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                                                                  Exhibit 10.26

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                         DONNA KARAN INTERNATIONAL INC.

                  1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

               (As amended and restated through December 8, 2000)

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                               Table of Contents

                                                                            Page
                                                                            ----

I.    Purposes of the Plan...................................................1

II.   Definitions............................................................1

III.  Effective Date.........................................................2

IV.   Administration.........................................................2
      A.    Duties of the Committee..........................................2
      B.    Advisors.........................................................3
      C.    Determinations...................................................3
      D.    Disinterested or Non-Employee Directors..........................3

V.    Shares; Adjustment Upon Certain Events.................................3
      A.    Shares to be Delivered; Fractional Shares........................3
      B.    Number of Shares.................................................3
      C.    Adjustments; Recapitalization, etc...............................3

VI.   Awards and Terms of Options............................................5
      A.    Grant............................................................5
      B.    Date of Grant....................................................5
      C.    Option Agreement.................................................5
      D.    Option Terms.....................................................6
      E.    Expiration.......................................................6
      F.    Acceleration of Exercisability...................................6

VII.  Effect of Termination of Directorship..................................7
      A.    Death, Disability or Otherwise Ceasing to be a Director..........7
      B.    Cancellation of Options..........................................7

VIII. Nontransferability of Options..........................................7

IX.   Rights as a Stockholder................................................8

X.    Termination, Amendment and Modification................................8

XI.   Use of Proceeds........................................................9

XII.  General Provisions.....................................................9
      A.    Right to Terminate Directorship..................................9
      B.    Trusts, etc......................................................9


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                                                                            Page
                                                                            ----

      C.    Notices..........................................................9
      D.    Severability of Provisions......................................10
      E.    Payment to Minors, Etc..........................................10
      F.    Headings and Captions...........................................10
      G.    Controlling Law.................................................10
      H.    Section 16(b) of the Act........................................10

XIII. Issuance of Stock Certificates;
            Legends; Payment of Expenses....................................10
      A.    Stock Certificates..............................................10
      B.    Legends.........................................................10
      C.    Payment of Expenses.............................................11

XIV.  Listing of Shares and Related Matters.................................11

XV.   Withholding Taxes.....................................................11

Form of Option Agreement                                             Exhibit A


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                         DONNA KARAN INTERNATIONAL INC.

                  1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

I. Purposes of the Plan

            The purposes of this 1996 Non-Employee Director Stock Option Plan
(the "Plan") are to enable the Donna Karan International Inc. (the "Company") to
attract, retain and motivate the directors who are important to the success and
growth of the business of the Company and to create a long-term mutuality of
interest between the directors and the stockholders of the Company by granting
the directors options to purchase Common Stock (as defined herein).

II. Definitions

            In addition to the terms defined elsewhere herein, for purposes of
this Plan, the following terms will have the following meanings when used herein
with initial capital letters:

            A. "Act" means the Securities Exchange Act of 1934, as amended, and
all rules and regulations promulgated thereunder.

            B. "Board" means the Board of Directors of the Company.

            C. "Code" means the Internal Revenue Code of 1986, as amended (or
any successor statute).

            D. "Committee" means the Board or a duly appointed committee of the
Board to which the Board has delegated its power and functions hereunder.

            E. "Common Stock" means the common stock of the Company, par value
$.01 per share, any common stock into which the common stock may be converted
and any common stock resulting from any reclassification of the common stock.

            F. "Company" means the Donna Karan International Inc., a Delaware
corporation, and any successor thereto.

            G. "Disability" shall mean a total and permanent disability, as
defined in Section 22(e)(3) of the Code.

            H. "Eligible Director" means a director of the Company who is not an
active employee of the Company or any Related Person and who is not an officer,
director or employee of (i) any entity which, directly or indirectly,
beneficially owns or controls 5% or more of the combined voting power of the
then outstanding voting securities of the Company (or any Related Person)
entitled to vote generally in the election of directors or (ii) any entity
controlling, controlled by or under common control (within the meaning of Rule
405 of the Securities Act) with any such entity. Notwithstanding the foregoing,
during the calendar year 1996, Stephan Weiss, Donna Karan, Frank
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R. Mori and Tomio Taki shall not be considered Eligible Directors and may not be
granted any Options under the Plan for calendar year 1996.

