<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
(MARK ONE)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED NOVEMBER 2, 1997
 
                                      OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
                 FOR THE TRANSITION PERIOD FROM       TO
                        COMMISSION FILE NUMBER 1-11752
 
                             ST. JOHN KNITS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
             CALIFORNIA                                95-2245070
   (STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER IDENTIFICATION
   INCORPORATION OR ORGANIZATION)                        NUMBER)
   
 
         17422 DERIAN AVENUE
         IRVINE, CALIFORNIA                               92614
   (ADDRESS OF PRINCIPAL EXECUTIVE                     (ZIP CODE)
              OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 863-1171
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                        NAME OF EACH EXCHANGE
      TITLE OF EACH CLASS                                ON WHICH REGISTERED
      -------------------                               ---------------------
      <S>                                              <C>
      COMMON STOCK                                     NEW YORK STOCK EXCHANGE
</TABLE>
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  The aggregate market value of Registrant's Common Stock held by
nonaffiliates as of January 28, 1998 was $614,943,847 based on 15,397,655
shares outstanding on such date and the closing sales price for the Common
Stock on such date of $39.9375 as reported on the New York Stock Exchange.
 
  As of January 28, 1998, the Registrant had 16,714,548 shares of Common Stock
outstanding.
 
  PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 2, 1997.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  St. John Knits, Inc. (the "Company") is a leading designer, manufacturer and
marketer of women's clothing and accessories, principally under the St. John
trade name. For thirty five years, the St. John name has been associated with
high quality and a specific look in knitwear characterized by vibrant colors
and classic, timeless styling. The St. John "look," combined with limited
production runs and selective distribution, has created an exclusive image,
engendering consumer loyalty. An expanding consumer base and repeat purchasers
have resulted in the Company's knitwear production being oversold to its
retail customers since 1986.
 
PRODUCTS
 
  The Company's products are organized primarily into eight separate product
lines: Knitwear, Accessories, Sport, Griffith & Gray, Shoes, Coat Collection,
SJK and Fragrance.
 
  KNITWEAR The Company organizes its St. John knitwear collection into four
  --------
groups. The breadth of each group enables the Company to compete in most
segments of women's designer clothing. The Company's knitwear products are
sold as a collection of lifestyle clothing suitable for women's business,
evening and casual needs. St. John knitwear is a year-round product, not
confined to a single season or climate, due to its all-purpose weight. The
Company designs knitwear collections to encourage consumers to coordinate
outfits, resulting in multiple product purchases within a collection. Each
group is sufficiently comprehensive to stand alone, which allows for
flexibility in marketing and presentation.
 
    Collection:
 
    The Collection line consists of elegant ready-to-wear styles for which
  the Company is best known. This line of daytime knit fashions includes
  sophisticated dresses and suits that focus on a tailored look and are aimed
  at active women engaged in all kinds of lifestyles. The Collection line
  also includes jacket, pant, skirt, coat and sweater styles. All items in
  the line are sold as separates, including two-piece suit styles.
 
    Dressy:
 
    The Dressy line consists of dresses, theater suits and dressy separates.
  The basic look of the Dressy line is one of understated elegance enhanced
  by innovative, often luxurious touches, such as layers of transparent
  paillettes and sequins, embroidered sleeves or glittery collars and cuffs.
 
    Basics:
 
    The Basics line is comprised of the Company's seasonless products, such
  as classic jackets, skirts and pants that are an integral part of women's
  wardrobes, all in solid black, white or navy. The designs are so basic that
  they can be combined with any number of styles from any of the Company's
  product lines worn for daytime or dressed up for evening. Basics items are
  made available for sale by the Company throughout the year. Since Basics
  items are seasonless, they do not have fixed selling periods and retailers'
  inventories of Basics products tend to be maintained throughout the year
  and reordered as necessary.
 
