<PAGE>
 
                               FINANCIAL SUMMARY                      EXHIBIT 13
                                                                      ----------
<TABLE>
<CAPTION>
 
 
(Thousands except per share amounts, ratios and store and associate data)
--------------------------------------------------------------------------------------------------------------------------------
Fiscal Year                                          1996           1995/./       1994         1993         1992         1991*
 ................................................................................................................................
<S>                                             <C>             <C>            <C>          <C>          <C>          <C>
SUMMARY OF OPERATIONS
Net Sales                                          $2,997,340     $2,516,555   $2,108,310   $1,630,828   $1,325,326   $1,199,496
Gross Income                                       $1,055,045     $  820,928   $  702,287   $  496,500   $  397,936   $  366,938
Operating Income                                   $  458,142     $  386,296   $  337,988   $  218,462   $  167,287   $  177,837
Operating Income as a Percentage of Sales                15.3%          15.4%        16.0%        13.4%        12.6%        14.8%
Income Before Income Taxes                         $  430,210     $  340,059   $  337,988   $  218,462   $  167,287   $  177,837
Net Income                                         $  258,210     $  204,059   $  202,988   $  132,462   $  102,287   $  106,404
Net Income as a Percentage of Sales                       8.6%           8.1%         9.6%         8.1%         7.7%         8.9%
 ................................................................................................................................
OTHER FINANCIAL INFORMATION
Total Assets                                       $1,135,162     $  943,353   $  768,551   $  655,061   $  611,429   $  487,388
Return on Average Assets                                   25%            24%          29%          21%          19%          26%
Working Capital                                    $  333,295     $  241,177   $  220,757   $  157,464   $  151,870   $  169,703
Current Ratio                                             2.0            2.0          2.6          2.3          2.6          3.1
Capital Expenditures                               $  123,630     $  128,229   $  107,037   $   81,145   $   78,792   $   76,975
Long-Term Debt                                     $  350,000     $  350,000            -            -            -            -
Debt-to-Equity Ratio                                       87%           130%           -            -            -            -
Shareholders' Equity                               $  402,053     $  268,937   $  573,195   $  469,136   $  455,180   $  371,188
Return on Average Shareholders' Equity                     77%            48%          39%          29%          25%          36%
Comparable Store Sales Increase                             7%             1%          13%           9%           1%           8%
 ................................................................................................................................
PER SHARE RESULTS
Net Income                                         $     1.02     $     0.92   $     0.97   $     0.63   $     0.49   $     0.51
Book Value                                         $     1.59     $     1.06   $     2.73   $     2.23   $     2.17   $     1.77
Weighted Average Shares Outstanding                   252,942        221,300      210,000      210,000      210,000      210,000
 ................................................................................................................................
STORES AND ASSOCIATES AT END OF YEAR
Total Number of Stores Open                             1,609          1,293        1,037          879          743          662
Selling Square Feet                                 5,047,000      4,230,000    3,419,000    2,915,000    2,349,000    1,895,000
Number of Associates                                   43,900         39,300       30,100       22,500       15,900       14,200
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/./ Fifty-three week fiscal year.
*   Includes the results of companies acquired subsequent to the date of
    acquisition.


<TABLE> 
<CAPTION> 
NUMBER OF STORES
<S>                     <C> 
1992 ----------------   743
1993 -------------------   879
1994 ---------------------- 1,037
1995 ------------------------- 1,293
1996 ---------------------------- 1,609
</TABLE> 

                   Intimate Brands, Inc. 30 1996 Annual Report
<PAGE>
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS



RESULTS OF OPERATIONS

Net sales for the 1996 thirteen-week fourth quarter were $1.161 billion, an
increase of 19% from $977 million for the fourteen-week fourth quarter a year
ago. Operating income before special and nonrecurring items was $281 million, up
23% compared to $228 million last year. Earnings per share before special and
nonrecurring items were up 25% to $0.65 compared to $0.52 in 1995. The Company
recognized a $12 million special and nonrecurring charge in the fourth quarter
of 1996 reflecting the early 1997 sale of Penhaligon's, a wholly-owned, U.K.-
based subsidiary. The 1996 operating results for Penhaligon's, representing
sales of $5.5 million and a pre-tax loss of $3.1 million, are included in the
Company's consolidated results. After reflecting the Penhaligon's charge,
earnings per share were $0.62 for the quarter, up 19% over last year.

  Net sales for the fifty-two week fiscal year ended February 1, 1997 increased
19% to $2.997 billion from $2.517 billion for the fifty-three week last year.
Operating income for the year before special and nonrecurring charges increased
22% to $470 million from 1995's $386 million. Earnings per share before the
Penhaligon's charge were $1.05 in 1996 compared to $0.85 on a pro-forma basis a
year ago, an increase of 24%. After reflecting the Penhaligon's charge, the
Company earned $1.02 per share, an increase of 20% over last year's pro-forma
results.

  The table below includes pro-forma 1995 results reflecting 1) approximately
250 million shares outstanding subsequent to the initial public offering
("IPO"), 2) interest expense on only the Company's outstanding long-term debt
subsequent to the IPO for the entire year and 3) the elimination of interest
earned on temporary excess cash related to the IPO of the Company. 

Divisional highlights include the following:

 . Victoria's Secret is now a $2 billion brand. Victoria's Secret Stores achieved
  an annual sales increase of 13% to $1.45 billion while operating income
  increased 14%, bolstered by strong fourth quarter margins. Building strong
  brand equity throughout the year with new products like the Perfect Silhouette
  bra and the growing Victoria's Secret Bath & Fragrance business has put
  Victoria's Secret Stores in an excellent position as we begin 1997.

 . Victoria's Secret Catalogue experienced a year that started out more slowly
  than expected, but regained momentum in the last half of the year. Sales for
  the year were $684 million, up 3%. Although fourth quarter sales were
  basically flat, operating profits grew by 27%.

 . Bath & Body Works, Intimate Brands' fastest growing and highest profit margin
  business, grew 1996 sales by 59% to $753 million and operating profits by 55%.
  Two hundred and fifty-two stores were added, solidifying Bath and Body Works'
  position in the personal care retail industry. In the fourth quarter, sales
  increased 58% and profits were up 60%, driven by a successful Holiday selling
  season. Bath and Body Works anticipates opening approximately 200 stores in
  1997, including an additional 35 Bath & Body Works at Home test stores.