            I. "Fair Market Value" shall mean, for purposes of this Plan, unless
otherwise required by any applicable provision of the Code or any regulations
issued thereunder, as of any date, the last sales prices reported for the Common
Stock on the applicable date, (i) as reported by the principal national
securities exchange in the United States on which it is then traded, or (ii) if
not traded on any such national securities exchange, as quoted on an automated
quotation system sponsored by the National Association of Securities Dealers, or
if the sale of the Common Stock shall not have been reported or quoted on such
date, on the first day prior thereto on which the Common Stock was reported or
quoted.

            J. "Option" means the right to purchase the number of Shares granted
in the Option agreement at a prescribed purchase price on the terms specified in
the Plan.

            K. "Participant" means an Eligible Director who is granted an Option
under the Plan, which Option has not expired.

            L. "Related Person" means, other than the Company (a) any
corporation that is defined as a subsidiary corporation in Section 424(f) of the
Code; (b) any corporation or trade or business (including, without limitation, a
partnership or limited liability company) which is controlled 50% or more by the
Company or one of its subsidiaries (whether by ownership of stock, assets or an
equivalent ownership interest); (c) any corporation that is defined as a parent
corporation in Section 424(e) of the Code; or (d) any corporation or trade or
business (including, without limitation, a partnership or limited liability
company) which controls 50% or more of the Company (whether by ownership of
stock, assets or an equivalent ownership interest).

            M. "Securities Act" means the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.

            N. "Share" means a share of Common Stock.

            O. "Termination of Directorship" with respect to an individual means
that individual is no longer acting as a director (whether a non-employee
director or employee director) of the Company.

III. Effective Date

            The Plan shall become effective as of ________________ (the
"Effective Date"). Grants of Options under the Plan will be made after the
Effective Date of the Plan pursuant to Article VI(B) of this Plan.

IV. Administration

            A. Duties of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full authority to interpret the Plan and to
decide any questions and settle all controversies and disputes that may arise in
connection with the Plan; to establish, amend and rescind


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rules for carrying out the Plan; to administer the Plan, subject to its
provisions; to prescribe the form or forms of instruments evidencing Options and
any other instruments required under the Plan and to change such forms from time
to time; and to make all other determinations and to take all such steps in
connection with the Plan and the Options as the Committee, in its sole
discretion, deems necessary or desirable. Any determination, action or
conclusion of the Committee shall be final, conclusive and binding on all
parties.

            B. Advisors. The Committee may employ such legal counsel,
consultants and agents as it may deem desirable for the administration of the
Plan, and may rely upon any advice or opinion received from any such counsel or
consultant and any computation received from any such consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel, consultant
or agent shall be paid by the Company.

            C. Determinations. Each determination, interpretation or other
action made or taken pursuant to the provisions of this Plan by the Committee
shall be final, conclusive and binding for all purposes and upon all persons,
including, without limitation, the Participants, the Company, directors,
officers and other employees of the Company, and the respective heirs,
executors, adminis trators, personal representatives and other successors in
interest of each of the foregoing.

            D. Disinterested or Non-Employee Directors. Notwithstanding anything
herein to the contrary and solely to the extent required under Section 16(b) of
the Act, the Committee may not take any action which would cause any Eligible
Director to cease to be a "disinterested person" or "non-employee director" for
purposes of Rule 16b-3 promulgated under the Act, as then in effect or any
successor provisions ("Rule 16b-3"), with regard to any stock option or other
equity plan of the Company.

