UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission File Number: 333-138342

Rafaella Apparel Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-2745750
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1411 Broadway, New York, New York 10018

(212) 403-0300

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 15, 2010, the registrant had 2,500,000 shares of its common stock, par value $0.01 per share, outstanding.

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RAFAELLA APPAREL GROUP, INC.

Quarterly Report

September 30, 2010

INDEX

		PAGE

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4T.	Controls and Procedures	33

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	(Removed and Reserved)	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAFAELLA APPAREL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares)

(unaudited)

	September 30, 2010			June 30, 2010
Assets
Current assets:
Cash and cash equivalents	$	10,677		$	20,610
Receivables, net	21,747			10,854
Inventories	12,745			13,595
Deferred income taxes	2,047			2,047
Other current assets	4,160			4,094
Total current assets	51,376			51,200
Equipment and leasehold improvements, net	1,081			1,165
Intangible assets, net	30,414			31,331
Other assets	45			45
Total assets	$	82,916		$	83,741
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	7,005		$	9,282
Accrued expenses and other current liabilities	5,397			4,444
Current portion of senior secured notes	71,275			71,084
Total current liabilities	83,677			84,810
Income taxes	5,058			5,058
Deferred rent	396			434
Other liabilities	183			200
Total liabilities	89,314			90,502
Commitments and contingencies
Redeemable convertible preferred stock— $.01 par value; redemption value $5.33 per share plus 10% per annum; 7,500,000 shares authorized, issued and outstanding	61,110			60,110
Stockholders’ equity (deficit):
Common stock—$.01 par value; 11,111,111 authorized; 2,500,000 shares issued and outstanding	25			25
Additional paid in capital	307			307
Deemed dividend, in excess of predecessor basis	(26,022		)	(26,022		)
Retained earnings (deficit)	(41,818		)	(41,181		)
Total stockholders’ equity (deficit)	(67,508		)	(66,871		)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	82,916		$	83,741

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

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RAFAELLA APPAREL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(unaudited)

	Three Months Ended
	September 30, 2010			September 30, 2009
Net sales	$	37,308		$	29,401
Cost of sales	26,615			20,549
Gross profit	10,693			8,852
Selling, general and administrative expenses	6,985			6,452
Operating income	3,708			2,400
Interest expense, net	2,560			2,823
Gain on senior secured note purchases	—			(2,543		)
Interest expense and other financing, net	2,560			280
Income before provision for income taxes	1,148			2,120
Provision for income taxes	786			973
Net income	362			1,147
Dividends accrued on redeemable convertible preferred stock	1,000			1,000
Net income (loss) available to common stockholders	$	(638	)	$	147

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

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RAFAELLA APPAREL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Three Months Ended
	September 30, 2010			September 30, 2009
Cash flows used in operating activities:
Net income	$	362		$	1,147
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred finance charges	324			284
Accretion of original issue discount	191			193
Depreciation and amortization	1,057			1,383
Stock-based compensation expense	—			6
Income taxes	—			914
Deferred rent	(38		)	(19		)
Gain on senior secured note purchases	—			(2,543		)
Changes in operating assets and liabilities:
Accounts receivable	(10,893		)	(5,701		)
Inventories	850			1,022
Other current assets	(390		)	(126		)
Accounts payable	(2,225		)	(2,024		)
Accrued expenses and other current liabilities	1,036			2,105
Other liabilities	(17		)	—
Net cash used in operating activities	(9,743		)	(3,359		)
Cash flows used in investing activities:
Purchase of equipment and leasehold improvements	(56		)	(22		)
Net cash used in investing activities	(56		)	(22		)
Cash flows used in financing activities:
Deferred financing costs	(134		)	—
Repurchase of senior secured notes	—			(805		)
Net cash used in financing activities	(134		)	(805		)
Net decrease in cash and cash equivalents	(9,933		)	(4,186		)
Cash and cash equivalents, beginning of period	20,610			17,698
Cash and cash equivalents, end of period	$	10,677		$	13,512

Supplemental disclosures of non-cash investing and financing activities:
Accretion of preferred stock to redemption value	$	1,000		$	1,000

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

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RAFAELLA APPAREL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Rafaella Apparel Group, Inc., together with its subsidiaries (the “Company”), is a wholesaler, designer, sourcer, marketer and distributor of a full line of women’s career and casual sportswear separates sold primarily under the Rafaella brand and private label brands of our customers. The Company’s products are sold to department and specialty stores and off-price retailers located throughout the United States of America.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2010, the results of its operations for the three months ended September 30, 2010 and 2009, and its cash flows for the three months ended September 30, 2010 and 2009. These adjustments consist of normal recurring adjustments. Operating results for the three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at June 30, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements included herein should be read in conjunction with the audited consolidated financial statements of the Company as of June 30, 2010.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the continued strain on current credit and capital market conditions and the nearing maturity dates of the Credit Facility and the senior secured notes in June 2011, the Company believes that the forecasted cash and available credit capacity are not expected to be sufficient to meet its debt repayment obligations as they come due over the next twelve months. In order to enable the Company to meet its debt repayment obligations, the Company is currently seeking to refinance, extend or restructure its senior secured notes and Credit Facility. There can be no assurance that the Company will be able to do so on terms and conditions satisfactory to it within the period needed to meet these repayment obligations. The Company’s ability to refinance any of the existing indebtedness on commercially reasonable terms may be materially and adversely impacted by the current credit market conditions and the Company’s financial condition. The Company’s inability to repay under the terms of the financing agreements would lead to an event of default which would constitute debt being callable by creditors. The uncertainty associated with the Company’s ability to repay the outstanding debt raises substantial doubt about the Company’s ability to continue as a going concern. If the Company were unable to continue as a going concern, the Company would need to liquidate its assets and the Company might receive significantly less than the values at which they are carried on its condensed consolidated financial statements. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with the Company’s ability to meet its debt obligations as they come due.

2. Recent Accounting Pronouncements

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIE”) and the evaluation of when consolidation of a VIE is required. This amends the guidance for determining whether an entity is a VIE and establishes an additional reconsideration event for assessing whether an entity is, or continues to be, a VIE. The amendment modifies the requirements for determining whether an entity is the primary beneficiary of a VIE and requires ongoing reassessments of whether an entity is the primary beneficiary. This amendment also enhances the disclosure requirements about an entity’s involvement with a VIE. This amendment is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted this amendment in the first quarter of fiscal 2011 and the adoption of the amendment did not have any impact on the Company’s condensed consolidated financial statements.

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circumstances in which a financial asset, or a component of a financial asset, should be derecognized when the entire asset is not transferred, and establishes specific conditions for reporting the transfer of a portion of a financial asset as a sale. This amendment also requires enhanced disclosures about the transfer of financial assets and the transferor’s continuing involvement with transferred financial assets. The amendment is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted this amendment in the first quarter of fiscal 2011 and the adoption of the amendment did not have any impact on the Company’s condensed consolidated financial statements.

In January 2010, the FASB issued amendments to disclosure and classification requirements for fair value measurement and disclosures. These amendments provide for new disclosures requiring the Company to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfer and present separately information about purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. These amendments also provide clarification of existing disclosures for level of disaggregation and about inputs and valuation techniques. These amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the first phase of these amendments did not have any impact on the Company’s consolidated financial statements. The Company is evaluating the impact the adoption of the second phase of these amendments will have on its condensed consolidated financial statements.

3. Receivables

Receivables consist of (in thousands):

	September 30, 2010			June 30, 2010

Due from factor	$	21,886		$	13,771
Trade receivables	6,695			4,731
	28,581			18,502
Less: Allowances for sales returns, discounts, and credits	(6,834		)	(7,648		)
	$	21,747		$	10,854

Historically, the Company factored a significant portion of its trade receivables, on a non-recourse basis, with GMAC Commercial Finance LLC (“GMAC”), a commercial factor. In accordance with the terms of an Amended and Restated Collection Services Factoring Agreement dated December 16, 2008 between GMAC and the Company, all accounts receivable of the Company then held by GMAC were sold back to the Company effective as of such date. On December 19, 2008, the Company delivered to GMAC a notice of termination of the GMAC arrangement pursuant to the terms thereof. On February 5, 2009, as part of the termination of the GMAC arrangement, the Company arranged for an irrevocable letter of credit in an aggregate amount of $2,000,000 (the “Letter of Credit”) for the benefit of GMAC. The Letter of Credit permits GMAC to draw amounts equal to amounts collected by GMAC, after January 6, 2009, if certain identified customers of the Company file a petition for relief from creditors under the United States Bankruptcy Code and claims are made for GMAC to return to the customer or its bankruptcy estate amounts GMAC has collected from such customer. The Letter of Credit was subsequently reduced to $65,000 in September 2009 and expires on April 2, 2011, subject to extension under certain circumstances.

On December 19, 2008, the Company entered into a factoring agreement with Wells Fargo Trade Capital, LLC (“Wells Fargo”), a commercial factor, pursuant to which the Company may assign certain of its receivables to Wells Fargo. Wells Fargo provides collection services and assumes credit risk on those receivables that are assigned and approved in advance.

An allowance for sales discounts, returns, markdowns, co-op advertising and operational chargebacks is included as a reduction to net sales and receivables. These provisions result from seasonal negotiations with customers, as well as historic deduction trends and the evaluation of current market conditions.

For the three months ended September 30, 2010 and 2009, the provision for sales returns, discounts and credits charged to earnings was $6,792,000 and $8,703,000, respectively, and decreased by authorized deductions taken by customers of $7,606,000 and $8,254,000, respectively.

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4. Inventories

Inventories are summarized as follows (in thousands):

	September 30, 2010		June 30, 2010

Piece goods (held by contractors)	$	356	$	319
Finished goods:
In warehouse	7,928		5,768
In transit	4,461		7,508
	$	12,745	$	13,595

5. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities are summarized as follows (in thousands):

	September 30, 2010		June 30, 2010

Accrued interest expense	$	2,380	$	359
Accrued bonuses	201		2,011
Accrued compensation and benefits	265		473
Accrued professional fees	638		615
Accrued warehouse and distribution costs	792		8
Other accrued expenses	1,121		978
	$	5,397	$	4,444

6. Short-term Borrowings

On June 20, 2005, the Company entered into a secured revolving credit facility agreement (as amended through May 21, 2010, the “Credit Facility”) with HSBC Bank USA, National Association. The Company, Cerberus Capital Management, L.P. (“Cerberus”), as a lender and the term lender, HSBC Bank USA, National Association (“HSBC” or the “Agent”), as agent and as lender, the other lenders signatory thereto from time to time (the “Lenders”) and the other loan parties signatory thereto (together with Cerberus and HSBC, collectively the “Loan Parties”) entered into a certain Amended and Restated Financing Agreement dated as of May 21, 2010 (the “Amended and Restated Financing Agreement”) to amend and restate the Credit Facility.

The Amended and Restated Financing Agreement, which matures on June 10, 2011, provides for (a) letters of credit of up to $20,000,000 to be provided by HSBC, (b) revolving direct debt advances of up to $5,000,000 on or after December 16, 2010 to be provided by Cerberus (the Company will not be entitled to obtain any revolving direct debt advances prior to December 16, 2010), and (c) term loans of up to $5,000,000 to be provided by Cerberus (the “Term Loan Commitment”). The above letters of credit and revolving direct debt advances are subject to the additional conditions as noted below.

