified domestic relations order ("QDRO"), as determined by the
Committee.

ii) No Award may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution or pursuant to a QDRO,
and any such purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance shall be void and unenforceable against the
Company or any Affiliate; provided that the designation of a beneficiary
shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.

(b) No Rights to Awards. No Employee, Participant or other Person
shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The term and conditions of Awards need not be the same with respect
to each recipient.

(c) Share Certificates. All certificates for Shares or other
securities of the Company or any Affiliate delivered under the Plan pursuant to
the exercise or vesting of any Award shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under the Plan
or the rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which such Shares or other securities are
then listed, and any applicable Federal or state laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.

(d) Delegation. Subject to the terms of the Plan and applicable
law, the Committee may delegate to one or more officers or managers of the
Company or any Affiliate, or to a committee of such officers or managers, the
authority, subject to such terms and limitations as the Committee shall
determine, to grant Awards to, or to cancel, modify or waive rights with respect
to, or to alter, discontinue, suspend, or terminate Awards held by, Employees
who are not officers or directors of the Company for purposes of Section 16 of
the Exchange Act, or any successor section thereto, or who are otherwise not
subject to such Section.

(e) Withholding. A Participant may be required to pay to the
Company or any Affiliate and the Company or the Affiliate shall have the right
and is hereby authorized to withhold from any payment due or transfer made
pursuant to the exercise or vesting of any Award or from any compensation or
other amount owing to a Participant the amount (in cash, Shares, other
securities, or other property) of any applicable withholding taxes in respect of
the exercise or vesting of

<PAGE>

an Award and to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. The Committee
may provide for additional cash payments to holders of Awards to defray or
offset any tax arising from the exercise or vesting of any Award.

(f) Award Agreements. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto,
including but not limited to the effect on such Award of the death, retirement
or other termination of employment of a Participant and the effect, of any, of a
change in control of the Company.

(g) No Limit on Other Compensation Arrangements. Nothing contained
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other compensation arrangements, which may, but need not,
provide for the grant of the types of Awards provided for hereunder (subject to
shareholder approval if such approval is required), and such arrangements may be
either generally applicable or applicable only in specific cases.

(h) No Right to Employment or Service. The grant of an Award shall
not be construed as giving a Participant the right to be retained in the employ
of the Company or any Affiliate. Further, the Company or an Affiliate may at any
time dismiss a Participant from employment, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.

(i) No Rights as Stockholder. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.

(j) Governing Law. The validity, construction, and effect of the
Plan and any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of Delaware.

(k) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.

(l) Other Laws. The Committee may refuse to issue or transfer any
Shares under any Award if, acting in its sole discretion, it determines that the
issuance or transfer of such Shares might violate any applicable law or
regulation or entitle the Company to recover the same under Section 16(b) of the
Exchange Act, and any payment tendered to the Company by a Participant, other
holder or beneficiary in connection with the exercise or vesting of such Award
shall be promptly refunded to the relevant Participant, holder or beneficiary.
Without limiting the generality of the foregoing, no Award granted hereunder
shall be construed as an offer to sell securities of

<PAGE>

the Company, and no such offer shall be outstanding, unless and until the
Committee in its sole discretion has determined that any such offer, if made,
would be in compliance with all applicable requirements of the U.S. federal
securities laws.

(m) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.

(n) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be cancelled, terminated, or otherwise eliminated.

(o) Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.

SECTION 10. TERM OF THE PLAN.

(a) Effective Date. The Plan shall be effective as of the date of
its adoption by the Board.

(b) Expiration Date. No Award shall be granted under the Plan after
May 7, 2008. Unless otherwise expressly provided in the Plan or in an applicable
Award Agreement, any Award granted hereunder may, and the authority of the Board
or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any
such Award or to waive any conditions or rights under any such Award shall,
continue after May 7, 2008.

<PAGE>

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-74590, No. 33-74588 and No. 33-93912) of
Authentic Fitness Corporation of our report dated August 20, 1998 appearing on
page F-1 on this Annual Report on Form 10-K.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
September 28, 1998
<PAGE>

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-74590, Form S-8 No. 33-74588 and Form S-8 No. 33-93912)
pertaining to the Authentic Fitness 1992 Long Term Stock Incentive Plan, the
Authentic Fitness 1993 Stock Option Plan for Non-Employee Directors and the
Authentic Fitness Corporation Savings Plan, of our report dated October 2, 1996,
with respect to the consolidated statements of operations, shareholders' equity
and cash flows and schedule of Authentic Fitness Corporation included in the
Form 10-K for the year ended July 4, 1998.

ERNST & YOUNG LLP

Los Angeles, Calfornia
September 28, 1998

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF AUTHENTIC FITNESS CORPORATION FOR
THE YEAR ENDED JULY 5, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-04-1998
<PERIOD-START> JUL-06-1997
<PERIOD-END> JUL-04-1998
<CASH> 638
<SECURITIES> 0
<RECEIVABLES> 126,824
<ALLOWANCES> 4,864
<INVENTORY> 63,910
<CURRENT-ASSETS> 194,588
<PP&E> 73,706
<DEPRECIATION> 23,289
<TOTAL-ASSETS> 316,162
<CURRENT-LIABILITIES> 125,491
<BONDS> 33,178
<COMMON> 23
0
0
<OTHER-SE> 150,842
<TOTAL-LIABILITY-AND-EQUITY> 316,162
<SALES> 367,484
<TOTAL-REVENUES> 367,484
<CGS> 218,820
<TOTAL-COSTS> 218,820
<OTHER-EXPENSES> 98,883
<LOSS-PROVISION> 27,188
<INTEREST-EXPENSE> 14,253
<INCOME-PRETAX> 35,528
<INCOME-TAX> 12,759
<INCOME-CONTINUING> 22,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,769
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01

</TABLE>