V. Shares; Adjustment Upon Certain Events

            A. Shares to be Delivered; Fractional Shares. Shares to be issued
under the Plan shall be made available, at the sole discretion of the Board,
either from authorized but unissued Shares or from issued Shares reacquired by
Company and held in treasury. No fractional Shares will be issued or transferred
upon the exercise of any Option nor will any compensation be paid with regard to
fractional shares.

            B. Number of Shares. Subject to adjustment as provided in this
Article V, the maximum aggregate number of Shares authorized for issuance under
the Plan shall be 100,000. Where an Option is for any reason cancelled, or
expires or terminates unexercised, the Shares covered by such Option shall again
be available for the grant of Options, within the limits provided by the
preceding sentence.

            C. Adjustments; Recapitalization, etc. The existence of this Plan
and the Options granted hereunder shall not affect in any way the right or power
of the Board or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the Company,
any issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting Common Stock, the dissolution or liquidation of the Company or any
sale or transfer of all or part of its assets or business,


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or any other corporate act or proceeding, in which case the provisions of this
Article V(C) shall govern outstanding Options:

            1. The Shares with respect to which Options may be granted are
Shares of Common Stock as presently constituted, but, if and whenever the
Company shall effect a subdivision, recapitalization or consolidation of Shares
or the payment of a stock dividend on Shares without receipt of consideration,
the aggregate number and kind of shares of capital stock issuable under this
Plan shall be proportionately adjusted, and each holder of a then outstanding
Option shall have the right to purchase under such Option, in lieu of the number
of Shares as to which the Option was then exercisable but on the same terms and
conditions of exercise set forth in such Option, the number and kind of shares
of capital stock which he or she would have owned after such sub-division,
recapitalization, consolidation or dividend if immediately prior thereto he had
been the holder of record of the number of Shares as to which such Option was
then exercisable.

            2. If the Company merges or consolidates with one or more
corporations and the Company shall be the surviving corporation, thereafter upon
exercise of an Option theretofore granted, the Participant shall be entitled to
purchase under such Option in lieu of the number of Shares as to which such
Option shall then be exercisable, but on the same terms and conditions of
exercise set forth in such Option, the number and kind of shares of capital
stock or other property to which the Participant would have been entitled
pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, the Participant had been the
holder of record of the number of Shares as to which such Option was then
exercisable.

            3. If the Company shall not be the surviving corporation in any
merger or consolidation, or if the Company is to be dissolved or liquidated,
then, unless the surviving corporation assumes the Options or substitutes new
Options which are determined by the Board in its sole discretion to be
substantially similar in nature and equivalent in terms and value for Options
then outstanding, upon the effective date of such merger, consolidation,
liquidation or dissolution, any unexercised Options shall expire without
additional compensation to the holder thereof; provided, that, the Committee
shall deliver notice to each Participant at least twenty (20) days prior to the
date of consummation of such merger, consolidation, dissolution or liquidation
which would result in the expiration of the Options and during the period from
the date on which such notice of termination is delivered to the consummation of
the merger, consolidation, dissolution or liquidation, each Participant shall
have the right to exercise in full effective as of such consummation all the
Options that are then outstanding (without regard to limitations on exercise
otherwise contained in the Options) but contingent on occurrence of the merger,
consolidation, dissolution or liquidation, and, provided that, if the
contemplated transaction does not take place within a ninety (90) day period
after giving such notice for any reason whatsoever, the notice, accelerated
vesting and exercise shall be null and void and if and when appropriate new
notice shall be given as aforesaid. Notwithstanding the foregoing and solely to
the extent required by Section 16(b) of the Act, the Options held by persons
subject to Section 16(b) of the Act that would not have vested under the Plan
except pursuant to Article VI(F) prior to the effective date of such merger,
consolidation, liquidation or dissolution shall not expire on such date but
shall expire thirty (30) days after they would have otherwise vested under the
Plan and shall after the effective date of such merger, consolidation,
liquidation or dissolution represent only the right to receive the number and
kind of shares of capital stock or other property to which the Participant would
have been entitled if immediately prior to the effective date of such


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merger, consolidation, liquidation or dissolution the Participant had been the
holder of record of the number of Shares as to which such Option was then
exercisable.