Under the terms of the Amended and Restated Financing Agreement, the Company’s ability to cause the issuance of letters of credit prior to December 16, 2010 is limited to the lesser of (x) $20,000,000 and (y) subject to reserves required by HSBC, if any, and the availability reserve discussed below (i) the sum of (a) 70% of eligible receivables plus (b) 70% of eligible factored receivables, plus (ii) the lesser of (I) the sum of (a) 50% of eligible inventory plus (b) 50% of outstanding eligible documentary letters of credit, and (II) the inventory advance cap, plus (iii) cash collateral. The inventory advance cap is (i) $10,000,000 from the effective date of the Amended and Restated Financing Agreement through and including September 30, 2010, (ii) $5,000,000 from October 1, 2010 through and including December 15, 2010 and (iii) $0 thereafter. The availability reserve is (a) $10,000,000 through December 15, 2010 and (b) $0 on and after December 16, 2010. From and after December 16, 2010, the Company’s ability to cause the issuance of letters of credit is limited to the lesser of $20,000,000 and the amount of cash collateral deposited by the Company to cash collateralize letters of credit. The Amended and Restated Financing Agreement further provides that standby letters of credit shall be limited to $4,011,000 in the aggregate undrawn amount outstanding at any time.

Under the terms of the Amended and Restated Financing Agreement, the Company’s revolving direct debt advances on or after December 16, 2010 is limited to the lesser of (i) $5,000,000 and (ii) subject to reserves required by HSBC, if any, the sum of (x) 65% of eligible receivables plus (y) 65% of eligible factored receivables.

The term loans may be used solely to fund repayments or repurchases of the Company’s outstanding 11¼% Senior Secured Notes due June 2011 (the “Notes”); and the Company shall not repurchase any of the Notes except (a) with the proceeds of the term loans or (b) as otherwise required pursuant to the terms of the Notes indenture. The term loans are secured by a first lien on all of the Company’s assets on a pari passu basis with all other obligations under the Amended and Restated Financing Agreement, subject to the provisions of the Amended and Restated Financing Agreement relating to the application of proceeds from the Company. Any term loans, borrowed under the Term Loan Commitment, are also due and payable on June 10, 2011 or upon termination of the Amended and Restated Financing Agreement.

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The Amended and Restated Financing Agreement provides that the minimum working capital requirement shall be $25,000,000 as of the end of the fiscal quarter ending June 30, 2010 and $27,000,000 as of the end of the fiscal quarters ending thereafter. Working capital is defined as the sum of cash, accounts receivable, and inventory, reduced by current liabilities; the definition of current liabilities excludes indebtedness under the Company’s senior secured notes at any point on or after June 30, 2010. With the exception of the fiscal quarters ending on June 30, 2010 and September 30, 2010, the Company is required to maintain positive net income during each period of two consecutive fiscal quarters (on a rolling basis). The Company was permitted to incur up to a net loss of $1,300,000 during each of the two consecutive fiscal quarters (on a rolling basis) ending on June 30, 2010 and September 30, 2010. For purposes of determining compliance with the net income financial covenant, the definition of net income excludes noncash expenses associated with (i) amortization of customer relationships and non-compete agreements, (ii) the accretion of the senior secured notes original issue discount, (iii) amortization of deferred financing costs, and (iv) impairment charges, if any, resulting from a decline in the value of the Company’s intangible assets.

The Amended and Restated Financing Agreement sets forth the following cash collateral requirements: (i) $5,500,000 from July 1, 2010 through and including July 31, 2010; (ii) $3,000,000 from October 1, 2010 through and including October 31, 2010; and (iii) $2,000,000 from November 1, 2010 through and including November 30, 2010. Effective on and after December 16, 2010, the Company is required to cash collateralize all outstanding letters of credit in an amount equal to one hundred and five percent (105%) of such outstanding letters of credit. A condition precedent to the issuance of any letter of credit on and after December 16, 2010 is that the Company shall have deposited with HSBC cash collateral in an amount equal to 105% of the undrawn face amount of each such letter of credit.

As of September 30, 2010, the Company was in compliance with each of the financial covenants. A violation of the financial covenants constitutes an event of default under the Amended and Restated Financing Agreement; such an event of default could result in all debt becoming due and payable, and HSBC having the right to terminate the Credit Facility and its obligation to make advances thereunder. If the Company’s operations were to deteriorate beyond its forecasted results, it could result in a debt covenant violation and the Company would need another amendment. If the Company were unable to amend the terms of the Amended and Restated Financing Agreement, the Company’s financial condition and results of operations may be materially adversely affected. Due to the inherent uncertainties in making estimates and assumptions, there can be no assurance that the Company will satisfy its financial covenants in future periods.

At September 30, 2010, there were no loans and $10.0 million of letters of credit outstanding under the Amended and Restated Financing Agreement. The outstanding letters of credit are comprised of letters of credit totaling $6.0 million in connection with purchase orders for merchandise from third-party manufacturers and standby letters of credit totaling $4.0 million issued by HSBC, which serve as security for obligations under certain operating leases, a customs bond and the GMAC Letter of Credit (refer to Note 3 for further discussion). The Company’s aggregate maximum availability for letters of credit approximated $8.1 million as of September 30, 2010 (inclusive of $4.0 million of cash collateral deposited by the Company as of period end).

The Company requires significant working capital to purchase inventory and is often required to post commercial letters of credit when placing orders with certain of its third-party manufacturers or fabric suppliers. The 105% cash collateral requirement with respect to all outstanding letters of credit which commences on December 16, 2010 may significantly reduce our liquidity, which in turn may impose significant operating restrictions on the Company and may limit, or even prohibit, the Company from operating as it otherwise might in the absence of such cash collateralization requirements.

The Amended and Restated Financing Agreement includes various other covenants with which the Company has to comply in order to maintain borrowing availability including, but not limited to, covenants limiting or restricting the Company’s ability to incur indebtedness, incur liens, enter into mergers or consolidations, dispose of assets, make investments, pay dividends and repurchase capital stock, enter into transactions with affiliates or prepay certain indebtedness. In addition, the Company is required to report various financial and non-financial information periodically to HSBC. The Amended and Restated Financing Agreement also contains customary events of default including, but not limited to, payment defaults, covenant defaults, cross-defaults to the senior secured notes, material judgment defaults, inaccuracy of representations and warranties, bankruptcy and insolvency events, defects in HSBC’s security interest, change in control events, and certain events which would have a material adverse effect. An event of default could result in all debt becoming due and payable, and HSBC having the right to terminate the Credit Facility and its obligation to make advances under it.

Pursuant to the Amended and Restated Financing Agreement, in the event the Company has outstanding direct debt advances on or after December 16, 2010, the Company remits funds from the collection of receivables to pay down borrowings outstanding under the Amended and Restated Financing Agreement. Under the Company’s factoring agreement, the Company directs its customers to remit payments on accounts receivable to its factor. At the request of HSBC, the Company has directed its factor to remit the funds from the collection of receivables directly to an HSBC account to reduce borrowings outstanding under the Amended and Restated Financing Agreement. Payments from customers in connection with the Company’s factoring arrangement are reflected in operating cash flows as collections of receivables. Funds remitted under this arrangement to reduce short-term borrowings are reflected in cash flows from financing activities in the statement of cash flows.

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There were no loan borrowings or repayments under the Amended and Restated Financing Agreement during the three months ended September 30, 2010 and 2009.

The Amended and Restated Financing Agreement provided for (i) an extension fee of $25,000 payable to HSBC, as Agent, payable upon execution, (ii) a revolving commitment closing fee payable to Cerberus of $125,000, which fee was earned as of the effective date of the Amended and Restated Financing Agreement and payable upon the Termination Date (as such term is defined in the Amended and Restated Financing Agreement), and (iii) term loan fees payable to Cerberus, as term lender, of (a) a closing fee of $125,000, which fee was earned as of the effective date of the Amended and Restated Financing Agreement and payable upon the Termination Date, and (b) a facility fee at a rate equal to one-quarter of one percent (0.25%) per annum on average daily unused portion of the Term Loan Commitment earned on a monthly basis and payable upon the Termination Date. Borrowings under the Amended and Restated Financing Agreement bear variable interest at the Company’s option at either (i) a base rate or (ii) the London interbank offered rate plus two and three quarters percent (2.75%) per annum (each as defined). The Amended and Restated Financing Agreement provides for a monthly commitment fee of 0.25% per annum on the unused portion of the available commitments for revolving direct debt advances and letters of credit under the facility.

The foregoing is a summary of the Amended and Restated Financing Agreement, and does not purport to be complete and is qualified in its entirety by the copy of the Amended and Restated Financing Agreement.

7. Senior Secured Notes

On June 20, 2005, the Company received aggregate proceeds of $163,400,000 from the issuance of 11.25% senior secured notes, face value $172,000,000. The notes were issued at 95% of face value, resulting in an original issue discount of $8,600,000 that is being amortized under the effective interest method over the term of the notes. Senior secured notes principal amount outstanding at September 30, 2010 and June 30, 2010 is $71,861,000 and $71,861,000, respectively. At September 30, 2010 and June 30, 2010, debt held in treasury approximated $65,537,000 and $65,537,000, respectively. At September 30, 2010 and June 30, 2010, the unamortized original issue discount is $586,000 and $777,000, respectively. The Company’s senior secured notes are recorded at carrying book value at September 30, 2010 and June 30, 2010. At September 30, 2010 and June 30, 2010, the fair value of the senior secured notes, determined based upon quoted market prices, was approximately $47,428,000 and $48,147,000, respectively. The notes bear cash interest at 11.25%. After giving effect to the original issue discount and costs associated with the issuance, the notes have an effective interest rate of approximately 13.7%. The notes mature on June 15, 2011 and cash interest is payable semiannually on June 15 and December 15 of each year, commencing December 15, 2005. The notes are collateralized by a second priority lien on substantially all of the assets of the Company. The notes are subordinated to amounts outstanding under the Amended and Restated Financing Agreement.

Within 100 days after the end of each fiscal year, beginning with the fiscal year ended on June 30, 2006, the Company must make an offer to repurchase all or a portion of the notes at 101% of their principal amount at maturity plus accrued and unpaid interest to the date of purchase, with 50% of excess cash flow, as defined, from the previous fiscal year. Senior secured note aggregate principal amounts of $598,000, $221,000 and $17,429,000 were repurchased during November 2008, 2007 and 2006, respectively, in connection with excess cash flow offers made by the Company. The November 2008, 2007 and 2006 repurchases of the notes, which were at 101% of their principal amount at maturity plus accrued and unpaid interest to the date of purchase, approximated $631,000, $234,000 and $18.4 million, respectively. The Company wrote-off $1.7 million of unamortized original issue discount and deferred financing costs to interest expense in connection with the November 2006 repurchase. Unamortized original issue discount and deferred financing costs associated with the November 2008 and 2007 repurchases were not significant.

An annual excess cash flow payment with respect to the fiscal year ending June 30, 2010 was not required. This was based on the Company’s financial position as of June 30, 2010 and its results of operations and cash flows for the year then ended.