<TABLE>
<CAPTION>
Year-to-Date
 .............................................................................. 
                                    As      Pro-forma                       As
                              Reported    Adjustments    Pro-forma    Reported
                           February 3,    February 3,  February 3, February 1,
                                  1996           1996         1996        1997
------------------------------------------------------------------------------ 
<S>                          <C>         <C>            <C>          <C>
Operating income              $386,296             --     $386,296    $458,142
Interest expense               (49,536)       $17,364      (32,172)    (32,544)
Other income, net                3,299         (1,430)       1,869       4,612
------------------------------------------------------------------------------  
Income before income taxes     340,059         15,934      355,993     430,210
Provision for income taxes     136,000          6,400      142,400     172,000
 .............................................................................. 
Net income                    $204,059        $ 9,534     $213,593    $258,210
------------------------------------------------------------------------------  
Net income per share              $.92                        $.85       $1.02
------------------------------------------------------------------------------  
Weighted average shares
 outstanding                   221,300         29,260      250,560     252,942
------------------------------------------------------------------------------  
</TABLE>

                  Intimate Brands, Inc. 31 1996 Annual Report
<PAGE>
 
FINANCIAL SUMMARY

The following summarized financial data compares fiscal 1996 to the comparable
periods for 1995 and 1994:

<TABLE>
<CAPTION>
                                                                                                    % Change
                                                                                             ......................
Net Sales (millions):                                            1996     1995*     1994     1996-1995    1995-1994
 ................................................................................................................... 
<S>                                                            <C>      <C>       <C>        <C>          <C> 
 Victoria's Secret Stores                                      $1,450   $1,286    $1,181           13%           9%
 Victoria's Secret Catalogue                                      684      661       569            3%          16%
 Bath & Body Works                                                753      475       260           59%          83%
 Cacique                                                           88       80        92           10%         (13%)
 Other                                                             22       15         6
 ................................................................................................................... 
 Total                                                         $2,997   $2,517    $2,108           19%          19%
 ................................................................................................................... 
Increase (Decrease) in Comparable Store Sales:
 Victoria's Secret Stores                                           5%      (1%)      12%
 Bath & Body Works                                                 11%      21%       39%
 Cacique                                                            8%     (20%)     (12%)
 ................................................................................................................... 
 Total                                                              7%       1%       13%
 ................................................................................................................... 
Retail sales increase attributable to
 new and remodeled stores                                          19%      17%       16%
Retail sales per average selling square foot                   $  495   $  483    $  486            2%          (1%)
Retail sales per average store (thousands)                     $1,583   $1,585    $1,606            0%          (1%)
Average store size at the end of year (selling square feet)     3,137    3,271     3,297           (4%)         (1%)
Retail selling square feet (thousands)                          5,047    4,230     3,419           19%          24%
 ................................................................................................................... 
Number of stores:
 Beginning of year                                              1,293    1,037       879
  Opened                                                          325      260       166
  Closed                                                           (9)      (4)       (8)
 ................................................................................................................... 
 End of year                                                    1,609    1,293     1,037           24%          25%
-------------------------------------------------------------------------------------------------------------------
</TABLE>

* Represents fifty-three week fiscal year 

Net Sales

Net sales for the thirteen-week fourth quarter of 1996 increased by 19% to
$1.161 billion over the fourteen-week fourth quarter of 1995. Excluding the
extra fifty-third week last year, net sales increased 24%. This increase was
primarily attributable to the net addition of 316 new stores and 64
remodel/expansions, which accounted for 83% of the total net sales increase. The
balance of the increase was due principally to the 8% increase in comparable
store sales and an $18 million increase in catalogue and other sales, offset by
the extra week in 1995. In 1995, fourth quarter sales increased 22% to $977
million over 1994. The sales increase was primarily attributable to 256 net new
and 60 remodeled stores, which accounted for 69% of the increase. The balance of
the increase came from the extra week (22% of the total increase), a 3% increase
in catalogue sales and a 1% increase in comparable store sales.

  Sales for 1996, a fifty-two week fiscal year, increased by 19% to $2.997
billion over the fifty-three week 1995 fiscal year. Excluding the fifty-third
week in 1995, net sales increased 21% for the year. The sales increase was
attributable to new and remodeled stores (accounting for 73% of the total net
sales increase), and a 7% increase in comparable store sales (25% of the total
increase), and a $41 million increase in catalogue and other sales, offset by
the extra week in 1995. In 1995, sales increased by 19% to $2.517 billion from
1994. The sales increase was attributable to new and remodeled stores, which
accounted for 65% of the total net sales increase. In addition, a 14% increase
in catalogue sales accounted for 19% of the total increase, 10% from the extra
week in 1995 and a 1% increase in comparable store sales comprised the balance.

  In 1996, Victoria's Secret Stores sales increased 13% to $1.450 billion over
1995. The sales increase was primarily attributable to the net addition of 65
new stores and 312,000 selling square feet (70% of the total increase). The
remaining increase came from a 5% increase in comparable store sales, slightly
offset by the impact of the extra week in 1995. In 1995, Victoria's Secret
Stores sales increased 9% to $1.286 billion over the fifty-two week fiscal year
1994. The increase was primarily attributable to the net addition of 70 stores
and 428,000 selling square feet, as the increase attributable to the extra week
in 1995 was offset by the 1% decrease in comparable store sales.

  In 1996, Bath & Body Works sales increased 59% to $753 million over 1995. The
increase was primarily attributable to a net increase of 252 new stores and
506,000 selling square feet, which repre-


                  Intimate Brands, Inc. 32 1996 Annual Report
<PAGE>
 
sents 84% of the total increase in net sales. The remaining increase came from
the 11% increase in comparable store sales, partially offset by the extra week
in 1995. In 1995, Bath & Body Works sales increased by 83% to $475 million over
the fifty-two week period in 1994. The increase was attributable to a net
increase of 180 stores and 359,000 selling square feet (73% of the total
increase). The remainder of the increase was due to a 21% increase in comparable
store sales and the extra week in 1995.

 In 1996, Victoria's Secret Catalogue net sales increased 3% to $684 million
over 1995. A 7% increase in net sales attributable to the 11% increase in
catalogue circulation for the year was partially offset by the impact of the
extra week in 1995. In 1995, Victoria's Secret Catalogue sales increased 16% to
$661 million over the fifty-two week period in 1994. Catalogue circulation
increased 25% for the year, which accounted for 84% of the net sales increase.
The remaining increase was due to the extra week in 1995.

Gross Income

Gross income increased as a percentage of net sales to 40.4% for the fourth
quarter 1996 from 37.4% for the same period in 1995. The rate increase is
primarily due to a 1.8% increase in merchandise margins (representing gross
income before the deduction of buying and occupancy costs) as well as a 1.2%
rate reduction in buying and occupancy costs. The increase in gross income rate
is primarily the result of the growth of Bath & Body Works in the overall mix of
net sales for the Company. Bath & Body Works 1996 fourth quarter sales were
approximately 32% of the total Company compared to 24% in 1995. Bath & Body
Works has historically recorded significantly higher merchandise margins on
personal care products (higher initial markups) and lower buying and occupancy
costs (due to smaller store size and higher sales productivity), as compared
with the balance of the Company. The Company believes that the continued strong
growth of Bath & Body Works will have a positive ongoing impact on gross income
as a percent of total Company sales. The increase in merchandise margins was
also impacted by increased rates at both Bath & Body Works (primarily from lower
promotional activity), and Victoria's Secret Stores (primarily from higher
initial markup). Buying and occupancy costs were also favorably impacted by
Victoria's Secret Catalogue, which experienced a decrease in catalogue and
related costs, due to lower paper prices.

  In fourth quarter 1995, gross income decreased as a percent of net sales to
37.4% from 38.3% for the same period in 1994. The decrease was primarily due to
a 0.7% decrease in merchandise margins, as well as a 0.2% increase in buying and
occupancy costs expressed as a percentage of sales. The decrease in merchandise
margins was primarily the result of Victoria's Secret Stores' decline from
1994's outstanding performance. This was offset to some extent by the growth of
Bath & Body Works from 17% to 24% of total Company sales. The increase in buying
and occupancy costs was primarily a result of higher catalogue and related
costs. Significant paper and postage cost increases pushed catalogue and related
expense up by 32% over 1994, on a 25% increase in catalogues mailed.