            4. If as a result of any adjustment made pursuant to the preceding
paragraphs of this Article V(C), any Participant shall become entitled upon
exercise of an Option to receive any shares of capital stock other than Common
Stock, then the number and kind of shares of capital stock so receivable
thereafter shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock set forth in this Article V(C).

            5. Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or other securities, and in any case whether or not for
fair value, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of Shares subject to Options theretofore granted or
the purchase price per Share.

VI. Awards and Terms of Options

            A. Grant. Upon the date of the approval of the Plan by the Board
(the "Initial Grant Date"), each Eligible Director shall be automatically
granted an Option to purchase 7,500 Shares, subject to the terms of the Plan.
Any Eligible Director who is first elected to the Board after the Initial Grant
Date shall automatically be granted, on the date of such election, an Option to
purchase 7,500 Shares, subject to the terms of the Plan. Without further action
by the Board or the stockholders (except as provided in Article X) of the
Company, each year, other than with respect to the year in which an Eligible
Director receives the initial grant of an Option, as of the first day of the
month following the annual meeting of the shareholders of the Company (each such
date, an "Annual Date of Grant"), each Eligible Director shall be automatically
granted an Option to purchase 500 Shares or, effective as of May 1, 1998, an
Option to purchase 1,000 Shares, subject, in each case, to the terms of the
Plan, provided that no such Option shall be granted if on the date of grant the
Company has liquidated, dissolved or merged or consolidated with another entity
in such a manner that it is not the surviving entity (unless the Plan has been
assumed by such surviving entity with regard to future grants).

            B. Date of Grant. If a grant of Options is to be made on a day on
which the principal national exchange or automated quotation system sponsored by
the National Association of Securities Dealers with respect to which Shares are
traded is not open for trading, the grant shall be made on the first day
thereafter on which such exchange or system is open for trading. Notwithstanding
the foregoing, in the event no Fair Market Value can be determined pursuant to
the provisions hereof, no annual grant shall be made for such fiscal year.

            C. Option Agreement. Options shall be evidenced by Option agreements
in substantially the form annexed hereto as Exhibit A as modified from time to
time.


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            D. Option Terms:

            1. Exercise Price. The purchase price per share ("Purchase Price")
      deliverable upon the exercise of an Option shall be 100% of the Fair
      Market Value of such Share at the time of the grant of the Option, or the
      par value of the Share, whichever is the greater.

            2. Period of Exercisability for Options to Purchase Shares. Except
      as provided in Article VI(F), Options granted to Eligible Directors shall
      vest and become exercisable on the first anniversary of the date of grant.

            3. Procedure for Exercise. A Participant electing to exercise one or
      more Options shall give written notice to the Secretary of the Company of
      such election and of the number of Options he or she has elected to
      exercise. Shares purchased pursuant to the exercise of Options shall be
      paid for at the time of exercise in cash or by delivery of unencumbered
      Shares owned by the Participant for at least six months (or such longer
      period as required by applicable accounting standards to avoid a charge to
      earnings) or a combination thereof.

            E. Expiration. Except as otherwise provided herein, if not
previously exercised each Option shall expire upon the tenth anniversary of the
date of the grant thereof.