In addition to the excess cash flow repurchases, the Company also repurchased $16,062,000 of the senior secured notes at 101% of their principal amount at maturity, plus accrued and unpaid interest, for approximately $16.3 million on June 29, 2007. The Company wrote-off $1.4 million of unamortized original issue discount and deferred financing costs to interest expense in connection with the June 29, 2007 senior secured note repurchase.

The Company purchased, at a discount, $6.0 million and $8.0 million of outstanding senior secured notes on the open market in January 2008 and June 2008, respectively. A pre-tax gain of approximately $3.1 million, resulting from the difference between the carrying book value of the senior secured notes and the amount paid, net of deferred financing costs that were written-off at the time of purchase, was recorded to gain on senior secured note purchases during the fiscal year ended June 30, 2008.

The Company purchased, at a discount, $28.5 million, $2.0 million, $4.0 million and $4.4 million of outstanding senior secured notes on the open market in August 2008, March 2009, April 2009, and May 2009, respectively. A pre-tax gain of approximately $25.6 million, resulting from the difference between the carrying book value of the senior secured notes and the amount paid, net of deferred financing costs that were written-off at the time of purchase, was recorded to gain on senior secured note purchases during the fiscal year ended June 30, 2009.

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The Company purchased, at a discount, $3.5 million, $5.0 million, and $4.4 million of outstanding senior secured notes on the open market in July 2009, November 2009, and December 2009, respectively. A pre-tax gain of approximately $2.5 million and $5.5 million resulting from the difference between the carrying book value of the senior secured notes and the amount paid, net of deferred financing costs that were written-off at the time of purchase, was recorded to gain on senior secured note purchase during the first and second quarter of the fiscal year ended June 30, 2010, respectively.

The Company did not purchase any outstanding senior secured notes on the open market during the quarter ended September 30, 2010.

As noted in Note 6, the Company’s senior Amended and Restated Financing Agreement expires on June 10, 2011 and the Company’s senior secured notes mature on June 15, 2011. Management currently does not believe that the Company will have sufficient cash on hand, based on current cash flow projections, to settle the senior secured notes in June 2011 at principal or face value. If the Company is unable to secure additional financing, its business and results from operations, financial condition and cash flows may be materially adversely affected and impact the Company’s ability to continue as a going concern. Consequently, management is currently in the process of exploring alternative long-term financing. There can be no assurance that any such financing will be available with terms favorable to the Company or at all.

On February 22, 2010, the Company commenced a debt tender offer (“Tender Offer”) to purchase up to approximately 51% of its outstanding 11-¼% Senior Secured Notes due 2011 (the “Notes”). The consummation of the Tender Offer was conditioned upon, among other conditions, the valid tender by holders of Notes with a minimum aggregate principal amount at maturity of $17,975,000 (the “Minimum Tender Amount”). At 11:59 p.m., New York City time, on March 19, 2010 the Tender Offer expired and the Minimum Tender Amount of Notes was not tendered. Consequently, the Company did not purchase any Notes pursuant to the Tender Offer.

In connection with the Tender Offer, on February 22, 2010, the Company also entered into an agreement (the “Originally Restated Agreement”) with HSBC and Cerberus Capital Management, L.P. (“Cerberus”), as the term lender, to amend and restate the Credit Facility, by and among HSBC, as agent and lender, the other lenders signatory thereto from time to time, the Company, and the other loan parties signatory thereto. The closing of the Originally Restated Credit Agreement was subject to, among other things, the consummation of the Tender Offer in accordance with its terms. As noted above, the Tender Offer was not consummated, as the Minimum Tender Amount was not satisfied, and accordingly, a closing did not occur with respect to the Originally Restated Credit Agreement and the Company’s Credit Facility remains in full force and effect.

The senior secured notes indenture contains various covenants with which the Company has to comply, including, but not limited to, covenants limiting or restricting the Company’s ability to incur indebtedness, incur liens, enter into mergers or consolidations, dispose of assets, make investments, pay dividends and repurchase capital stock or enter into transactions with affiliates. In addition, the Company is required to report various financial and non-financial information periodically to the trustee. The senior secured notes indenture also contains customary events of default including, but not limited to, payment defaults, cross-defaults to other indebtedness in excess of $7.5 million, material judgment defaults, bankruptcy and insolvency events, defects in security interests, and change in control events. An event of default could result in all debt becoming due and payable.

8. Income Taxes

The Company remains subject to federal, state and local income tax examinations by tax authorities for all tax years beginning on or after January 1, 2007. Examination of the Company’s 2006 federal income tax return by the Internal Revenue Service was completed, as was a state tax audit for the 2006 and 2005 tax years. No significant adjustments were proposed in connection with these examinations. Subsequently, the related unrecognized tax benefits were recognized.

The Company recognizes interest expense related to unrecognized tax benefits in income tax expense. Interest expense related to unrecognized tax benefits was not significant during the three month periods ended September 30, 2010 and 2009.

In accordance with ASC Subtopic 740-270, Income Taxes — Interim Reporting, the Company determined the income tax provision for the three months ended September 30, 2010 on a discrete basis since the Company could not reliably estimate its annual effective income tax rate for the year ending June 30, 2011 because minor changes in its estimated pre-tax results could have a significant impact on the Company’s annualized effective tax rate. This is a change from the prior year where the annual effective tax rate approach was used. Accordingly, the tax rate used for the U.S. component of the income tax provision for the three months ended September 30, 2010 was based on the actual effective tax rate for the period.

The Company’s effective income tax rate for the three months ended September 30, 2010 was 68.5%. For the three months ended September 30, 2010, the Company recorded a provision for income taxes of $0.8 million. The difference between the statutory federal income tax rate of 34.0% and the Company’s effective income tax rate of 68.5% is primarily attributable to the valuation allowance of $0.3 million that the Company established on a deferred tax asset attributable to the amortization of the Company’s customer relationship intangible assets during the three months ended September 30, 2010. The underlying tax basis of the customer relationships is capital in nature. The asset would generate a capital loss for income tax purposes upon disposition at its carrying

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value, which can only be used to offset capital gain income. The Company determined that the deferred tax asset is not more likely than not to be realized as there are no actual or projected capital gains available to offset any future capital losses that might be generated from the customer relationship deferred tax asset.

For the fiscal year ended June 30, 2010, the Company reviewed its annual effective tax rate on a quarterly basis and made the necessary changes if information or events warranted such changes. The annual effective tax rate was forecasted quarterly using actual historical information and forward-looking estimates.

The Company’s effective income tax rate for the three months ended September 30, 2009 was 45.9%. For the three months ended September 30, 2009, the Company recorded a provision for income taxes of $1.0 million. For the three months ended September 30, 2009, the Company’s tax provision was increased by approximately $1.0 million attributed to the Company’s July 2009 senior secured note open market purchase (Note 7). The Company treated this as a discrete item. The estimated annual effective income tax rate for the year ending June 30, 2010 approximated 3%. The estimated annual effective income tax rate of 3% was primarily due to the Company projecting pre-tax losses for fiscal 2010 and having to provide a valuation allowance of $1.4 million on a deferred tax asset attributable to the amortization of the Company’s customer relationship intangible assets. As noted above, the underlying tax basis of the customer relationships is capital in nature, and thus would generate capital losses for income tax purposes.

9. Stock-Based Compensation

Stock-based compensation awards are accounted for in accordance with ASC 718, Compensation — Stock Compensation. The Rafaella Apparel Group, Inc. Equity Incentive Plan (the “Plan”) provides for the issuance of stock option and restricted stock-based compensation awards to senior management, other key employees, and consultants to the Company. The Company has reserved 1,111,111 shares of common stock for issuance pursuant to the terms of the Plan. While the terms of individual awards may vary, employee stock options granted to-date vest in annual increments of 25% over the first four years of the grant, expire no later than ten years after the grant date, and have an exercise price of $5.33 per share.

Under the Plan, unvested awards become immediately vested upon the occurrence of a Liquidity Event. A Liquidity Event, as defined in the Plan, is (i) a change in control, (ii) the sale, transfer or other disposition of all or substantially all of the business and assets, (iii) the consummation of an initial public offering, or (iv) the dissolution or liquidation of the Company. Common stock acquired through the exercise of stock option grants or vesting of restricted stock issued under the Plan may not be sold, disposed of or otherwise transferred by a participant of the Plan prior to a Liquidity Event without the consent of Cerberus Capital Management, L.P. (“Cerberus”), a shareholder of the Company.

Under the Plan, prior to a Liquidity Event, the Company has the right, but not the obligation, to purchase from a participant and to cause the participant to sell to the Company, common stock acquired through the exercise of stock option grants or vesting of restricted stock issued following the participant’s (i) death, (ii) termination of employment with the Company as a result of disability, (iii) termination of employment by the Company without cause, (iv) termination of employment by the Company for cause, or (v) termination of employment with the Company for any other reason. The purchase price for shares under clauses (i), (ii), or (iii) above is the greater of (a) the purchase price paid for such shares by the participant and (b) the fair market value of such shares.

The purchase price for shares under clauses (iv) and (v) above is the lesser of (a) the purchase price, if any, paid for such shares by the participant, or if no price was paid, one dollar ($1.00) and (b) 50% of the fair market value of such shares. If at any time after an initial public offering, a participant’s employment or relationship is terminated for cause, the Company has the right, but not the obligation, to purchase from the participant and to cause the participant to sell to the Company, all common stock acquired through the exercise of stock option grants or vesting of restricted stock issued for the same purchase price as that of clauses (iv) and (v) above. In the event that the Company does not exercise its repurchase rights above, Cerberus may also elect to repurchase the shares under the same terms and conditions.

On September 16, 2010, the Company’s board of directors approved the grant of options to an employee to purchase 111,111 shares of common stock of the Company. The weighted-average estimated fair value of stock options granted during the three months ended September 30, 2010 was $0.09. Fair value was estimated using the Black-Scholes option pricing model with the following assumptions: (i) dividend yield - 0%, (ii) expected volatility - 50%, (iii) risk-free interest rate - 1.47%, and (iv) expected life - 4 years.

A summary of stock option plan activity during the three months ended September 30, 2010 is presented below:

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	Shares	Weighted Average Remaining Contractual Life (in years)
Options outstanding, July 1, 2010	999,999
Grants	111,111
Forfeited	—
Options outstanding, September 30, 2010	1,111,110	7.5
Options exercisable, September 30, 2010	866,664	6.6

As of September 30, 2010, 555,555 stock options are subject to certain call right provisions described above. Subsequent to a Liquidity Event, the call right provisions lapse, except for employees terminated for cause. As a result of the call right provisions, the stock option awards do not substantively vest prior to the occurrence of a Liquidity Event. Accordingly, stock-based compensation expense will not be recognized until it is probable that a Liquidity Event will occur. As of September 30, 2010, it was not probable that a Liquidity Event will occur. Unrecognized compensation costs related to these options approximated $268,000 at September 30, 2010.

The Company recorded compensation expense related to 555,555 stock options, not subject to the call right provisions, of approximately $6,000 during the three months ended September 30, 2009. The 555,555 stock options not subject to the call right provisions were fully vested as of June 30, 2010 and, accordingly, the Company did not incur compensation expense related to these stock options during the three month ended September 30, 2010.