  Gross income for 1996, expressed as a percent of net sales, increased 2.6% to
35.2% from 32.6% in 1995. The increase is attributed to a 1.5% increase in
merchandise margins and a 1.0% decrease in buying and occupancy costs. The
primary factor resulting in the increase is the change in the mix in sales of
the Company, as Bath & Body Works increased from 19% of total sales in 1995 to
25% in 1996. Victoria's Secret Stores contributed to the increase in gross
income as a percent of net sales by improving merchandise margins through
increased initial markup. In 1995, gross income, expressed as a percentage of
net sales, was 32.6%, which was 0.7% below the rate for 1994. The decrease was
primarily due to a 0.4% increase in buying and occupancy costs as a percent of
sales and a 0.3% decrease in merchandise margins. The increase in buying and
occupancy costs was primarily a result of higher catalogue and related costs.
The decrease in merchandise margin was primarily from Victoria's Secret Stores'
decline from 1994's outstanding performance. This was partially offset by the
growth of Bath & Body Works, from 12% to 19% of total sales, with its higher
merchandise margins than Company average.

General, Administrative and Store
Operating Expenses

General, administrative and store operating expenses increased as a percent of
net sales to 16.2% in the fourth quarter of 1996 from 14.1% and 13.5% for the
same periods in 1995 and 1994. This increase is primarily the result of the
growth of Bath & Body Works net sales in the fourth quarter from 17% of total
Company sales in 1994, to 24% in 1995 and 32% in 1996. Bath & Body Works, which
operates in significantly smaller stores, has historically recorded higher than
Company average general, administrative and store operating expenses as a
percent of sales


                  Intimate Brands, Inc. 33 1996 Annual Report
<PAGE>
 
due to its emphasis on point of sale marketing and sales floor coverage.
Expectations are that the continued growth of Bath & Body Works, as a percent of
the total Company net sales, will continue to cause these costs for the total
Company, expressed as a percent of net sales, to increase. In addition to the
shift in the sales mix, the increase in rate is somewhat exacerbated due to the
investments made in store staffing and management and point of sale marketing
for the Victoria's Secret Bath & Fragrance business.

  General, administrative and store operating expenses, expressed as a percent
of sales, were 19.5% for fiscal year 1996 compared to 17.3% for 1995. The 1996
expenses increased primarily from the growth of Bath & Body Works percentage of
the total Company sales mix and investments made in store staffing and the
marketing for Victoria's Secret Bath & Fragrance business. The 1995 expenses
were held flat with 1994 as a percent of sales, as expenses grew at a slower
rate than sales at Victoria's Secret Stores, Victoria's Secret Catalogue and
Bath & Body Works, despite the growth of Bath & Body Works, which has
historically incurred an expense rate higher than the Company average.

Special and Nonrecurring Item

The Company recognized a $12 million charge in the fourth quarter of 1996
representing the estimated loss on the early 1997 sale of Penhaligon's, which
had 1996 sales of $5.5 million and a $3.1 million pre-tax operating loss (see
Note 3).

Operating Income

Operating income, as a percent of sales, was 15.3%, 15.4% and 16.0% for fiscal
years 1996, 1995 and 1994. The decrease in operating income as a percent of net
sales in 1996 was primarily due to the $12 million Penhaligon's charge. Without
that charge, operating income as a percent of sales would have been
15.7%, a 0.3% increase. Improved gross income and the changing sales mix of the
Company, as mentioned above, were responsible for the increase.

  The 1995 operating income rate decrease of 0.6% came primarily from the
decline of Victoria's Secret Stores merchandise margins and the increased paper
and postage expenses at Victoria's Secret Catalogue. These reductions were
partially offset by higher margins at Bath & Body Works and the growth of Bath &
Body Works to 19% of total Company sales from 12% in 1994.

Interest Expense and Other Income

In 1996, the Company incurred $8.1 million and $32.5 million in interest for the
fourth quarter and year, compared to $9.6 million and $49.5 million in 1995 for
the same periods. Interest expense for 1996 resulted primarily from the $350
million of long-term debt, whereas 1995 is comprised of $21.7 million of
interest on $350 million of long-term debt which was outstanding for
approximately nine months of the year. The balance primarily resulted from $800
million of short-term debt. All of the short-term debt was repaid in 1995 with
cash made available by the initial public offering and cash flow from
operations.

  In 1996, the Company earned $1.6 million and $4.6 million in other income for
the fourth quarter and year, compared to $1.9 million and $3.3 million in 1995
for the same periods. This other income is primarily interest income (based upon
the Federal Reserve AA composite 30-day rate) earned from excess cash from
operations managed through The Limited, Inc.'s centralized cash management
system (see Note 10).

FINANCIAL CONDITION

The Company's consolidated balance sheet as of February 1, 1997 provides
evidence of financial strength and flexibility. A more detailed discussion of
liquidity, capital resources and capital requirements follows.

Liquidity and Capital Resources

Cash provided by operating activities and cash funding from The Limited, Inc.'s
centralized cash management systems provide the resources to support operations,
including projected growth, seasonal requirements and capital expenditures. A
summary of the Company's working capital position and capitalization follows
(thousands):

<TABLE>
<CAPTION>
                                                  1996       1995       1994
 ..............................................................................
<S>                                             <C>        <C>        <C>
Cash Provided by Operating
  Activities                                    $337,664   $323,908   $205,593
Working Capital                                 $333,295   $241,177   $220,757
Capitalization:
  Long-Term Debt                                $350,000   $350,000         --
  Deferred Income Taxes                           50,935     71,475   $ 52,957
  Shareholders' Equity                           402,053    268,937    573,195
 ..............................................................................
Total Capitalization                            $802,988   $690,412   $626,152
------------------------------------------------------------------------------ 
</TABLE> 

The Company considers the following to be useful measures of liquidity and
 capital resources:

<TABLE> 
<CAPTION> 
                                                    1996       1995       1994
 ...............................................................................
<S>                                                 <C>        <C>        <C> 
Debt-to-Capitalization Ratio                          44%        51%      N/M*
(Long-Term Debt Divided by
Total Capitalization)
Cash Flow to Capital Investment                      273%       253%       192%
(Net Cash Provided by Operating
Activities Divided by
Capital Expenditures)
-------------------------------------------------------------------------------
</TABLE>
*N/M = Not Meaningful


                  Intimate Brands, Inc. 34 1996 Annual Report
<PAGE>
 
The Company's operations are seasonal in nature and are comprised of two
principal selling seasons: Spring (the first and second quarters) and Fall (the
third and fourth quarters). The fourth quarter, including the Holiday season,
has accounted for approximately 39% of net sales in each of the last three
years. Accordingly, cash requirements are highest in the third quarter as the
Company's inventory builds in anticipation of the Holiday selling season, which
in turn produces a substantial portion of the Company's operating cash flow for
the year.