            F. Acceleration of Exercisability.

            All Options granted and not previously exercisable shall become
fully exercisable immediately upon the occurrence of a Change in Control (as
defined herein). For this purpose, a "Change in Control" shall be deemed to have
occurred upon any of the following:

                  (a) the acquisition by any "person" (as such term is used in
      Section 13(d) and 14(d) of the Act) other than a person who is a
      stockholder of the Company on the effective date of the registration
      statement filed under the Securities Act relating to the first public
      offering (the "Initial Public Offering") of securities of the Company (an
      "Initial Stockholder") of 30% or more of the voting power of securities of
      Company or the acquisition by an Initial Stockholder, other than an
      affiliate of the Company that would be a Related Person, of an additional
      5% of the voting power of securities of the Company over and above that
      owned immediately after the closing date of the Initial Public Offering of
      the Company's Common Stock; excluding however, the following: (x) any
      acquisition by the Company or a Related Person of any of the foregoing, or
      (y) any acquisition by an employee benefit plan (or related trust)
      sponsored or maintained by the Company or a Related Person; or

                  (b) (i) the acquisition by any "person" (as such term is used
      in Section 13(d) and 14(d) of the Act) other than a person who, on the
      effective date of the Initial Public Offering is a holder of any ownership
      interest in Donna Karan Studio (an "Initial Licensee Interest Holder") of
      30% or more of the voting power of Donna Karan Studio or (ii) the
      acquisition by an Initial Licensee Interest Holder, other than an
      affiliate of Gabrielle Studio, Inc. (and excluding any such acquisition
      resulting from a purchase, sale or transfer of Takihyo Inc. stock by and
      between any of the current stockholders of Takihyo Inc.) that would be a
      Related Person (but substituting Gabrielle Studio, Inc. for the Company in
      such definition) of Gabrielle Studio, Inc., of an additional 5% of the
      voting power of securities of the Company


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<PAGE>

      over and above that owned immediately after the closing date of the
      Initial Public Offering of the Company's Common Stock; excluding however,
      the following: (x) any acquisition by the Company or a Related Person of
      any of the foregoing, or (y) any acquisition by an employee benefit plan
      (or related trust) sponsored or maintained by the Company or a Related
      Person; or

                  (c) any merger or sale of substantially all of the assets of
      the Company under circumstances where the holders of the Common Stock of
      the Company immediately prior to the transaction becoming public knowledge
      were not holders of 80% of the equity securities of the surviving entity
      resulting from such transaction; or

                  (d) any change in the composition of the Board of Directors of
      the Company not approved by (i) a majority of the Board prior to such
      change and (ii) by not less than two directors of the Company who were
      directors prior to the time any person who was not an Initial Shareholder
      acquired 30% or more of the voting power of securities of the Company.

VII. Effect of Termination of Directorship

            A. Death, Disability or Otherwise Ceasing to be a Director.

            Upon Termination of Directorship on account of Disability, death,
resignation or failure to stand for reelection or otherwise, all outstanding
Options then exercisable and not exercised by the Participant prior to such
Termination of Directorship shall remain exercisable by the Participant or, in
the case of death, by the Participant's estate or by the person given authority
to exercise such Options by his or her will or by operation of law, until the
earlier of (i) first anniversary of the Participant's Termination of
Directorship or (ii) the remaining term of the Option.

            B. Cancellation of Options.

            Except as provided in Article VI(F), Options that were not
exercisable during the period such person serves as a director shall not become
exercisable upon a Termination of Directorship for any reason whatsoever, and
such Options shall terminate and become null and void upon a Termination of
Directorship.

VIII. Nontransferability of Options

            No Option shall be transferable by the Participant otherwise than by
will or under applicable laws of descent and distribution and during the
lifetime of the Participant may be exercised only by the Participant or his or
her guardian or legal representative. In addition, except as provided above, no
Option shall be assigned, negotiated, pledged or hypothecated in any way
(whether by operation of law or otherwise), and no Option shall be subject to
execution, attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate any Option, or in the event of any levy upon
any Option by reason of any execution, attachment or similar process contrary to
the provisions hereof, such Option shall immediately terminate and become null
and void.