The Company is obligated to pay certain cash payments equal to three-tenths percent (0.3%) of the Appreciated Value of the Company in connection with Sale Transactions and three-tenths percent (0.3%) of the Net Dividends paid other than in connection with a Sale Transaction (each term as defined) in connection with an agreement entered into among the Company and a former employee. As the cash payments are contingent in nature, compensation expense will not be recognized until it is probable that such payments will occur. As of September 30, 2010, it was not probable that a Sale Transaction or a Net Dividend payment will occur.

10. Concentration of Credit Risk and Major Customers

The Company maintains its cash accounts in one commercial bank located in both New York and Hong Kong. The New York cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank.

Receivables arise in the normal course of business. Management minimizes its credit risk with respect to trade receivables sold to its factor. For trade receivables not factored, management monitors the creditworthiness of such customers and reviews the outstanding receivables at period end, as well as uncollected account experience, and establishes an allowance for doubtful accounts as deemed necessary.

For the three months ended September 30, 2010, sales to three customers approximated $9.3 million, $8.2 million, and $4.6 million of the Company’s consolidated net sales. For the three months ended September 30, 2009 sales to three customers approximated $9.4, million, $5.7 million, and $4.6 million of the Company’s consolidated net sales. Accounts receivable, net of allowances, from three customers approximated $6.1 million, $4.9 million and $2.2 million at September 30, 2010. Accounts receivable, net of allowances, from three customers approximated $3.7 million, $1.8 million and $1.6 million at June 30, 2010.

11. Commitments and Contingencies

The Company, from time to time, is party to various legal proceedings. While management, including external counsel, currently believes that the ultimate outcome of such proceedings, individually and in the aggregate, if any, will not have a material adverse impact on its financial position or results of operations, litigation is subject to inherent uncertainties. The Company records legal costs incurred in connection with a loss contingency as incurred as a part of the selling, general and administrative expenses line item of the consolidated statements of operations.

The Company enters into employment and consulting agreements with certain of its employees from time to time. These contracts typically provide for severance and other benefits. Additionally, the Company has certain operating leases, which are disclosed in the notes to the consolidated annual financial statements. The Company has no other off balance sheet arrangements.

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12. Exit Activities

During the quarter ended September 30, 2009, the Company decided to exit one of its warehouses located in Bayonne, NJ. The warehouse is currently under lease until January 2011 and has been utilized since July 2007 for warehousing and distribution activities. As a result of the decision to exit this warehouse, the Company assessed the recoverability of the long-term assets associated with the facility. These assets include leasehold improvements to the warehouse facility as well as racking used for inventory storage. As a result of this analysis, the Company wrote down the value of its leasehold improvements and fixed assets located at this warehouse by approximately $0.3 million (net) during the period ended September 30, 2009. This charge has been recorded as a part of the selling, general and administrative expenses line item of the statements of operations. Based on the applicable authoritative guidance for exit and disposal activities, the Company met the cease-use criteria for the warehouse being exited in the second quarter of fiscal 2010. A charge for approximately $0.2 million, for the estimated costs to be incurred to satisfy rental commitments under the lease, offset by sublease rental rates was recorded as part of selling, general and administrative expense line item of the statement of operations during the quarter ended December 31, 2009. As of September 30, 2010, approximately $0.1 million of the related liability remains as part of the accrued expenses and other current liabilities line item of the condensed consolidated balance sheet.

13. Restructuring and Other Charges

During the fourth quarter of the fiscal year ended June 30, 2010, the Company’s management approved, committed to, and initiated a restructuring plan, resulting from a cost savings initiative, by announcing its closure of the main warehouse located in Bayonne, NJ to discontinue its warehouse, distribution and logistics operations. In connection with the exit plan, the Company reduced its workforce by approximately 70 employees. As a result of the decision to exit this warehouse the Company assessed the recoverability of the long-term assets associated with the facility. These assets include distribution equipment used for inventory. The write-down of fixed assets resulting from this analysis was not significant for the fiscal year ended June 30, 2010. The Company recorded restructuring charges for severance and employee benefits of approximately $0.2 million during the fourth quarter of the fiscal year ended June 30, 2010, which were fully paid out during the quarter ended September 30, 2010.

14. Subsequent Events

The Company has performed an evaluation of subsequent events through the filing of this quarterly report, and has determined that no material subsequent events have occurred other than as described below.

Amended and Restated Employment Agreement; Equity Incentive Award

On October 13, 2010, the Company entered into an Amended and Restated Employment Agreement with Richard Metzger in connection with the promotion of Mr. Metzger to Executive Vice-President of Design of the Company.

Prior to Mr. Metzger’s promotion, Mr. Metzger served as Vice-President of Design of the Company. Mr. Metzger’s amended agreement provides for, among other things, an increase in Mr. Metzger’s (i) annual base salary, from $315,000 to $375,000, and (ii) target bonus, from 25% of his base salary to 50% thereof. In addition, pursuant to the terms of his amended agreement, Mr. Metzger will be entitled to receive an equity grant to be determined by the Company’s board of directors, subject to the terms and conditions of the Company’s Equity Incentive Plan and customary documentation with respect thereto.

On September 16, 2010, the Company’s board of directors also approved the grant of options to Mr. Metzger pursuant to the Company’s Equity Incentive Plan to purchase 111,111 shares of common stock of the Company, exercisable for $5.33 per share, to Mr. Metzger. One quarter of Mr. Metzger’s options vest on each of the first, second, third and fourth anniversaries of the grant date.

The foregoing summary of each of Mr. Metzger’s amended and restated employment agreement and equity incentive award agreement does not purport to be complete and is qualified in its entirety by each such agreement.

15. Guarantor Consolidating Financial Statements

In June 2005, the Company issued 11.25% senior secured notes that are fully, unconditionally, jointly and severally guaranteed on a senior secured basis by Verrazano, Inc. (“Verrazano”), a wholly-owned subsidiary of the Company. Verrazano was formed in 2004 and commenced operations in 2005. The following condensed consolidating financial information as of September 30, 2010 and June 30, 2010 and for the three months ended September 30, 2010 and 2009 is provided in lieu of separate financial statements for the Company and Verrazano.

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

As of September 30, 2010

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano		Non- guarantor Subsidiary and Eliminations			Total
Assets
Current assets:
Cash and equivalents	$	9,280		$	1,392	$	5		$	10,677
Receivables, net	20,179			1,568		—			21,747
Inventories	11,690			1,055		—			12,745
Deferred income taxes	1,952			95		—			2,047
Other current assets	5,150			15,273		(16,263		)	4,160
Total current assets	48,251			19,383		(16,258		)	51,376
Equipment and leasehold improvements, net	979			—		102			1,081
Intangible assets, net	29,853			561		—			30,414
Investment in subsidiaries	18,094			—		(18,094		)	—
Other assets	—			—		45			45
Total assets	$	97,177		$	19,944	$	(34,205	)	$	82,916
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	6,439		$	517	$	49		$	7,005
Accrued expenses and other current liabilities	20,246			307		(15,156		)	5,397
Current portion of senior secured notes	71,275			—		—			71,275
Total current liabilities	97,960			824		(15,107		)	83,677
Income taxes	5,058			—		—			5,058
Deferred rent	374			—		22			396
Other liabilities	183			—		—			183
Total liabilities	103,575			824		(15,085		)	89,314
Commitments and contingencies
Redeemable convertible preferred stock	61,110			—		—			61,110
Stockholders’ equity (deficit):
Common stock	25			—		—			25
Additional paid in capital	307			8,741		(8,741		)	307
Deemed dividend, in excess of predecessor basis	(26,022		)	—		—			(26,022		)
Retained earnings (deficit)	(41,818		)	10,379		(10,379		)	(41,818		)
Total stockholders’ equity (deficit)	(67,508		)	19,120		(19,120		)	(67,508		)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	97,177		$	19,944	$	(34,205	)	$	82,916

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

As of June 30, 2010

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano		Non- guarantor Subsidiary and Eliminations			Total
Assets
Current assets:
Cash and equivalents	$	19,240		$	1,368	$	2		$	20,610
Receivables, net	9,800			1,054		—			10,854
Inventories	11,300			2,295		—			13,595
Deferred income taxes	1,952			95		—			2,047
Other current assets	5,199			15,285		(16,390		)	4,094
Total current assets	47,491			20,097		(16,388		)	51,200
Equipment and leasehold improvements, net	1,050			—		115			1,165
Intangible assets, net	30,687			644		—			31,331
Investment in subsidiaries	17,901			—		(17,901		)	—
Other assets	—			—		45			45
Total assets	$	97,129		$	20,741	$	(34,129	)	$	83,741
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	7,488		$	1,755	$	39		$	9,282
Accrued expenses and other current liabilities	19,651			3		(15,210		)	4,444
Current portion of senior secured notes	71,084			—		—			71,084
Total current liabilities	98,223			1,758		(15,171		)	84,810
Income taxes	5,058			—		—			5,058
Deferred rent	409			—		25			434
Other liabilities	200			—		—			200
Total liabilities	103,890			1,758		(15,146		)	90,502
Commitments and contingencies
Redeemable convertible preferred stock	60,110			—		—			60,110
Stockholders’ equity (deficit):
Common stock	25			—		—			25
Additional paid in capital	307			8,741		(8,741		)	307
Deemed dividend, in excess of predecessor basis	(26,022		)	—		—			(26,022		)
Retained earnings (deficit)	(41,181		)	10,242		(10,242		)	(41,181		)
Total stockholders’ equity (deficit)	(66,871		)	18,983		(18,983		)	(66,871		)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	97,129		$	20,741	$	(34,129	)	$	83,741

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2010

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano		Non-guarantor Subsidiary and Eliminations			Total

Net sales	$	32,721		$	4,587	$	—		$	37,308
Cost of sales	22,917			3,760		(62		)	26,615
Gross profit	9,804			827		62			10,693
Selling, general and administrative expenses	6,582			403		—			6,985
Operating income	3,222			424		62			3,708
Interest expense, net	2,560			—		—			2,560
Interest expense and other financing, net	2,560			—		—			2,560
Income before provision for income taxes	662			424		62			1,148
Provision for income taxes	492			288		6			786
Equity in earnings of subsidiaries	192			—		(192		)	—
Net income (loss)	362			136		(136		)	362
Dividends accrued on redeemable convertible preferred stock	1,000			—		—			1,000
Net income (loss) available to common stockholders	$	(638	)	$	136	$	(136	)	$	(638	)

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2009

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano		Non-guarantor Subsidiary and Eliminations			Total

Net sales	$	24,813		$	4,588	$	—		$	29,401
Cost of sales	16,397			3,863		289			20,549
Gross profit	8,416			725		(289		)	8,852
Selling, general and administrative expenses	5,932			520		—			6,452
Operating income	2,484			205		(289		)	2,400
Interest expense, net	2,823			—		—			2,823
Gain on senior secured note purchase	(2,543		)	—		—			(2,543		)
Interest expense and other financing, net	280			—		—			280
Income before provision for income taxes	2,204			205		(289		)	2,120
Provision for income taxes	967			6		—			973
Equity in earnings of subsidiaries	(90		)	—		90			—
Net income	1,147			199		(199		)	1,147
Dividends accrued on redeemable convertible preferred stock	1,000			—		—			1,000
Net income available to common stockholders	$	147		$	199	$	(199	)	$	147