  Net cash provided by operating activities totaled $337.7 million, $323.9
million and $205.6 million for 1996, 1995 and 1994. In 1996, the net cash used
to fund the increase in inventory approximated $76.0 million versus $63.4
million and $69.9 million in 1995 and 1994. In both 1996 and 1995 inventories
increased by 21%, consistent with the Company's 19% increase in net sales. In
1996, accounts payable and accrued expenses increased principally as a result of
a $32.4 million increase in merchandise/trade payables, $11.1 million in
payroll and related liabilities and accrued rent of $6.3 million. These
increases are all due to the overall growth of the Company. In 1995, accrued
expenses increased principally from $17.2 million of interest and $7.3 million
of rent from store growth. Prior to 1995, the Company had no direct debt and
paid no interest. Beginning in 1995, income tax liabilities were recorded on the
Company's balance sheet. Prior to this, the Company transferred all current
income tax liabilities to The Limited, Inc. as incurred. As a result, income
taxes increased approximately $92.8 million in 1995.

  Investing activities were all for capital expenditures, which are primarily
for new and remodeled stores.

 Included in financing activities were cash dividends paid of $.48 per share.
Other financing activities in 1996 include the net receipt of $34.1 million from
the intercompany and cash management account activity with The Limited, Inc.
(see Note 10). Prior to the capitalization of the Company, such amounts were
reflected as a component of shareholders' equity. Other changes in shareholders'
equity in 1995 and 1994 represent net intercompany activity such as that
described in Note 10 prior to the incorporation of the Company. The remaining
changes in financing activities in 1995 represent the activities related to the
formation of the Company and the related initial public offering.

Capital Expenditures

Capital expenditures, primarily for new and remodeled stores, amounted to $123.6
million, $128.2 million and $107.0 million for 1996, 1995 and 1994, of which
$91.5 million, $109.1 million and $62.4 million, was for new stores and
remodeling and expanding existing stores. The Company expended $10.4 million in
1994 for leasehold improvements to a new catalogue telemarketing center in
Kettering, Ohio, to expand Victoria's Secret Catalogue's operations.

<TABLE>
<CAPTION>
                                                                Change from Prior Year
                                                                ......................
                                Goal-1997    1996       1995     1997-1996   1996-1995
 ......................................................................................
<S>                             <C>        <C>        <C>        <C>         <C>
Victoria's Secret Stores
 Stores                               801        736        671         65          65
 Selling Sq. Ft.                3,615,000  3,326,000  3,014,000    289,000     312,000
Bath &Body Works
 Stores                               960        750        498        210         252
 Selling Sq. Ft.                1,869,000  1,354,000    848,000    515,000     506,000
Cacique
 Stores                               118        119        120         (1)         (1)
 Selling Sq. Ft.                  363,000    365,000    366,000     (2,000)     (1,000)
Penhaligon's*
 Stores                                --          4          4         (4)         --
 Selling Sq. Ft.                       --      2,000      2,000     (2,000)         --
 ......................................................................................
Total Retail Divisions
 Stores                             1,879      1,609      1,293        270         316
 Selling Sq. Ft.                5,847,000  5,047,000  4,230,000    800,000     817,000
--------------------------------------------------------------------------------------
</TABLE>
* Reflects sale in early 1997.


                  Intimate Brands, Inc. 35 1996 Annual Report
<PAGE>
 
  The Company anticipates spending $145-$170 million in 1997 for capital
expenditures, of which $120-$140 million will be for new stores, the relocation
and expansion of existing stores and related improvements for the retail
businesses. Also included in the capital expenditure estimate is about $20
million for equipment and leasehold improvements for the Bath & Body Works new
distribution center and world headquarters, scheduled for completion in the
summer of 1997.

  The Company has announced its intention to add approximately 800,000 selling
square feet in 1997, which will represent a 16% increase over year-end 1996. It
is anticipated the increase will result from the addition of approximately 270
net new stores and the expansion of approximately 35 stores. The Company expects
that future capital expenditures will be funded principally by net cash provided
by operating activities.

Impact of Inflation

The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on the results of operations and
financial condition have been minor.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report, the Form 10-K or made by management of the Company involve risks
and uncertainties, and are subject to change based on various important factors.
The following factors, among others, in some cases have affected and in the
future could affect the Company's financial performance and actual results and
could cause actual results for 1997 and beyond to differ materially from those
expressed or implied in any such forward-looking statements: changes in consumer
spending patterns, consumer preferences and overall economic conditions, the
impact of competition and pricing, changes in weather patterns, political
stability, currency and exchange risks and changes in existing or potential
duties, tariffs or quotas, postal rate increases and charges, paper and printing
costs, availability of suitable store locations at appropriate terms, ability to
develop new merchandise and ability to hire and train associates.



                  Intimate Brands, Inc. 36 1996 Annual Report
<PAGE>
 
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
 
 
(Thousands except per share amounts)
------------------------------------------------------------------------------------------------
                                                               1996           1995          1994
 ................................................................................................
<S>                                                      <C>           <C>           <C>
NET SALES                                               $ 2,997,340    $ 2,516,555   $ 2,108,310
Cost of Goods Sold, Occupancy and Buying Costs           (1,942,295)    (1,695,627)   (1,406,023)
 ................................................................................................
GROSS INCOME                                              1,055,045        820,928       702,287
General, Administrative and Store Operating Expenses       (584,903)      (434,632)     (364,299)
Special and Nonrecurring Item                               (12,000)             -             -
 ................................................................................................
OPERATING INCOME                                            458,142        386,296       337,988
Interest Expense                                            (32,544)       (49,536)            -
Other Income, Net                                             4,612          3,299             -
 ................................................................................................
INCOME BEFORE INCOME TAXES                                  430,210        340,059       337,988
Provision for Income Taxes                                  172,000        136,000       135,000
 ................................................................................................
NET INCOME                                              $   258,210    $   204,059   $   202,988
 ................................................................................................
NET INCOME PER SHARE                                    $      1.02    $       .92   $       .97
------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial 
Statements.



     NET SALES CAGR 23%                              NET INCOME CAGR 26%  
       (IN MILLIONS)                                   (IN MILLIONS)      
  (Compound Annual Growth                                                 
   Rate, last four years)                       
                                                
  [BAR GRAPH APPEARS HERE]                        [BAR GRAPH APPEARS HERE]
                                                                          



                   Intimate Brands, Inc. 37 1996 Annual Report
<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
 
(Thousands)
------------------------------------------------------------------------------
ASSETS                                             Feb. 1, 1997   Feb. 3, 1996
 ..............................................................................
<S>                                                <C>            <C>
CURRENT ASSETS
  Cash and Equivalents                               $  135,111      $  12,095
  Accounts Receivable                                    18,750         16,928
  Inventories                                           434,800        358,846
  Intercompany Receivable                                    60         34,136
  Other                                                  68,255         66,430
 ..............................................................................
TOTAL CURRENT ASSETS                                    656,976        488,435
 ..............................................................................
PROPERTY AND EQUIPMENT, NET                             395,647        358,032
 ..............................................................................
OTHER ASSETS                                             82,539         96,886
 ..............................................................................
TOTAL ASSETS                                         $1,135,162      $ 943,353
------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
 ..............................................................................
CURRENT LIABILITIES
  Accounts Payable                                   $   88,896      $  64,452
  Accrued Expenses                                      136,598        104,023
  Income Taxes                                           98,187         78,783
 ..............................................................................
TOTAL CURRENT LIABILITIES                               323,681        247,258
 ..............................................................................
LONG-TERM DEBT                                          350,000        350,000
 ..............................................................................
DEFERRED INCOME TAXES                                    50,935         71,475
 ..............................................................................
OTHER LONG-TERM LIABILITIES                               8,493          5,683
 ..............................................................................
SHAREHOLDERS' EQUITY
  Common Stock                                            2,527          2,527
  Paid-In Capital                                       675,240        675,421
  Retained Earnings (Deficit)                          (272,071)      (409,011)
 ..............................................................................
                                                        405,696        268,937
 ..............................................................................
  Less: Treasury Stock, at Cost                          (3,643)             -
 ..............................................................................
TOTAL SHAREHOLDERS' EQUITY                              402,053        268,937
 ..............................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $1,135,162      $ 943,353
------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial 
Statements.