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IX. Rights as a Stockholder

            A Participant (or a permitted transferee of an Option) shall have no
rights as a stockholder with respect to any Shares covered by such Participant's
Option until such Participant (or permitted transferee) shall have become the
holder of record of such Shares, and no adjustments shall be made for dividends
in cash or other property or distributions or other rights in respect to any
such Shares, except as otherwise specifically provided in this Plan.

X. Termination, Amendment and Modification

            Subject to the number of Shares authorized for issuance under the
Plan as provided in Article V(B), the Plan shall continue in effect without
limit unless and until the Board otherwise determines. The termination of the
Plan shall not terminate any outstanding Options that by their terms continue
beyond such termination date. The Committee or the Board at any time or from
time to time may amend this Plan to effect (i) amendments necessary or desirable
in order that this Plan and the Options shall conform to all applicable laws and
regulations, and (ii) any other amendments deemed appropriate, provided that no
such amendment may be made if either the authority to make such amendment or the
amendment would cause the Eligible Directors to cease to be "disinterested
persons" or "non-employee directors" with regard to this Plan or any other stock
option or other equity plan of the Company for purposes of Rule 16b-3 and
further provided that solely to the extent required by Section 16(b) of the Act,
the provisions of the Plan relating to the amount, price and timing of, and
eligibility for, awards shall not be amended more than once every six (6) months
except to comport with changes in the Code and the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Notwithstanding the
foregoing, solely to the extent required by law, the Committee or the Board may
not effect any amendment that would require the approval of the stockholders of
the Company under Rule 16b-3 unless such approval is obtained. In no event,
unless no longer required as a condition of compliance with the requirements of
Rule 16b-3, shall the Committee or the Board, without the approval of
stockholders, normally entitled to vote for the election of directors of the
Company:

            1. increase the number of Shares available for grants under this
      Plan;

            2. reduce the minimum exercise price at which any option may be
      exercised;

            3. change the requirements as to eligibility for participation under
      this Plan;

            4. change the number of Options to be granted or the date on which
      such Options are to be granted; or

            5. increase the benefits accruing to Participants hereunder.

            This Plan may be amended or terminated at any time by the
stockholders of the Company.


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<PAGE>

            Except as otherwise required by law, no termination, amendment or
modification of this Plan may, without the consent of the Participant or the
permitted transferee of his Option, alter or impair the rights and obligations
arising under any then outstanding Option.

XI. Use of Proceeds

            The proceeds of the sale of Shares subject to Options under the Plan
are to be added to the general funds of the Company and used for its general
corporate purposes as the Board shall determine.

XII. General Provisions

            A. Right to Terminate Directorship. This Plan shall not impose any
obligations on the Company to retain any Participant as a director nor shall it
impose any obligation on the part of any Participant to remain as a director of
the Company.

            B. Trusts, etc. Nothing contained in the Plan and no action taken
pursuant to the Plan (including, without limitation, the grant of any Option
thereunder) shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between the Company and any Participant or the executor,
administrator or other personal representative or designated beneficiary of such
Participant, or any other persons. If and to the extent that any Participant or
such Participant's executor, administrator or other personal representative, as
the case may be, acquires a right to receive any payment from the Company
pursuant to the Plan, such right shall be no greater than the right of an
unsecured general creditor of the Company.

            C. Notices. Any notice to the Company required by or in respect of
this Plan will be addressed to the Company at 550 Seventh Avenue, New York, New
York 10018, Attention: General Counsel, or such other place of business as shall
become the Company's principal executive offices from time to time. Each
Participant shall be responsible for furnishing the Committee with the current
and proper address for the mailing to such Participant of notices and the
delivery to such Participant of agreements, Shares and payments. Any such notice
to the Participant will, if the Company has received notice that the Participant
is then deceased, be given to the Participant's personal representative if such
representative has previously informed the Company of his or her status and
address (and has provided such reasonable substantiating information as the
Company may request) by written notice under this Section. Any notice required
by or in respect of this Plan will be deemed to have been duly given when
delivered in person or when dispatched by telecopy or, in the case of notice to
the Company, by facsimile as described above, or one business day after having
been dispatched by a nationally recognized overnight courier service or three
business days after having been mailed by United States registered or certified
mail, return receipt requested, postage prepaid. The Company assumes no
responsibility or obligation to deliver any item mailed to such address that is
returned as undeliverable to the addressee and any further mailings will be
suspended until the Participant furnishes the proper address.