    Couture:
 
    The Couture line is comprised of both a day and evening group. The day
  group includes dresses and two-piece suits which are designed with elegant
  embroidery and beautiful lining. The evening group consists of two-piece
  suits and long gowns. Both groups are designed using colored paillettes and
  sequins and are very exclusive with limited production quantities.
 
  ACCESSORIES The Accessories line is comprised of fine fashion jewelry, silk
  -----------
scarves, suede belts and handbags. All accessories are color coordinated with
the various fashion collections, yet are designed to work equally well on
their own. Four collections of upscale jewelry are produced each year, from
gold earrings and chunky chokers to bracelets, chain necklaces and chain
belts.
 
                                       1
<PAGE>
 
  SPORT St. John Sport consists of a line of activewear which includes
  -----
jackets, skirts, pants, tops and jeans. The line is primarily manufactured in
the Company's production facilities using woven fabrics purchased in Italy.
 
  GRIFFITH & GRAY The Griffith & Gray line includes suits, coats, dresses,
  ---------------
separates and eveningwear. Nearly one half of the line is manufactured in the
Company's production facilities, including various knit styles. The balance of
the line is manufactured by outside contractors located in Italy using high
quality European woven fabrics.
 
  SHOES The St. John Shoe line consists of pumps, sling backs, loafers and
  -----
boots, manufactured in Italy using the finest Italian leather. During fiscal
1997, the Company began distribution of the shoe line to most of its major
customers in the United States.
 
  COAT COLLECTION The St. John Coat Collection consists primarily of faux fur
  ---------------
coats in various styles and colors, manufactured in the Company's factories,
using fabric imported from Europe.
 
  SJK The SJK line consists of dresses, skirts, pants, jackets and sweaters
  ---
which are simpler and priced from 30% to 50% lower than the Company's knit
product line. The new line began shipping during the fourth quarter of fiscal
1997. SJK will be distributed through the Company's major customers.
 
  FRAGRANCE The Fragrance line includes perfume, eau de parfum, perfumed body
  ---------
mist, body cream, lotion, body powder and bath products. The signature
fragrance is marketed as an accessory to the St. John apparel line through
most of the Company's major customers and the Company's own retail stores.
During fiscal 1997, the Company signed a distribution agreement to allow
another company the rights to distribute the fragrance in the United States.
 
  The following table details the approximate range of suggested retail prices
by product line. The suggested retail prices are indicative of individual item
prices.
 
<TABLE>
<CAPTION>
                                                            RANGE OF SUGGESTED
      PRODUCT LINE             SELECTED PRODUCTS              RETAIL PRICES
      --------------- -----------------------------------   ------------------
      <C>             <S>                                   <C>
      Knitwear
       Collection     Dresses, 2-Piece Suits, 3-Piece          $350-$1,300
                      Suits, Jackets,
                      Pants, Skirts, Coats, Sweaters,
                      Separates
       Dressy         Dresses, Theater Suits, Dressy           $650-$2,000
                      Separates
       Basics         Skirts, Jackets, Pants                   $160-$  690
       Couture        Dresses, Gowns, Two-Piece Suits          $900-$3,300
      Accessories     Jewelry, Scarves, Belts, Handbags        $ 65-$  450
      Sport           Jackets, Skirts, Pants, Tops, Jeans      $120-$  700
      Griffith & Gray Suits, Coats, Dresses, Separates,        $300-$1,200
                      Eveningwear
      Shoes           Pumps, Sling Backs, Loafers, Boots       $220-$  495
      Coat Collection Faux Fur Coats                           $700-$1,300
      SJK             Dresses, Skirts, Pants, Jackets,         $150-$  600
                      Sweaters
      Fragrance       Perfume, Bath Products                   $ 25-$  250
</TABLE>
 
                                       2
<PAGE>
 
SALES BY DIVISION
 
  The following is a comparison of the net sales by division for the past two
fiscal years:
 