                  Intimate Brands, Inc. 38 1996 Annual Report
<PAGE>
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
 
 
(Thousands)
------------------------------------------------------------------------------------------------------------------------------------
                                                                Common Stock
                                                            ....................
                                                                                             Retained    Treasury            Total 
                                                            Shares       Par     Paid-In     Earnings      Stock,    Shareholders' 
                                                       Outstanding     Value     Capital     (Deficit)    at Cost           Equity 
 ....................................................................................................................................
<S>                                                    <C>             <C>       <C>         <C>         <C>         <C>
BALANCE, JANUARY 29, 1994                                  210,000         -           -    $ 469,136           -        $ 469,136 
Intercompany Activity                                            -         -           -      (98,929)          -          (98,929)
Net Income                                                       -         -           -      202,988           -          202,988 
 ....................................................................................................................................

BALANCE, JANUARY 28, 1995                                  210,000         -           -    $ 573,195           -        $ 573,195 
Intercompany Activity                                            -         -           -       (5,941)          -           (5,941)
Transfer of Equity to Debt ($350,000 Long-Term
     Debt and $550,000 Short-Term Borrowings)                    -         -           -     (900,000)          -         (900,000)
Cash Dividend to Parent Prior to Initial
     Public Offering                                             -         -           -     (250,000)          -         (250,000)
Sale of Common Stock in Initial Public Offering             42,700    $2,527    $675,421            -           -          677,948 
Net Income                                                       -         -           -      204,059           -          204,059 
Cash Dividends to Shareholders                                   -         -           -      (30,324)          -          (30,324)
 ....................................................................................................................................

BALANCE, FEBRUARY 3, 1996                                  252,700    $2,527    $675,421    $(409,011)          -        $ 268,937 
Net Income                                                       -         -           -      258,210           -          258,210 
Cash Dividends to Shareholders                                   -         -           -     (121,270)          -         (121,270)
Purchase of Treasury Stock                                    (235)        -           -            -     $(3,986)          (3,986)
Exercise of Stock Options and Other                             33         -        (181)           -         343              162 
 ....................................................................................................................................

BALANCE, FEBRUARY 1, 1997                                  252,498    $2,527    $675,240    $(272,071)    $(3,643)       $ 402,053 
------------------------------------------------------------------------------------------------------------------------------------

</TABLE> 
The accompanying Notes are an integral part of these Consolidated Financial 
Statements.




                  Intimate Brands, Inc. 39 1996 Annual Report
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
 
 
(Thousands)
---------------------------------------------------------------------------------

                                                     1996        1995        1994 
 .................................................................................
<S>                                             <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net Income                                      $ 258,210   $ 204,059   $ 202,988 
 .................................................................................
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH
FLOWS

Depreciation and Amortization                      85,573      75,686      69,331 
Special and Nonrecurring Item                      12,000           -           - 
 .................................................................................
CHANGE IN ASSETS AND LIABILITIES

Accounts Receivable                                (1,822)     (4,888)     (3,315)
Inventories                                       (75,954)    (63,374)    (69,923)
Accounts Payable and Accrued Expenses              53,510      33,459      13,149 
Income Taxes                                       (1,136)     92,808      (4,549)
Other Assets and Liabilities                        7,283     (13,842)     (2,088)
 .................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES         337,664     323,908     205,593 
 .................................................................................
CASH USED FOR INVESTING ACTIVITIES

Capital Expenditures                             (123,630)   (128,229)   (107,037)
 .................................................................................
FINANCING ACTIVITIES

Proceeds from Short-Term Borrowings                     -     250,000           - 
Repayments of Short-Term Borrowings                     -    (800,000)          - 
Proceeds from Sale of Common Stock                      -     677,948           - 
Dividends Paid                                   (121,270)   (280,324)          - 
Purchase of Treasury Stock                         (3,986)          -           - 
Decrease (Increase) in Intercompany Receivable     34,076     (34,136)          - 
Other Changes in Shareholders' Equity                 162      (5,941)    (98,929)
 .................................................................................
NET CASH USED FOR FINANCING ACTIVITIES            (91,018)   (192,453)    (98,929)
 .................................................................................
NET INCREASE (DECREASE) IN CASH AND
 EQUIVALENTS                                      123,016       3,226        (373)

Cash and Equivalents, Beginning of Year            12,095       8,869       9,242 
 .................................................................................
CASH AND EQUIVALENTS, END OF YEAR               $ 135,111   $  12,095   $   8,869 
---------------------------------------------------------------------------------
</TABLE> 
The accompanying Notes are an integral part of these Consolidated Financial 
Statements.

      WORKING CAPITAL
       (IN MILLIONS)

   [GRAPH APPEARS HERE]

     CAPITAL EXPENDITURES
        (IN MILLIONS)

     [GRAPH APPEARS HERE]


                  Intimate Brands, Inc. 40 1996 Annual Report
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

Intimate Brands, Inc. (the "Company") was incorporated on May 16, 1995, and on
May 19, 1995 acquired the assets and liabilities of the Intimate Brands
Businesses in exchange for 210 million shares of Class B common stock issued to
The Limited, Inc. The Intimate Brands Businesses include specialty retail and
catalogue operations which offer women's intimate and other apparel, personal
care products and accessories, and, prior to their transfer to the Company, were
direct and indirect subsidiaries of The Limited, Inc. They consisted of
Victoria's Secret Stores, Victoria's Secret Catalogue, Bath & Body Works,
Cacique, Penhaligon's and Gryphon Development. An initial public offering (the
"Offering") of 40 million shares of the Company's Class A common stock was
consummated on October 24, 1995, and on November 21, 1995, the Company sold an
additional 2.7 million shares as a result of underwriters exercising options to
purchase additional shares at the Offering price per share to cover over-
allotments. After these transactions, approximately 83% of the outstanding
common stock of the Company was owned by The Limited, Inc.

  The net proceeds received by the Company from the sale of the common stock
in the above transactions approximated $678 million and were used to repay
borrowings under a $250 million bank credit agreement and approximately $428
million of short-term intercompany debt.

  An additional $122 million of short-term intercompany debt was paid from cash
flow generated from operations during the fourth quarter of 1995. All short-term
intercompany debt was fully repaid as of February 3, 1996.