                                       9
<PAGE>

            D. Severability of Provisions. If any provisions of the Plan shall
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions of the Plan, and the Plan shall be construed and
enforced as if such provisions had not been included.

            E. Payment to Minors, Etc. Any benefit payable to or for the benefit
of a minor, an incompetent person or other person incapable of receipt thereof
shall be deemed paid when paid to such person's guardian or to the party
providing or reasonably appearing to provide for the care of such person, and
such payment shall fully discharge the Committee, the Company and their
employees, agents and representatives with respect thereto.

            F. Headings and Captions. The headings and captions herein are
provided for reference and convenience only. They shall not be considered part
of the Plan and shall not be employed in the construction of the Plan.

            G. Controlling Law. The Plan shall be construed and enforced
according to the laws of the State of Delaware, without giving effect to rules
governing the conflict of laws.

            H. Section 16(b) of the Act. All elections and transactions under
the Plan by persons subject to Section 16 of the Act involving shares of Common
Stock are intended to comply with any applicable condition under Rule 16b-3. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void. The Committee may establish and adopt
written administrative guidelines, designed to facilitate compliance with
Section 16(b) of the Act, as it may deem necessary or proper for the
administration and operation of the Plan and the transaction of business
thereunder.

XIII. Issuance of Stock Certificates; Legends; Payment of Expenses

            A. Stock Certificates. Upon any exercise of an Option and payment of
the exercise price as provided in such Option, a certificate or certificates for
the Shares as to which such Option has been exercised shall be issued by the
Company in the name of the person or persons exercising such Option and shall be
delivered to or upon the order of such person or persons, however, in the case
of Options exercised pursuant to Section V(C)3 hereof, subject to the merger,
consolidation, dissolution or liquidation triggering the rights under that
section.

            B. Legends. Certificates for Shares issued upon exercise of an
Option shall bear such legend or legends as the Committee, in its sole
discretion, determines to be necessary or appropriate to prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act or to implement the provisions of any agreements between the Company and the
Participant with respect to such Shares.

            C. Payment of Expenses. The Company shall pay all issue or transfer
taxes with respect to the issuance or transfer of Shares, as well as all fees
and expenses necessarily incurred by the Company in connection with such
issuance or transfer and with the administration of the Plan.


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<PAGE>

XIV. Listing of Shares and Related Matters

            If at any time the Board or the Committee shall determine in its
sole discretion that the listing, registration or qualification of the Shares
covered by the Plan upon any national securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the grant of
Options or the award or sale of Shares under the Plan, no Option grant shall be
effective and no Shares will be delivered, as the case may be, unless and until
such listing, registration, qualification, consent or approval shall have been
effected or obtained, or otherwise provided for, free of any conditions not
acceptable to the Board.

XV. Withholding Taxes

            The Company shall have the right to require, prior to the issuance
or delivery of any shares of Common Stock, payment by the Participant of any
federal, state or local taxes required by law to be withheld.


                                       11
<PAGE>

                                                                       Exhibit A

                         DONNA KARAN INTERNATIONAL INC.
                                OPTION AGREEMENT
                                 PURSUANT TO THE
                  1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

Dear [Eligible Director]:

                              Preliminary Statement

            As a director of the Donna Karan International Inc. (the "Company")
on the [Initial Grant Date/Annual Date of Grant (the "Grant Date")] and pursuant
to the terms of the Donna Karan International Inc. 1996 Non-Employee Director
Stock Option Plan, annexed hereto as Exhibit 1 (the "Plan"), you, as an Eligible
Director (as defined in the Plan), have been automatically granted a
nonqualified stock option (the "Option") to purchase the number of shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), set forth
below.