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the three months ended September 30, 2010

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano			Non- guarantor Subsidiary and Eliminations			Total

Cash flows provided by (used in) operating activities:
Net income (loss)	$	362		$	136		$	(136	)	$	362
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred finance charges	324			—			—			324
Accretion of original issue discount	191			—			—			191
Depreciation and amortization	959			83			15			1,057
Income taxes	—			—			—			—
Deferred rent	(35		)	—			(3		)	(38		)
Equity in earnings of subsidiaries	(192		)	—			192			—
Changes in operating assets and liabilities:
Accounts receivable	(10,379		)	(514		)	—			(10,893		)
Inventories	(390		)	1,240			—			850
Other current assets	(276		)	12			(126		)	(390		)
Accounts payable	(997		)	(1,237		)	9			(2,225		)
Accrued expenses and other current liabilities	678			304			54			1,036
Other liabilities	(17		)	—			—			(17		)
Net cash provided by (used in) operating activities	(9,772		)	24			5			(9,743		)
Cash flows used in investing activities:
Purchase of equipment and leasehold improvements	(54		)	—			(2		)	(56		)
Net cash used in investing activities	(54		)	—			(2		)	(56		)
Cash flows used in financing activities:
Deferred financing costs	(134		)	—			—			(134		)
Net cash used in financing activities	(134		)	—			—			(134		)
Net increase (decrease) in cash and cash equivalents	(9,960		)	24			3			(9,933		)
Cash and cash equivalents, beginning of period	19,240			1,368			2			20,610
Cash and cash equivalents, end of period	$	9,280		$	1,392		$	5		$	10,677

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Rafaella Apparel Group, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the three months ended September 30, 2009

(In thousands)

(unaudited)

	Rafaella Apparel Group			Verrazano			Non-guarantor Subsidiary and Eliminations			Total

Cash flows provided by (used in) operating activities:
Net income	$	1,147		$	199		$	(199	)	$	1,147
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of deferred finance charges	284			—			—			284
Accretion of original issue discount	193			—			—			193
Depreciation and amortization	1,285			82			16			1,383
Stock-based compensation expense	6			—			—			6
Income taxes	914			—			—			914
Deferred rent	(16		)	—			(3		)	(19		)
Gain on senior secured note purchase	(2,543		)	—			—			(2,543		)
Equity in earnings of subsidiaries	90			—			(90		)	—
Changes in operating assets and liabilities:
Accounts receivable	(4,782		)	(919		)	—			(5,701		)
Inventories	1,132			(110		)	—			1,022
Other current assets	(343		)	3,249			(3,032		)	(126		)
Accounts payable	(1,006		)	(1,000		)	(18		)	(2,024		)
Accrued expenses and other current liabilities	(1,105		)	(92		)	3,302			2,105
Other assets	(1		)	—			1			—
Net cash provided by (used in) operating activities	(4,745		)	1,409			(23		)	(3,359		)
Cash flows used in investing activities:
Purchase of equipment and leasehold improvements	(22		)	—			—			(22		)
Net cash used in investing activities	(22		)	—			—			(22		)
Cash flows used in financing activities:
Repurchase of senior secured notes	(805		)	—			—			(805		)
Net cash used in financing activities	(805		)	—			—			(805		)
Net increase (decrease) in cash and cash equivalents	(5,572		)	1,409			(23		)	(4,186		)
Cash and cash equivalents, beginning of period	17,440			230			28			17,698
Cash and cash equivalents, end of period	$	11,868		$	1,639		$	5		$	13,512

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

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been derived from our historical financial statements and is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A section in conjunction with our condensed financial statements and notes to those statements included in Item 1 of this Quarterly Report, as well as our Annual Report on Form 10-K filed October 13, 2010. The discussion below contains 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. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will be,” “will likely continue,” “will likely result” or words or phrases of similar meaning. All of these forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause our business, strategy or actual results to differ materially from the forward-looking statements. These risks and uncertainties may include those discussed elsewhere in our Annual Report on Form 10-K filed October 13, 2010 and other factors, some of which may not be known to us. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy or actual results to differ materially from those contained in forward-looking statements. Factors you should consider that could cause these differences include, among other things:

· our ability to continue as a going concern;

· our ability to refinance, extend or restructure the senior secured notes;

· our ability to refinance the Credit Facility;

· our liquidity and the availability and cost of additional or continued sources of financing;

· our ability to generate sufficient cash flow to service our existing debt service obligations;

· our ability to satisfy financial and other covenants of the Credit Facility and senior secured notes indenture;

· the weakness in the national economy in general and the consumer retail markets in particular;

· the financial condition of our customers and continued consolidation among our customers in the retail industry;

· our ability to retain major customers at current or historical levels;

· competition and pricing pressures in apparel industry;

· our continued ability to anticipate customer and consumer tastes;

· ability to accurately forecast customer demand;

· fluctuations in the price, availability and quality of fabrics, and in particular, cotton;

· our ability to comply with the vendor operating policies and procedures of our customers;

· our dependence upon third party manufacturing in foreign countries and the resulting fluctuations in cost of manufacturing apparel clothing;

· changes in export regulations of foreign companies and changes in U.S. import rules and regulations;

· protection of our brand and trademarks;

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· our ability to retain our senior management and attract and retain qualified and experienced employees; and

· other factors described in our Annual Report on Form 10-K filed October 13, 2010.

Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

The following is a discussion of our results of operations and financial condition. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this filing. The discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products, and our future results and is intended to provide the reader of our financial statements with a narrative discussion about our business. The discussion is presented in the following sections:

· Company Overview

· Results of Operations, and

· Liquidity and Capital Resources

We based our statements on assumptions or estimates that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons.

COMPANY OVERVIEW

Our Company

We are an established wholesaler, designer, sourcer, marketer and distributer of a full line of women’s career and casual sportswear separates. We have been in the women’s apparel business since 1982 and market our products primarily under the Rafaella brand and private label brands of our customers. We design, source and market pants, sweaters, blouses, knits, jackets and skirts for all seasons of the year. Our in-house design staff develops our lines to include core basics, fashion related separates and replenishment items with updated features and colors using a variety of natural and synthetic fabrics. Using our design specifications, we outsource the manufacturing and production of our clothing line to factories primarily in Asia and also the Middle East. We sell our products directly to department, specialty and chain stores and off-price retailers. During fiscal 2010, we had over 240 customers, representing over 3,900 individual retail locations. Our customers include some of the largest retailers of women’s clothing in the United States.

Certain factors not solely within our control, including the nearing maturity dates of the Credit Facility and our senior secured notes and our uncertainty with respect to the refinancing thereof, raise substantial doubt about our ability to continue as a going concern. We can give no assurance as to our ability to raise sufficient capital or revenues to meet our obligations or our ability to continue as a going concern.

Our Industry

The retail women’s apparel industry is highly competitive, with many providers of similar types of clothing as are designed and marketed by us. In addition, there has been a consolidation in the industry, decreasing the number of retailers and the floor space available for our products. Wholesalers of women’s apparel are subject to pricing pressures from both retailers and consumers, stemming from the increased competition for customers and economic cycles that impacts the spending of our consumers.

The women’s apparel industry in which we operate has historically been subject to cyclical variations, current general economic conditions, and perceived or anticipated future economic conditions. The current economic environment, characterized by a dramatic decline in consumer discretionary spending, has materially and adversely affected the retail and wholesale apparel industry. Discretionary purchases, such as women’s apparel, have been especially negatively impacted in the current economic environment.

Critical Trends; Performance Drivers

Primary Revenue Variables

Our revenues are impacted by various factors, including the following:

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· national and regional economic conditions;

· overall levels of consumer spending for apparel;

· demand by retailers for our brand and products;

· pricing pressures due to competitive market conditions and buying power of retailers;

· the accuracy of our forecast of demand for our products;

· the performance of our products within the prevailing retail environment;

· actions of our competitors;

· ability of our third-party manufacturers to timely deliver products of acceptable quality; and

· the economic impact of uncontrollable factors, such as terrorism and war.

Primary Expense Variables

Variations in our cost of sales are primarily due to:

· fluctuations in the price, availability and quality of raw materials and cost of production labor;

· the length and level of variation in the production runs we order from third party manufacturers;

· fluctuations in duties, taxes and other charges on imports;

· pricing pressures due to competition for manufacturing sources;

· reductions in the value of our unsold inventories;

· fluctuations in energy prices which impact manufacturing costs and inbound transportation costs; and

· international economic and political conditions.

Variations in selling, general and administrative expenses are primarily due to:

· changes in headcount and salaries and related fringe benefits;

· costs associated with product development;

· changes in warehousing and distribution expenses associated with sales volumes, outbound transportation expenses impacted by changes in energy costs, and the need for third party storage or shipping services;

· costs associated with professional services;

· changes in PR and marketing expenses;

· changes in factoring costs and provisions for customer bad debts;

· costs associated with enhancing and maintaining an adequate system of internal controls; and

· costs associated with regulatory compliance.

Consolidation in the Industry

There has been, and continues to be, consolidation activity in the United States retail women’s apparel industry. With the growing trend towards consolidation, we are increasingly dependent upon key retailers whose bargaining strength and share of our business is growing. It is possible that these larger retailers may, instead of continuing to purchase women’s sportswear separates from us, decide to manufacture or source such items themselves. There is also the possibility that customers may consolidate with one or more of their other vendors and begin sourcing items from such vendors. Consolidation may also result in store closures which could adversely impact our sales.

In addition, as a result of consolidation, we may face greater pressure from these larger customers to provide more favorable pricing and trade terms, to comply with increasingly more stringent vendor operating procedures and policies and to alter our products or product mix to provide different items such as exclusive merchandise, private label products or more upscale goods. If we are unable to provide more favorable terms or to develop satisfactory products, programs or systems to comply with any new product requirements, operating procedures or policies, this could adversely affect our operating results.

Changing Customer Tastes

We have designed our products primarily using basic styling with updated features and colors in order to minimize the impact of fashion trends. However, fabric, color and other style factors are still critical in determining whether our products are purchased by consumers and consequently by our direct customers. Consumer tastes can change rapidly. We may not be able to anticipate, gauge or respond to changes in customer tastes in a timely manner. If we misjudge the market for our products or product groups or if we fail to identify and respond appropriately to changing consumer demands, we may be faced with a significant amount of unsold finished goods inventory, which could have a material adverse affect on our expected operating results and decrease our

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sales and gross margins. Conversely, if we predict consumer preferences accurately, we could experience increased sales and greater operating income because our selling, general and administrative expenses would remain at or near their current levels even with increased sales.

Competition

As an apparel company, we face competition on many fronts, including with respect to the following:

· establishing and maintaining favorable brand recognition;

· developing products that appeal to consumers;

· pricing products appropriately; and

· obtaining access to, and sufficient floor space in, retail stores.