  The accompanying consolidated financial statements include the historical
financial statements of, and transactions applicable to, the Intimate Brands
Businesses and reflect the assets, liabilities, results of operations and cash
flows on a historical cost basis.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
all significant subsidiaries which are more than 50% owned and controlled. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
years are designated in the financial statements and notes by the calendar year
in which the fiscal year commences. The results for fiscal year 1996 represent
the 52-week period ended February 1, 1997 and results for fiscal years 1995 and
1994 represent the 53-week period ended February 3, 1996 and the 52-week period
ended January 28, 1995.

Cash and Equivalents

Cash and equivalents include amounts on deposit with financial institutions and
money market investments with maturities of less than 90 days.

Inventory

Inventories are principally valued at the lower of average cost or market, on a
first-in first-out basis, utilizing the retail method.

Catalogue Costs and Advertising

Catalogue costs, primarily consisting of catalogue production and mailing costs,
are amortized over the expected future revenue stream, which is principally from
three to six months from the date catalogues are mailed. All other advertising
costs are expensed at the time the promotion first appears in media or in the
store. Catalogue and advertising costs amounted to $229 million, $213 million
and $169 million in 1996, 1995 and 1994.

Property and Equipment

Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 10-15 years for building and leasehold improvements,
and 3-10 years for other property and equipment. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major

                  Intimate Brands, Inc. 41 1996 Annual Report
<PAGE>
 
renewals and betterments that extend service lives are capitalized. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that full recoverability is questionable. Factors used in the valuation
include, but are not limited to, management's plans for future operations,
recent operating results and projected cash flows.

Goodwill Amortization

Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized on a straight-line basis
principally over 30 years.

Shareholders' Equity

At February 1, 1997, there were 550 million of $.01 par value Class A shares and
550 million of $.01 par value Class B shares authorized, of which 42.5 million
shares (net of .2 million shares held in treasury) and 210 million shares,
respectively, were issued and outstanding. At February 3, 1996, there were 42.7
million Class A shares and 210 million Class B shares issued and outstanding. In
addition there were 55 million of $.01 par value preferred shares authorized,
none of which have been issued.

  Holders of Class A common stock generally have identical rights to holders of
Class B common stock, except that holders of Class A common stock are entitled
to one vote per share while holders of Class B common stock are entitled to
three votes per share on all matters submitted to a vote of shareholders. Each
share of Class B common stock is convertible while held by The Limited, Inc. or
any of its subsidiaries into one share of Class A common stock.

Revenue Recognition

Sales are recorded upon purchase by customers. A reserve is provided equal to
the gross profit on projected catalogue merchandise returns, based on prior
experience.

Income Taxes

Income taxes are calculated in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the
use of the liability method. Deferred tax assets and liabilities are recognized
based on the difference between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.

  Deferred tax assets and liabilities are measured using enacted tax rates in
effect in the years in which those temporary differences are expected to
reverse. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.

  The Company is included in The Limited, Inc.'s consolidated Federal and
certain state income tax groups for income tax reporting purposes and is
responsible for its proportionate share of income taxes calculated upon its
Federal taxable income at a current estimate of the annual effective tax rate.

Net Income Per Share

Net income per share is computed based upon the weighted average number of
outstanding common shares, including the effect of stock options. The common
stock issued to The Limited, Inc. (210 million Class B shares) in connection
with the incorporation of the Company is assumed to have been outstanding for
all periods presented. There were 253.1 million, 221.3 million and 210 million
weighted average shares considered outstanding for 1996, 1995 and 1994.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Since actual results may differ from those estimates, the
Company revises its estimates and assumptions as new information becomes
available.

Reclassifications

Certain amounts in previously reported balance sheet captions have been
reclassified to conform with current year presentation.

3. SPECIAL AND NONRECURRING ITEM

During the fourth quarter of 1996, the Company recognized a $12 million charge
representing the estimated loss on the sale of Penhaligon's, a U.K.-based
subsidiary. The transaction closed subsequent to the end of fiscal 1996, in
early 1997.

                  Intimate Brands, Inc. 42 1996 Annual Report
<PAGE>
 
4. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consisted of (thousands):

<TABLE> 
<CAPTION> 
                                                1996      1995
<S>                                         <C>       <C>
 ..............................................................
Furniture, fixtures and equipment           $577,024  $497,228
Building improvements and leaseholds         122,748   105,680
Construction in progress                       1,827     2,457
 ..............................................................
                                             701,599   605,365

Less: accumulated depreciation
 and amortization                            305,952   247,333
 ..............................................................
Property and equipment, net                 $395,647  $358,032
--------------------------------------------------------------
</TABLE> 
 
5. LEASED FACILITIES AND COMMITMENTS

Annual store rent is comprised of a fixed minimum amount, plus contingent rent
based upon a percentage of sales exceeding a stipulated amount. Store lease
terms generally require additional payments covering taxes, common area costs
and certain other expenses.

 A summary of rent expense for 1996, 1995 and 1994 follows (thousands):
<TABLE>
<CAPTION>
                                      1996      1995      1994
<S>                               <C>       <C>       <C>
 ..............................................................
Store rent:
 Fixed minimum                    $135,439  $109,238  $ 89,506
 Contingent                         10,874     9,039     7,294
 ..............................................................
Total store rent                   146,313   118,277    96,800
Buildings, equipment and other      15,633    10,183    10,880
 ..............................................................
Total rent expense                $161,946  $128,460  $107,680
--------------------------------------------------------------
</TABLE>

Rent expense includes charges from The Limited, Inc. and its subsidiaries for
office and distribution center space under formal agreements which approximate
market rates. At February 1, 1997, the Company was committed to noncancelable
leases with remaining terms of one to twenty years. These commitments include
store leases with initial terms ranging from ten to twenty years and offices and
distribution centers leased from The Limited with initial terms of 15 years. A
majority of the Company's store leases are guaranteed by The Limited. A summary
of minimum rent commitments under noncancelable leases follows (thousands):

<TABLE> 

<S>                                       <C>   
1997                                      $158,857
1998                                       159,186
1999                                       155,459
2000                                       152,001
2001                                       146,828
Thereafter                                 624,324
</TABLE> 

6. OTHER ASSETS

Other assets consisted of (thousands):

<TABLE> 
<CAPTION> 
                                              1996     1995
<S>                                       <C>       <C> 
 ...........................................................
Goodwill, net of accumulated
 amortization of $25,924 and $22,480      $ 76,531  $87,872
Other                                        6,008    9,014
 ...........................................................
Total other assets                        $ 82,539  $96,886
----------------------------------------------------------- 
</TABLE>

7. ACCRUED EXPENSES
Accrued expenses consisted of (thousands):

<TABLE> 
<CAPTION> 
                                                    1996       1995
<S>                                             <C>        <C> 
 ...................................................................
Accrued compensation,                   
 payroll taxes and benefits                     $ 33,099   $ 21,982
Accrued rent                                      23,347     17,022
Accrued taxes, other than income                  12,768     15,580
Estimated returns for catalogue
 merchandise                                      13,276     10,051
Accrued interest                                  14,029     17,186
Other                                             40,079     22,202
 ...................................................................
Total accrued expenses                          $136,598   $104,023
-------------------------------------------------------------------
</TABLE> 