            The terms of the grant are as follows:

            1. Tax Matters. No part of the Option granted hereby is intended to
qualify as an "incentive stock option" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").

            2. Grant of Option. Subject in all respects to the Plan and the
terms and conditions set forth herein, you are hereby granted an Option to
purchase from the Company up to [_________] Shares (as defined in the Plan), at
a price per Share of $_________ (the "Option Price").

            3. Exercisability. Except as provided in Article VI(F) of the Plan
in the event of a Change in Control, you may exercise all or any part of your
Option on or after the first anniversary of the Grant Date (the "Vesting Date"),
provided you do not incur a Termination of Directorship prior to the Vesting
Date. Upon the occurrence of a Change in Control (as defined in the Plan) prior
to your Termination of Directorship, the Option shall immediately become
exercisable with respect to all Shares subject thereto, regardless of whether
the Option has vested with respect to such Shares.

            4. Termination. Unless terminated otherwise pursuant to the Plan,
the Option shall expire on the earlier of: (i) the tenth anniversary of the
Grant Date, (ii) to the extent exercisable on the date of your Termination of
Directorship, on the first anniversary of your Termination of Directorship, or
(iii) to the extent not exercisable on the date of your Termination of
Directorship, upon your Termination of Directorship.

            5. Restriction on Transfer of Option. The Option granted hereby is
not transferable otherwise than by will or under the applicable laws of descent
and distribution and during your lifetime may be exercised only by you or your
guardian or legal representative. In addition, the Option shall not be assigned,
negotiated, pledged or hypothecated in any way (whether by operation of law or
otherwise), and the Option shall not be subject to execution, attachment or
similar process. Upon any attempt to transfer, assign, negotiate,
<PAGE>

pledge or hypothecate the Option, or in the event of any levy upon the Option by
reason of any execution, attachment or similar process contrary to the
provisions hereof, the Option shall immediately become null and void.

            6. Rights as a Stockholder. You shall have no rights as a
stockholder with respect to any Shares covered by the Option until you shall
have become the holder of record of the Shares, and no adjustments shall be made
for dividends in cash or other property, distributions or other rights in
respect of any such Shares, except as otherwise specifically provided for in the
Plan.

            7. Provisions of Plan Control. This grant is subject to all the
terms, conditions and provisions of the Plan and to such rules, regulations and
interpretations relating to the Plan as may be adopted by the Committee and as
may be in effect from time to time. Any capitalized term used but not defined
herein shall have the meaning ascribed to such term in the Plan. The annexed
copy of the Plan is incorporated herein by reference. If and to the extent that
this grant conflicts or is inconsistent with the terms, conditions and
provisions of the Plan, the Plan shall control, and this grant shall be deemed
to be modified accordingly.

            8. Notices. Any notice or communication given hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person or,
in the case of notice to the Company, by facsimile to the facsimile number set
forth below, or when dispatched by telecopy, or one business day after having
been dispatched by a nationally recognized courier service or three business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, to the appropriate party at the
address (or, in the case of notice to the Company, facsimile number) set forth
below (or such other address as the party shall from time to time specify in
accordance with Article XII(C) of the Plan.):

            If to the Company, to:

                  Donna Karan International Inc.
                  550 Seventh Avenue
                  New York, New York 10018
                  Attention: General Counsel


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<PAGE>

            If to you, to:

                  the address indicated on the signature page at the end of this
                  grant.

                                    Sincerely,


                                    DONNA KARAN INTERNATIONAL INC.


                                    By:______________________________
                                       Name:
                                       Title:

Accepted:


_____________
[PARTICIPANT]
Address:


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