The United States apparel industry is highly fragmented and includes a number of very large brands and companies marketing multiple brands, many of which have greater financial, technical and marketing resources, greater manufacturing capacity and more extensive and established customer relationships than we do. We believe we have maintained prices for our branded products in department and specialty stores below comparable products offered by our branded competitors. However, the future competitive responses encountered from these larger, more established apparel companies might be more aggressive and comprehensive than we anticipate and we may not be able to compete effectively. For example, if our branded competitors were to match our prices for comparable products, we may be forced to lower our prices or endure lower sales as a result. The competitive nature of the apparel industry may result in lower prices for our products and decreased gross profit margins, either of which may have a material adverse affect on our sales and results of operations.

Import Restrictions and Regulations

Our transactions with our foreign suppliers are subject to the risks of doing business abroad. Imports into the United States are affected by, among other things, the cost and availability of transportation of the products and the imposition of import duties and restrictions. The countries that we source our products from may, from time to time, also impose restrictions or take various economic actions, which could affect our ability to import products from such countries at the current or increased levels. Imports into the United States can also be subjected to various additional restrictions and the assessment of punitive antidumping duties or countervailing duties when goods are shipped to the U.S. at less than fair value (dumping) or with certain countervailable subsidies from the exporting nation. In 2007, the U.S. Government altered a more than twenty-year policy by applying its antisubsidy laws to certain exports from China. Bills have been introduced in Congress which would hold China and other countries accountable for currency manipulation through the assessment of additional duties (such as those available under the antidumping and countervailing duty laws). The effect of these changes could be an increase to the cost of goods imported by us from China. The pendency of the above-described actions can have a disruptive effect on imports from the exporting country while the action is pending as a result of the potentially resulting uncertainty. We cannot predict the likelihood or frequency of any such events occurring.

Various private interests have proposed implementing a monitoring program covering textile imports from China. Should these proposals in the future be adopted and should they result in affirmative determinations of injury, they could result in additional restrictions or duties.

U.S. import quotas on apparel imported from China expired on December 31, 2008. On September 11, 2009, acting under the authority of the China product safeguard provision (section 421 of the Trade Act of 1974, as amended), the U.S. President proclaimed that certain passenger vehicle and light truck tires from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. The determination further provided for the imposition of additional import duties on such products, for a period of three years, as a remedy. It is possible that other U.S. domestic interests may petition for similar relief in the form of additional import duties or other measures such as quotas. We cannot predict whether such action would be sought or approved.

In addition, various economic factors, including, but not limited to, the exchange rate between the U.S. and Chinese currencies, and increased cost for raw materials, labor and transportation, could materially impact the availability or cost at which we could import our products.

New and proposed reporting requirements to be made at or prior to the time of entry may also impact the speed and efficiency at which our goods may enter into the commerce of the United States. These include, among others, the new “10 + 2” security filing. Increased time lags for the release of imported product may also be the case with respect to ongoing governmental initiatives in the areas of supply chain security and product safety.

We monitor these and other trade related developments and continually seek to minimize our potential exposure to related risks through, among other measures, shifts of production among countries and manufacturers.

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In addition to the factors outlined above, our import operations may be adversely affected by political or economic instability resulting in the disruption of trade from exporting countries, any significant fluctuations in the value of the dollar against foreign currencies and restrictions on the transfer of funds.

RESULTS OF OPERATIONS

The following table summarizes our historical operations as a percentage of net sales for the quarterly periods ended September 30, 2010 and 2009.

	Quarterly Periods Ended
(in thousands, except percentages)	September 30, 2010				September 30, 2009

Net sales	$	37,308	100.0	%	$	29,401		100.0	%
Cost of sales	26,615		71.3		20,549			69.9
Gross profit	10,693		28.7		8,852			30.1
Selling, general and administrative expenses	6,985		18.7		6,452			21.9
Operating income	3,708		9.9		2,400			8.2
Interest expense, net	2,560		6.9		2,823			9.6
Gain on senior secured note purchases	—		—		(2,543		)	(8.6	)
Interest expense and other financing, net	2,560		6.9		280			1.0
Income before provision for income taxes	1,148		3.1		2,120			7.2
Provision for income taxes	786		2.1		973			3.3
Net income	362		1.0		1,147			3.9

Quarterly period ended September 30, 2010 compared to quarterly period ended September 30, 2009

Set forth below is a description of the results of operations derived from the financial statements for the quarterly period ended September 30, 2010, as compared to the financial statements for the quarterly period ended September 30, 2009.

Net sales. Net sales for the quarterly period ended September 30, 2010 was $37.3 million. As compared to net sales of $29.4 million for the quarterly period ended September 30, 2009, net sales increased by approximately $7.9 million or 26.9%. The increase of net sales was principally due to an increase in gross sales of $5.8 million, related to an increase in volume (approximately 18%) partially offset by a decrease in average revenue per unit (approximately 3%). The increase in customer volume was primarily attributed to increases in department store, private label and off-price sales. The decrease in average revenue per unit was primarily attributed to decreases in department store and off-price sales per unit partially offset by an increase in private label sales per unit. The increase in net sales was also favorably impacted by a $1.7 million decline in customer allowances and returns for the quarterly period ended September 30, 2010 compared to the quarterly period ended September 30, 2009.

Gross profit. Gross profit for the quarterly period ended September 30, 2010 was $10.7 million. As a percentage of net sales, gross profit over this period was 28.7%. As compared to the gross profit of $8.9 million for the quarterly period ended September 30, 2009 (30.1% of net sales), gross profit increased by $1.8 million or 20.8%. Gross profit as a percentage of net sales decreased by approximately 1.4% for the quarterly period ended September 30, 2010 compared to the quarterly period ended September 30, 2009. Gross profit as a percentage of net sales was unfavorably impacted by an increase in off-price customer sales as a percentage of total net sales and a decrease in department store sales as a percentage to total net sales. This decrease was offset by an increase in private label sales as a percentage of total net sales. The decrease in gross profit as a percentage of net sales was partially offset by a decrease in customer allowances as a percentage of net sales during the quarterly period ended September 30, 2010 compared with the prior year.

Selling, general and administrative expenses. Selling, general and administrative expenses for the quarterly period ended September 30, 2010 was $7.0 million. As compared to selling, general and administrative expenses of $6.5 million for the quarterly period ended September 30, 2009, there was an increase of $0.5 million or 8.3%. The increase in selling, general and administrative expenses was primarily attributable to an increase in third party warehouse and distribution related expenses of $0.7 million, offset by a decrease in depreciation and amortization costs of $0.3 million. As a percentage of net sales, selling, general and administrative expenses was 18.7% for the quarterly period ended September 30, 2010 and 21.9% for the quarterly period ended September 30, 2009.

Operating income. Operating income for the quarterly period ended September 30, 2010 was $3.7 million. As compared to operating income of $2.4 million for the quarterly period ended September 30, 2009, operating income increased by $1.3 million or

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54.5%. The increase was a result of the changes described above.

Interest expense, net. Interest expense, net (cash interest and non-cash interest associated with original issue discount and deferred financing costs) for the quarterly period ended September 30, 2010 was $2.6 million. As compared to interest expense, net of $2.8 million for the quarterly period ended September 30, 2009, there was a decrease of $0.3 million or 9.3%. The decrease of interest expense, net was primarily due to the reduction in our senior secured notes outstanding period over period as a result of the senior secured notes purchases.

Gain on senior secured notes purchases. We did not purchase any of our senior secured notes on the open market for the quarterly period ended September 30, 2010. For the quarterly period ended September 30, 2009, we purchased $3.5 million of our senior secured notes on the open market in July 2009, resulting in pre-tax gain of $2.5 million (resulting from the difference between the carrying book value of the senior secured notes and the amounts paid, net of deferred financing costs that were written-off).

Interest expense and other financing, net. Interest expense and other financing, net for the quarterly period ended September 30, 2010 was $2.6 million. As compared to interest expense and other financing, net, of $0.3 million for the quarterly period ended September 30, 2009, interest expense and other financing, net increased by $2.3 million. The increase was primarily attributed to a reduction of pre-tax gain on senior secured notes purchases as discussed above. Refer to the “Liquidity and Capital Resources” section below for further discussion surrounding our senior secured notes.

Provision for income taxes. In accordance with ASC Subtopic 740-270, Income Taxes — Interim Reporting, the Company determined the income tax provision for the three months ended September 30, 2010 on a discrete basis since the Company could not reliably estimate its annual effective income tax rate for the year ending June 30, 2011 because minor changes in its estimated pre-tax results could have a significant impact on the Company’s annualized effective tax rate. This is a change from the prior year where the annual effective tax rate approach was used. Accordingly, the tax rate used for the U.S. component of the income tax provision for the three months ended September 30, 2010 was based on the actual effective tax rate for the period.

The Company’s effective income tax rate for the three months ended September 30, 2009 was 45.9%. For the three months ended September 30, 2009, the Company recorded a provision for income taxes of $1.0 million. For the three months ended September 30, 2009, the Company’s tax provision was increased by approximately $1.0 million attributed to the Company’s July 2009 senior secured note open market purchase. The Company treated this as a discrete item. The estimated annual effective income tax rate for the year ending June 30, 2010 approximated 3%. The estimated annual effective income tax rate of 3% was primarily due to the Company projecting pre-tax losses for fiscal 2010 and having to provide a valuation allowance of $1.4 million on a deferred tax asset attributable to the amortization of the Company’s customer relationship intangible assets. As noted above, the underlying tax basis of the customer relationships is capital in nature, and thus would generate capital losses for income tax purposes.

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Net income. Net income for the quarterly period ended September 30, 2010 was $0.4 million. Net income as a percentage of net sales for the quarterly period ended September 30, 2010 was 1.0%. Net income for the quarterly period ended September 30, 2009 was $1.1 million (3.9% of net sales). The decrease of $0.8 million was a result of the changes described above.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary liquidity and capital requirements have been to fund working capital for current operations, which consists of funding the buildup of inventories and receivables, and servicing our Credit Facility. Our liquidity and capital requirements also include making interest payments on the senior secured notes. The primary source of funds currently used to meet our liquidity and capital requirements is funds generated from operations, and in the future, may also include direct borrowings under the Credit Facility (as defined below).

Risks, Uncertainties, and Going Concern

Our liquidity outlook has changed since June 30, 2009 primarily as a result of the continued strain on current credit and capital market conditions and the nearing maturity dates of the Credit Facility and our senior secured notes in June 2011. As a result, we believe that our forecasted cash and available credit capacity are not expected to be sufficient to meet our debt repayment obligations as they come due over the next twelve months. In order to enable us to meet our debt repayment obligations, we are currently seeking to refinance, extend or restructure our senior secured notes and our Credit Facility. There can be no assurance that we will be able to do so on terms and conditions satisfactory to us within the period needed to meet these repayment obligations. Our ability to refinance any of our existing indebtedness on commercially reasonable terms may be materially and adversely impacted by the current credit market conditions and our financial condition. Our inability to repay the Credit Facility and the senior secured notes under the terms of the financing agreements would lead to an event of default which would constitute debt being callable by creditors. The uncertainty associated with our ability to repay our outstanding debt raises substantial doubt about our ability to continue as a going concern. If we were unable to continue as a going concern, we will need to liquidate our assets and we might receive significantly less than the values at which they are carried on our condensed consolidated financial statements. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with our ability to meet our debt obligations as they come due.