8. INCOME TAXES

The provision for income taxes consisted of (thousands):

<TABLE> 
<CAPTION> 
                                                    1996       1995       1994
<S>                                             <C>        <C>        <C> 
 ..............................................................................
Currently payable:
 Federal                                        $146,700   $108,800   $122,800
 State                                            28,300     15,600     16,800
 ..............................................................................
                                                 175,000    124,400    139,600
 ..............................................................................
Deferred:
 Federal                                          (4,700)     2,200     (5,100)
 State                                             1,700      9,400        500
 ..............................................................................
                                                  (3,000)    11,600     (4,600)
 ..............................................................................
Total provision                                 $172,000   $136,000   $135,000
------------------------------------------------------------------------------
</TABLE> 

A reconciliation between the statutory Federal income tax rate and the effective
income tax rate follows:

<TABLE> 
<CAPTION> 
                                                    1996       1995       1994
<S>                                                 <C>        <C>        <C> 
 ..............................................................................
Federal income tax rate                             35.0%      35.0%      35.0%
State income tax, net of Federal
 income tax effect                                   4.5        4.8        4.2
Other items, net                                     0.5        0.2        0.7
 ..............................................................................
                                                    40.0%      40.0%      39.9%
------------------------------------------------------------------------------
</TABLE>

Income taxes payable included current deferred tax assets of $458 thousand and
$9.7 million at February 1, 1997 and February 3, 1996. Current income tax
obligations are treated as having been settled through the intercompany accounts
as if the Company were filing its income tax returns on a separate company
basis. Such amounts were $167 million in 1996. A

                 Intimate Brands, Inc. 43 1996 Annual Report 
<PAGE>
 
summary of the effect of temporary differences which give rise to deferred
income tax balances follows (thousands):
<TABLE>
<CAPTION>
1996                     Assets   Liabilities      Total
 ........................................................
<S>                      <C>      <C>           <C>
Excess of tax over
 book depreciation             -     $(64,448)  $(64,448)
State income taxes       $11,262            -     11,262
Other, net                34,670      (31,961)     2,709
 ........................................................
Total deferred income
 taxes                   $45,932     $(96,409)  $(50,477)
--------------------------------------------------------

<CAPTION> 
1995                      Assets  Liabilities      Total
 ........................................................
<S>                      <C>      <C>           <C>
Excess of tax over
 book depreciation             -     $(68,071)  $(68,071)
State income taxes       $10,392            -     10,392
Other, net                20,596      (24,697)    (4,101)
 ........................................................
Total deferred income
 taxes                   $30,988     $(92,768)  $(61,780)
--------------------------------------------------------
</TABLE>

The Internal Revenue Service has assessed The Limited for additional taxes and
interest for the years 1989-1992. The portion of the assessment relating to the
Company was based on treatment of construction allowances. The Limited has made
deposits to mitigate further interest being assessed and management believes
these deposits are sufficient to limit any further exposure. The Limited has
allocated a portion of the deposit to the Company which is included in deferred
taxes.

9. LONG-TERM DEBT

Long-term debt consists of notes which represent the Company's proportionate
share of certain long-term debt of The Limited. The interest rates and
maturities of the notes parallel those of the corresponding debt of The Limited.
A summary of unsecured long-term debt at February 1, 1997 and February 3, 1996
follows (thousands):
<TABLE>
<CAPTION>
                                         1996      1995
 .......................................................
<S>                                 <C>       <C>
7 1/2% Debentures due March 2023     $100,000  $100,000
9 1/8% Notes due February 2001        150,000   150,000
8 7/8% Notes due August 1999          100,000   100,000
 .......................................................
                                     $350,000  $350,000
-------------------------------------------------------
</TABLE>

Each of the notes is to be automatically prepaid concurrently with any
prepayment of the corresponding debt of The Limited. The debt of The Limited
corresponding to the 7 1/2% debentures maturing in 2023 is subject to early
redemption by The Limited at its option beginning in 2003 at specified declining
premiums. The other notes are not subject to early redemption by The Limited.

10. RELATED PARTY TRANSACTIONS

Transactions between the Company and The Limited, Inc. and its wholly-owned
subsidiaries commonly occur in the normal course of business and principally
consist of the following:

  Merchandise purchases
  Capital expenditures for new and remodeled stores
  Real estate management and leasing
  Inbound and outbound transportation
  Corporate services

Information with regard to these transactions is as follows:

  Significant purchases are made from Mast, a wholly-owned subsidiary of The
Limited, Inc. Mast is a contract manufacturer and apparel importer. Prices are
negotiated on a competitive basis by merchants of the Company with Mast and the
manufacturers.

  The Company's real estate operations, including all aspects of lease
negotiations and ongoing dealings with landlords and developers, are handled
centrally by the Real Estate Division of The Limited ("Real Estate Division").
Real Estate Division expenses are allocated to the Company based on new and
remodeled store construction projects and open selling square feet in relation
to the totals for The Limited.

  The Company's store design and construction operations are coordinated
centrally by the Store Planning Division of The Limited ("Store Planning
Division"). The Store Planning Division facilitates the design and construction
of new stores and remodels and, upon completion, transfers the stores to the
Company at actual cost. Store Planning Division expenses are charged to the
Company based on new and remodeled store construction projects and open selling
square feet in relation to the totals for The Limited.

  The Company's inbound and outbound transportation expenses, exclusive of
Victoria's Secret Catalogue (which maintains its own order fulfillment
operation), are managed centrally by Limited Distribution Services ("LDS"), a
wholly-owned subsidiary of The Limited, Inc. Inbound freight is charged to the
Company based on actual receipts while outbound freight is charged based on a
percentage of cartons shipped.


                  Intimate Brands, Inc. 44 1996 Annual Report
<PAGE>
 
  The Limited provides certain services to the Company including, among other
things, aircraft, certain tax, treasury, legal, accounting and audit, corporate
development, risk management, associate benefit plan administration, human
resources and compensation, and government affairs services. Specifically
identifiable costs are charged directly to the Company. All other services-
related costs not specifically attributable to an operating business have been
allocated to the Company based upon a percentage of sales.

  The Company participates in The Limited's centralized cash management system.
Under this system, cash received from the Company's operations is transferred to
The Limited's centralized cash accounts and cash disbursements are funded from
the centralized cash accounts on a daily basis. For all periods through May 18,
1995, intercompany accounts have been characterized as a component of
shareholders' equity in the accompanying consolidated balance sheets and
intercompany transactions have been reported as financing activities in the
accompanying consolidated statements of cash flows. Effective May 19, 1995, the
intercompany accounts became an interest earning asset (interest bearing
liability). The amount of the intercompany receivable from The Limited under
these agreements at February 1, 1997 is approximately $60 thousand.

  The Company is charged rent expense, common area maintenance charges and
utilities for stores shared with other consolidated subsidiaries of The Limited,
Inc. The charges are based on square footage and represent the proportionate
share of the under-lying leases with third parties.

  The Company is also charged rent expense at market rates for the distribution
center and home office space that it occupies according to formal 15-year lease
agreements, which contain options to renew.