Credit Facility

On June 20, 2005, we entered into a secured revolving credit facility agreement (as amended through May 21, 2010, the “Credit Facility”) with HSBC Bank USA, National Association. The Company, Cerberus Capital Management, L.P. (“Cerberus”), as a lender and the term lender, HSBC Bank USA, National Association (“HSBC” or the “Agent”), as agent and as lender, the other lenders signatory thereto from time to time (the “Lenders”) and the other loan parties signatory thereto (together with Cerberus and HSBC, collectively the “Loan Parties”) entered into a certain Amended and Restated Financing Agreement dated as of May 21, 2010 (the “Amended and Restated Financing Agreement”) to amend and restate the Credit Facility.

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The Amended and Restated Financing Agreement provides that the minimum working capital requirement shall be $25,000,000 as of the end of the fiscal quarter ending June 30, 2010 and $27,000,000 as of the end of the fiscal quarters ending thereafter. Working capital is defined as the sum of cash, accounts receivable, and inventory, reduced by current liabilities; the definition of current liabilities excludes indebtedness under the Company’s senior secured notes at any point on or after June 30, 2010. With the exception of the fiscal quarters ending on June 30, 2010 and September 30, 2010, the Company is required to maintain positive net income during each period of two consecutive fiscal quarters (on a rolling basis). The Company is permitted to incur up to a net loss of $1,300,000 during each of the two consecutive fiscal quarters (on a rolling basis) ending on June 30, 2010 and September 30, 2010. For purposes of determining compliance with the net income financial covenant, the definition of net income excludes noncash expenses associated with (i) amortization of customer relationships and non-compete agreements, (ii) the accretion of the senior secured notes original issue discount, (iii) amortization of deferred financing costs, and (iv) impairment charges, if any, resulting from a decline in the value of the Company’s intangible assets.

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Senior Secured Notes

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The Company did not purchase any outstanding senior secured notes on the open market during the quarter ended September 30, 2010.

As noted in Note 6 and Note 7, the Company’s senior Amended and Restated Financing Agreement expires on June 10, 2011 and the Company’s senior secured notes mature on June 15, 2011. Management currently does not believe that the Company will have sufficient cash on hand, based on current cash flow projections, to settle the senior secured notes in June 2011 at principal or face value. If the Company is unable to secure additional financing, its business and results from operations, financial condition and cash flows may be materially adversely affected and impact the Company’s ability to continue as a going concern. Consequently, management is currently in the process of exploring alternative long-term financing. There can be no assurance that any such financing will be available with terms favorable to the Company or at all.

We may from time to time seek to purchase our outstanding senior secured notes in open market purchases, privately negotiated transactions or otherwise. These purchases, if any, will depend on prevailing market conditions based on our liquidity requirements, contractual restrictions and other factors. The amount of purchases of our senior secured notes may be material and may involve significant amounts of cash and/or financing availability. Under the American Recovery and Reinvestment Act of 2009 (“the Act”), the Company will receive temporary relief under the Delayed Recognition of Cancellation of Debt Income (“CODI”) rules. The Act contains a provision, at the election of a corporation, allowing a five-year deferral of CODI for debt purchased in 2009 or 2010, followed by recognition of CODI ratably over the succeeding five years. However, an electing corporation may be required to accelerate its deferred CODI and recognize currently into income upon certain triggering events such as impairment transactions, corporate reorganizations and changes in tax status. Absent an acceleration event, the Company will continue to defer the recognition of CODI pursuant to the provisions set forth in the Act. The provision applies for specified types of purchases, including the acquisition of a debt instrument for cash and the exchange of one debt instrument for another.

We continually review the capital expenditure needs for the business as they relate to the business’ information systems, infrastructure, and in-store expenditures and we anticipate that capital expenditures may increase in future periods. We also anticipate that we will incur costs, which may be substantial, to improve our infrastructure as a result of being a public company and support key branding/marketing initiatives.

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The following table summarizes our net cash provided by or used in operating, investing and financing activities for the three month periods ended September 30, 2010 and 2009.

	Three Month Periods Ended
(in thousands)	September 30, 2010			September 30, 2009
Net cash used in:
Operating activities	$	(9,743	)	$	(3,359	)
Investing activities	(56		)	(22		)
Financing activities	(134		)	(805		)
Net decrease in cash and cash equivalents	$	(9,933	)	$	(4,186	)

Operating activities. Cash flows used in operating activities for the three month periods ended September 30, 2010 and 2009 were $9.7 million and $3.4 million, respectively. The increase in cash flows used in operating activities from three months ended September 30, 2009 to three months ended September 30, 2010 is primarily due to higher accounts receivable balances attributable to increased sales and timing of collections, income taxes paid, and payment of incentive compensation, partially offset by an increase in operating income.

Investing activities. Net cash used in investing activities for the three month periods ended September 30, 2010 and 2009 were $56,000 and $22,000, respectively. The use of cash during each of these periods was attributed to capital expenditures.

Financing activities. Net cash used in financing activities for the three month periods ended September 30, 2010 and 2009 were $0.1 million and $0.8 million, respectively. The use of cash during three months ended September 30, 2010 was attributed to payments relating to the Amended and Restated Financing Agreement. The use of cash during three months ended September 30, 2009 was attributed to our July 2009 senior secured note open market purchase discussed above.

Off-Balance Sheet Arrangements

As of September 30, 2010, we had outstanding letters of credit totaling $6.0 million in connection with purchase orders for merchandise from third-party manufacturers and standby letters of credit totaling $4.0 million issued by HSBC, which serve as security for obligations under certain operating leases, a customs bond and the GMAC Letter of Credit (refer to the “Due From Factor” section below for further discussion).

We enter into employment and consulting agreements with certain of our employees from time to time. These contracts typically provide for severance and other benefits. Individually, none of the contracts are expected to be material, although in the aggregate, our obligations under these contracts could be significant. Additionally, we have certain operating leases, which are disclosed in the consolidated annual financial statements. The Company has no other off-balance sheet arrangements.

Due From Factor

We cannot borrow from Wells Fargo and GMAC and the amounts due from Wells Fargo and GMAC are pledged to our revolving credit facility lenders as security for amounts outstanding under our revolving credit facility.

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Contractual Obligations

There have been no significant changes in the Company’s contractual obligations since June 30, 2010.

Effects of Inflation

Although our purchases from foreign manufacturers are made in U.S. dollars, mitigating any foreign exchange rate risk on purchase commitments, we may be subject to higher prices charged by our manufacturers to compensate for inflation or other market forces in such countries.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies and a description of accounting policies that we believe are most critical may be found in the MD&A included in our Annual Report on Form 10-K filed October 13, 2010.

Recent Accounting Pronouncements

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIE”) and the evaluation of when consolidation of a VIE is required. This amends the guidance for determining whether an entity is a VIE and establishes an additional reconsideration event for assessing whether an entity is, or continues to be, a VIE. The amendment modifies the requirements for determining whether an entity is the primary beneficiary of a VIE and requires ongoing reassessments of whether an entity is the primary beneficiary. This amendment also enhances the disclosure requirements about an entity’s involvement with a VIE. This amendment is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted this amendment in the first quarter of fiscal 2010 and the adoption of the amendment did not have any impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment eliminates the concept of qualifying special purpose entities for accounting purposes. This amendment limits the circumstances in which a financial asset, or a component of a financial asset, should be derecognized when the entire asset is not transferred, and establishes specific conditions for reporting the transfer of a portion of a financial asset as a sale. This amendment also requires enhanced disclosures about the transfer of financial assets and the transferor’s continuing involvement with transferred financial assets. The amendment is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted this amendment in the first quarter of fiscal 2010 and the adoption of the amendment did not have any impact on the Company’s condensed consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial product market prices and rates. We are exposed to market risks, including changes in interest rates and a reduction in the value of the dollar.

Market risks related to our operations result primarily from changes in interest rates. Our interest rate exposure relates primarily to our variable interest line of credit. Borrowings under the credit facility bear variable interest at the Company’s option at either (i) a base rate or (ii) the London interbank offered rate plus two and three-quarters percent (2.75%) per annum (each rate as defined in the Amended and Restated Financing Agreement). Our interest expense on the line of credit is based on variable rates, as discussed in Note 6 to our condensed consolidated financial statements included elsewhere herein. There were no loan borrowings or repayments under the Amended and Restated Financing Agreement during the quarter ended September 30, 2010. At September 30, 2010, there were no loans outstanding under the Amended and Restated Financing Agreement.

When purchasing apparel from foreign manufacturers, we use letters of credit that require the payment in U.S. currency upon receipt of bills of lading for the products and other documentation. Prices are fixed in U.S. dollars at the time the purchase orders and/or letters of credit are issued, which mitigates the risk of a reduction in the value of the dollar. However, purchase prices for the Company’s products may be impacted by fluctuations in the exchange rate between the U.S. dollar and the local currencies of the foreign manufacturers, which may have the effect of increasing the Company’s cost of goods in the future. Due to the number of currencies involved and the fact that not all foreign currencies react in the same manner against the U.S. dollar, the Company cannot quantify in any meaningful way the potential effect of such fluctuations on future income. The Company does not engage in hedging activities with respect to such exchange rate risk.

ITEM 4T. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), which are designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the period ended September 30, 2010 (the “Evaluation Date”), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted under the supervision of, and reviewed by, our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the Evaluation Date.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the quarter ended September 30, 2010, there were no material changes to the Company’s previously disclosed legal proceedings. Additionally, the Company is, and from time to time may be, a party to routine legal proceedings incidental to the operation of its business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on the financial condition, operating results or cash flows of the Company, based on its current understanding of the relevant facts.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended June 30, 2010, which could materially affect our business, financial condition or future results. The risks described in this report and in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit No.		Description

2.1*		Securities Purchase Agreement, dated April 15, 2005, among RA Cerberus Acquisition, LLC, Rafaella Sportswear, Inc., Verrazano, Inc., Ronald Frankel and Rafaella Corporation

2.2*		Amendment No. 1 to the Securities Purchase Agreement, dated May 27, 2005

2.3*		Contribution Agreement, dated June 20, 2005, among Rafaella Sportswear, Inc. and Rafaella Apparel Group, Inc.

3.1*		Amended and Restated Certificate of Incorporation of Rafaella Apparel Group, Inc.

3.2*		Bylaws of Rafaella Corporation

3.3*		Certificate of Incorporation of Verrazano, Inc.

3.4*		Bylaws of Verrazano, Inc.

4.1*		Stockholder’s Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., RA Cerberus Acquisition, LLC, Rafaella Sportswear, Inc. and the principals set forth therein

4.2*		Indenture for the 11 1/4% Senior Secured Notes due 2011, dated June 20, 2005, among Rafaella Apparel Group, Inc., the guarantors named therein and The Bank of New York, as trustee and collateral agent

4.3*		First Supplemental Indenture, dated July 12, 2006, among Rafaella Apparel Group, Inc., the guarantors named therein and the Bank of New York, as trustee and collateral agent

4.4*		Form of 111¤4% Senior Secured Notes due 2011 (included in Exhibit 4.2)

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Exhibit No.		Description

4.5*		Form of Guarantee (included in Exhibit 4.2)

4.6*		Registration Rights Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., Jeffries & Company, Inc. and the guarantors named therein

4.7*		Intercreditor Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association, The Bank of New York, as trustee and collateral agent

4.8*		Second Lien Security Agreement, dated June 20, 2005, in favor of The Bank of New York, among Rafaella Apparel Group, Inc., the additional grantors listed therein and The Bank of New York

10.1*		Note Purchase Agreement, dated June 13, 2005, among the Company, Jeffries & Company, Inc. and the guarantors named therein

10.2*		Escrow Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., RA Cerberus Acquisition, LLC, Ronald Frankel, and JPMorgan Chase Bank, N.A., as escrow agent

10.3*		Redemption Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., Rafaella Sportswear, Inc. and RA Cerberus Acquisition, LLC

10.4*		Financing Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York

10.5*		Continuing Indemnity Agreement, dated June 20, 2005, between Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association

10.6*		Pledge Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association, as Agent

10.7*		Continuing Letter of Credit Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association

10.8*		Deposit Account Control Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc., The Bank of New York and HSBC Bank USA, National Association

10.9*		Trademark Collateral Security Agreement, dated June 20, 2005, among Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association

10.10*		Factoring Agreement, dated June 20, 2005, among GMAC Commercial Finance LLC and Rafaella Apparel Group, Inc.

10.11*		Rafaella Apparel Group, Inc. Equity Incentive Plan, dated June 20, 2005

10.12*		Employment Agreement, dated June 20, 2005, between Rafaella Apparel Group, Inc. and Chad J. Spooner

10.13*		Amendment to the Employment Agreement, dated June 20, 2005 between Rafaella Apparel Group, Inc. and Chad J. Spooner

10.14*		Employment Agreement, dated as of April 24, 2006, between Rafaella Apparel Group, Inc. and Christa Michalaros

10.15*		Consulting Agreement and General Release, effective as of April 25, 2006, among Rafaella Apparel Group, Inc. and Glenn S. Palmer

10.16*		Employment Agreement dated as of May 1, 2006, between Rafaella Apparel Group, Inc. and Nichole Vowteras

10.17*		Amendment to the Employment Agreement, dated as of June 20, 2006, between Rafaella Apparel Group, Inc. and Nichole Vowteras

10.18*		Employment Agreement, dated as of June 20, 2006, between Rafaella Apparel Group, Inc. and Rosemary Mancino

10.19		Employment Agreement, dated as of January 22, 2007, between Rafaella Apparel Group, Inc. and Jason W. Epstein, previously filed as Exhibit 10.19 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2007, filed May 15, 2007, and herein incorporated by reference.

10.20		Employment Agreement, dated as of January 8, 2008, between Rafaella Apparel Group, Inc. and Husein Jafferjee, previously filed as Exhibit 10.20 to Rafaella’s Current Report on Form 8-K, filed January 14, 2008, and herein incorporated by reference.

10.21		Consent and Amendment No. 3 to Financing Agreement, dated March 4, 2008, among Rafaella Apparel Group, Inc.,

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Exhibit No.		Description

		Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York, previously filed as Exhibit 10.21 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2008, filed May 15, 2008, and herein incorporated by reference.

10.22		Amendment No. 4 to Financing Agreement, dated March 28, 2008, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York, previously filed as Exhibit 10.22 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2008, filed May 15, 2008, and herein incorporated by reference.

10.23		Amendment No. 5 to Financing Agreement, dated May 14, 2008, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York, previously filed as Exhibit 10.23 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2008, filed May 15, 2008, and herein incorporated by reference.

10.24		Amendment to Employment Agreement, dated as of August 28, 2008, between Rafaella Apparel Group, Inc. and Husein Jafferjee, previously filed as Exhibit 10.24 to Rafaella’s Current Report on Form 8-K, filed September 3, 2008, and herein incorporated by reference.

10.25		Agreement for Chairman of Board of Directors, dated as of October 1, 2007, between Rafaella Apparel Group, Inc. and John Kourakos, previously filed as Exhibit 10.25 to Rafaella’s Current Report on Form 8-K, filed September 3, 2008, and herein incorporated by reference.

10.26		Amendment No. 1 to Financing Agreement, dated March 31, 2006, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York.

10.27		Amendment No. 2 to Financing Agreement, dated December 31, 2006, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and Israel Discount Bank of New York.

10.28		Amendment No. 6 to Financing Agreement, dated September 30, 2008, among Rafaella Apparel Group, Inc., Verrazano, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 10.28 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2008, and herein incorporated by reference.

10.29		Amended and Restated Collection Services Factoring Agreement, dated as of December 16, 2008, between Rafaella Apparel Group, Inc. and GMAC Commercial Finance LLC, previously filed as Exhibit 10.29 to Rafaella’s Current Report on Form 8-K, filed December 16, 2008, and herein incorporated by reference.

10.30		Factoring Agreement (Collection), dated December 19, 2008, between Rafaella Apparel Group, Inc. and Wells Fargo Trade Capital, LLC, previously filed as Exhibit 10.29 to Rafaella’s Current Report on Form 8-K, filed December 16, 2008, and herein incorporated by reference.

10.31		Factoring Agreement (Collection), dated December 19, 2008, between Verrazano, Inc. and Wells Fargo Trade Capital, LLC, previously filed as Exhibit 10.29 to Rafaella’s Current Report on Form 8-K, filed December 16, 2008, and herein incorporated by reference.

10.32		Amendment No. 7 to Financing Agreement, dated December 16, 2008, among Rafaella Apparel Group, Inc., Verrazano, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 10.32 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2008, and herein incorporated by reference.

10.33		Amendment No. 8 to Financing Agreement, dated February 10, 2009, among Rafaella Apparel Group, Inc., Verrazano, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 10.33 to Rafaella’s Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2008, and herein incorporated by reference.

10.34		Amendment No. 9 to Financing Agreement, dated September 25, 2009, among Rafaella Apparel Group, Inc., Verrazano, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 99.1 to Rafaella’s Current Report on Form 8-K filed October 1, 2009, and herein incorporated by reference.

10.35		Employment Agreement dated as of April 3, 2009, between Rafaella Apparel Group, Inc. and Lance Arneson, previously filed as Exhibit 99.1 to Rafaella’s Current Report on Form 8-K, filed June 9, 2009, and herein incorporated by reference.

10.36		Letter Agreement dated as of July 28, 2009, between Rafaella Apparel Group, Inc. and Joel H. Newman, previously filed as Exhibit 99.1 to Rafaella’s Current Report on Form 8-K, filed July 28, 2009, and herein incorporated by reference.

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Exhibit No.		Description

10.37		Amended and Restated Employment Agreement, dated as of November 2, 2009, by and among Rafaella Apparel Group, Inc. and Lance D. Arneson, previously filed as Exhibit 10.37 to Rafaella’s Current Report on Form 8-K, filed November 6, 2009, and herein incorporated by reference.

10.38		Amended and Restated Financing Agreement, dated as of February 22, 2010, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and the other lenders signatory thereto from time to time, previously filed as Exhibit 10.38 to Rafaella’s Quarterly Report on Form 10-Q, filed February 22, 2010, and herein incorporated by reference.

10.39		Amendment to the Factoring Agreement between Rafaella Apparel Group, Inc. and Wells Fargo Trade Capital, LLC, dated February 18, 2010, previously filed as Exhibit 10.39 to Rafaella’s Current Report on Form 8-K, filed March 4, 2010, and herein incorporated by reference.

10.40		Amendment to the Factoring Agreement between Verrazano Inc. and Wells Fargo Trade Capital, LLC, dated February 18, 2010, previously filed as Exhibit 10.39 to Rafaella’s Current Report on Form 8-K, filed March 4, 2010, and herein incorporated by reference.

10.41		Form of Amended and Restated Agreement for Chairman of Board of Directors, dated as of May 21, 2010, between Rafaella Apparel Group, Inc. and John Kourakos, previously filed as Exhibit 10.38 to Rafaella’s Quarterly Report on Form 10-Q, filed May 24, 2010, and herein incorporated by reference.

10.42		Amended and Restated Financing Agreement, dated as of May 21, 2010, among Rafaella Apparel Group, Inc., Verrazano, Inc., HSBC Bank USA, National Association and the other lenders signatory thereto from time to time, previously filed as Exhibit 10.39 to Rafaella’s Quarterly Report on Form 10-Q, filed May 24, 2010, and herein incorporated by reference.

10.43		Reaffirmation of Trademark Collateral Security Agreement, dated May 21, 2010, among Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 10.40 to Rafaella’s Quarterly Report on Form 10-Q, filed May 24, 2010, and herein incorporated by reference.

10.44		Reaffirmation of Stock Pledge Agreement, dated May 21, 2010, among Rafaella Apparel Group, Inc. and HSBC Bank USA, National Association, previously filed as Exhibit 10.41 to Rafaella’s Quarterly Report on Form 10-Q, filed May 24, 2010, and herein incorporated by reference.

10.45		Rafaella Apparel Group, Inc. Equity Incentive Plan Award Agreement between the Company and John Kourakos, previously filed as Exhibit 10.42 to Rafaella’s Current Report on Form 8-K, filed June 17, 2010, and herein incorporated by reference.

10.46		Rafaella Apparel Group, Inc. Equity Incentive Plan Award Agreement between the Company and Lance D. Arneson, previously filed as Exhibit 10.43 to Rafaella’s Current Report on Form 8-K, filed June 17, 2010, and herein incorporated by reference.

10.47		Logistics and Distribution Services Agreement by and between Rafaella Apparel Group, Inc. and IDS USA Inc., dated as of June 17, 2010, previously filed as Exhibit 10.1 to Rafaella’s Current Report on Form 8-K, filed June 23, 2010, and herein incorporated by reference.

10.48		Amended and Restated Employment Agreement, dated as of October 13, 2010, by and among Rafaella Apparel Group, Inc. and Richard Metzger, previously filed as Exhibit 10.48 to Rafaella’s Quarterly Report on Form 10-K, filed October 13, 2010, and herein incorporated by reference.

10.49		Rafaella Apparel Group, Inc. Equity Incentive Plan Award Agreement between the Company and Richard Metzger, previously filed as Exhibit 10.49 to Rafaella’s Quarterly Report on Form 10-K, filed October 13, 2010, and herein incorporated by reference.

21.1		List of subsidiaries of Rafaella Apparel Group, Inc., previously filed as Exhibit 21.1 to Rafaella’s Quarterly Report on Form 10-K, filed October 13, 2010, and herein incorporated by reference

31.1**		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2**		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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* Previously filed as an exhibit to the Registration Statement on Form S-4 (Reg. No.: 333-138342) originally filed with the SEC on November 1, 2006.

** Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RAFAELLA APPAREL GROUP, INC.

November 15, 2010	By:	/s/ Christa Michalaros
		Christa Michalaros
		Chief Executive Officer and Director
		(Principal Executive Officer)

November 15, 2010	By:	/s/ Lance D. Arneson
		Lance D. Arneson Chief Financial Officer (Principal Financial and Accounting Officer)

RAFAELLA APPAREL GROUP,INC. 10-Q