  The Company and The Limited have entered into intercompany agreements which
establish the provision of services in accordance with the terms described
above. The prices charged to the Company for services provided under these
agreements may be higher or lower than prices that may be charged by third
parties. It is not practicable therefore, to estimate what these costs would be
if The Limited were not providing these services and the Company was required to
purchase these services from outsiders or develop internal expertise. Management
believes the charges and allocations described above are fair and reasonable.

  The following table summarizes the related party transactions between the
Company and The Limited, Inc. and its wholly-owned subsidiaries for the years
indicated (thousands):
<TABLE>
<CAPTION>
                                    1996      1995      1994
 ............................................................
<S>                             <C>       <C>       <C>
Mast purchases                  $367,240  $286,335  $247,989
Capital expenditures              88,740   113,383    75,740
Inbound and outbound
 transportation                   31,816    22,336    13,378
Corporate charges                 35,130    31,860    26,560
Store leases and other
 occupancy                        35,510    27,730    20,407
Distribution center, MIS and
 home office expenses             11,253     7,413     9,345
Centrally managed benefits        32,713    28,025    19,879
Interest charges                  32,544    40,579         -
Interest income                    4,612     3,299         -
 ............................................................
Total                           $639,558  $560,960  $413,298
------------------------------------------------------------
</TABLE>

  Proprietary credit cards accepted by the Company are offered to customers
through Alliance Data Systems/World Financial Network National Bank ("ADS"), a
40% owned venture of The Limited, Inc. (The Limited, Inc. sold a 60% interest in
ADS effective January 1996; prior to that time it was a wholly-owned
subsidiary). ADS charges each business a separately negotiated fee for
transactions processed under this arrangement.

11. STOCK OPTIONS AND RESTRICTED STOCK
Prior to the Company's Offering, officers and key associates were granted
options in The Limited's stock plans. Concurrent with the Offering the Company
has established a stock plan for officers and key associates, providing for
awards of up to 17.5 million shares.

  Stock options are granted based upon fair market value at the date of grant.
In connection with the Offering, certain options to purchase stock of The
Limited held by Company associates were canceled in exchange for approximately
466,000 options to purchase the Company's common stock at the Offering price of
$17 per share.

  The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1996 financial

                  Intimate Brands, Inc. 45 1996 Annual Report
<PAGE>
 
statements, but elected to continue to measure compensation expense in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense for stock options has been
recognized. If compensation expense had been determined based on the estimated
fair value of options granted in 1995 and 1996, consistent with the methodology
in SFAS 123, the pro-forma effects on the Company's net income and net income
per share would have been immaterial.

  Also in connection with the Offering, 193,500 restricted shares of the
Company's common stock were granted at the Offering price of $17 per share in
exchange for canceling restricted shares of The Limited. Additionally,
approximately 169,000 and 163,000 restricted shares were granted in 1996 and
1995, with market values at date of grant of $3.0 million in 1996 and $2.5
million in 1995. The market value is being amortized as compensation expense
over the vesting period, generally four or five years. Compensation expenses
related to these awards amounted to $3.0 million, $2.7 million and $1.3 million
in 1996, 1995 and 1994.

A summary of option activity for 1996 and 1995 follows:
<TABLE>
<CAPTION>
 
                                1996               1995
                         ..................  .................
                                   Weighted           Weighted
                                    Average            Average
                                     Option             Option
                          Shares      Price   Shares     Price
 ..............................................................
<S>                    <C>         <C>       <C>      <C>
Outstanding at
 beginning of year       682,000        $17        -         -
Granted                  931,000        $15  682,000       $17
Exercised                (15,000)       $17        -         -
Canceled                 (68,000)       $16        -         -
 ..............................................................
Outstanding at end
 of year               1,530,000        $16  682,000       $17
--------------------------------------------------------------
Options exercisable
 at year-end             126,000        $17        -         -
--------------------------------------------------------------
</TABLE>

Approximately 90% of the options outstanding and exercisable at year-end are at
prices between $14 and $17 per share. The remaining options are at prices
between $17 and $23 per share.

12. RETIREMENT BENEFITS

The Company participates in a defined contribution retirement plan sponsored by
The Limited. Participation in this plan is available to all associates who have
completed 1,000 or more hours of service with the Company during certain 12-
month periods and attained the age of 21. The Company's contributions to this
plan are based on a percentage of the associates' annual compensation. The cost
of this plan was $10.9 million, $8.1 million and $5.5 million in 1996, 1995 and
1994.

13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.

Current Assets and Current Liabilities

The carrying value of accounts receivable, accounts payable and accrued expenses
approximates fair value because of their short maturity.

Long-Term Debt

The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair value
of the Company's long-term debt at February 1, 1997 and February 3, 1996 was
$354.7 million and $360.2 million.

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial results for 1996 and 1995 follow (thousands
except per share amounts):
<TABLE>
<CAPTION>
Quarter                                   First     Second     Third      Fourth
 ................................................................................
1996
<S>                                    <C>       <C>        <C>       <C>
Net sales                              $586,208   $653,291  $596,985  $1,160,856
Gross income                            174,777    216,962   194,031     469,275
Net income                               25,235     48,060    27,195     157,720
Net income
 per share                             $    .10   $    .19  $    .11  $      .62
--------------------------------------------------------------------------------
1995
Net sales                              $479,835   $553,511  $506,092  $  977,117
Gross income                            137,793    170,387   147,546     365,202
Net income                               24,402     33,724    14,017     131,916
Net income
 per share                             $    .12   $    .16  $    .07  $      .52
--------------------------------------------------------------------------------
</TABLE> 


                  Intimate Brands, Inc. 46 1996 Annual Report
<PAGE>
 
Market Price and Dividend Information

The following is a summary of market price and dividend activity since the
Company was originally listed on the New York Stock Exchange ("IBI") on 
October 24, 1995:
<TABLE> 
<CAPTION> 
                                          Market Price
 ....................................................................
                                                                Cash
                                                            Dividend
                                           High      Low   Per Share
 ....................................................................
Fiscal Year End 1996
 ....................................................................
<S>                                      <C>       <C>         <C> 
4th Quarter                              $20       $15 5/8      $.12
3rd Quarter                               21 3/4    17 1/8       .12
2nd Quarter                               24 3/8    18 3/4       .12
1st Quarter                              $21 1/2   $14 1/8      $.12
 ....................................................................

Fiscal Year End 1995
 ....................................................................
4th Quarter                              $18 1/8   $13 3/8      $.12
3rd Quarter                              $18 1/2   $16 3/4         -
--------------------------------------------------------------------
</TABLE>

On February 1, 1997, there were approximately 1,000 shareholders of record.
However, when including active associates who participate in the Company's stock
purchase plan, associates who own shares through Company sponsored retirement
plans and others holding shares in broker accounts under street name, the
Company estimates the shareholder base at approximately 36,000.


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Intimate Brands, Inc.

We have audited the accompanying consolidated balance sheets of Intimate Brands,
Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three fiscal years in the period ended February 1, 1997 (on
pages 37-46). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intimate Brands,
Inc. and subsidiaries as of February 1, 1997 and February 3, 1996 and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended February 1, 1997 in conformity with
generally accepted accounting principles.

Coopers &Lybrand L.L.P.
Columbus, Ohio
February 24, 1997


                  Intimate Brands, Inc. 47 1996 Annual Report