<TABLE>
<CAPTION>
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
     <S>                                                     <C>       <C>
     Knitwear............................................... $173,550  $149,297
     Company Owned Retail Stores............................   64,154    51,334
     Accessories............................................    9,328    10,105
     Sport..................................................    8,545     9,457
     Griffith & Gray........................................    5,605     3,585
     Shoes..................................................    3,441       --
     Coat Collection........................................    2,440     1,982
     SJK....................................................    1,980       --
     Fragrance..............................................    1,725     2,762
     Consolidated Subsidiaries..............................    2,074       --
     Sales Elimination......................................  (30,741)  (25,571)
                                                             --------  --------
     Total Net Sales........................................ $242,101  $202,951
                                                             ========  ========
</TABLE>
 
DESIGN
 
  Marie St. John Gray is the Company's Chief Designer and provides leadership
and direction for all aspects of the design process. In 1991, Kelly Gray
assumed the responsibilities of Creative Director, and she was appointed
President of the Company in April 1996. She currently shares with Marie Gray
the responsibility of providing leadership and direction for the design staff.
Each product line of the Company has its own design team which reports to
either Marie or Kelly Gray.
 
MARKETING
 
  The Company's products are distributed primarily through a select group of
specialty retailers and the Company's own retail boutiques. The Company
distributes its products to approximately 600 locations in the United States
and abroad. Three national specialty retailers, Saks Fifth Avenue, Neiman
Marcus and Nordstrom, each accounted for more than 10.0% of the Company's net
sales in fiscal 1997 (approximately 47% collectively), and have been customers
of the Company for approximately 25, 20 and 15 years, respectively. These
retailers generally purchase knitwear styles in each collection and carry a
representative display of every product line. Since the mid 1980s, the Company
has worked with these and certain other retailers to create in-store
boutiques, which are designated areas devoted exclusively to the Company's
products. Other significant customers of the Company include Jacobson's,
Macy's West, Lord & Taylor, Marshall Field's and Dayton Hudson.
 
  During fiscal years 1997 and 1996, foreign sales accounted for approximately
7.6% and 6.6% of the Company's net sales, respectively. The Company
distributes its products directly in Canada, Europe and parts of Asia. In
Europe and parts of Asia, the Company uses independent sales representatives.
During fiscal 1997, the Company formed a majority owned subsidiary in Japan.
This new entity will distribute the Company's products within Japan. Prior to
the formation of this new entity, the Company used a distributor for its sales
into Japan.
 
  The Company believes that most major retailers are continuing to consolidate
their women's apparel buying among a narrowing group of established brand name
vendors such as the Company. Further, the Company is viewed by most of its
major accounts as a core resource. This means that the Company's collection is
one of the top products in the store in terms of sales volume and is the focus
of management's attention and an important component to their profit
structure. A core resource is valued by its growth potential and ability to
make money for the store. As a core resource, the Company also receives
priority in display, advertising, promotion and high traffic locations for its
products.
 
  The Company markets its Collection, Dressy and Couture lines along with its
Sport and Griffith & Gray lines twice a year, during the fall and
cruise/spring seasons. The SJK and Shoe lines are marketed four times per
 
                                       3
<PAGE>
 
year, while the Coat Collection is marketed only once a year. The Company
markets its Basics, Accessories and Fragrance lines throughout the year. The
Company's product lines are sold in its Irvine, Dallas, New York and
Dusseldorf showrooms. The Company also markets its products in other foreign
countries using its outside sales representatives to show the lines at various
times throughout the year. Major accounts make their purchases in the Irvine
showroom so that members of the Company's senior management team can work
closely with these retailers to achieve the appropriate mix of merchandise.
Members of the senior management team are also present in Dallas, New York and
Dusseldorf to oversee sales during peak sales periods. Showings for the
Knitwear product line for the fall season generally occur in January with
delivery between May and October, and showings for the cruise/spring season
generally occur in August with delivery between November and April. Orders for
each of these six-month delivery periods normally are received within five
weeks of showings, and the goods are then made to order, thereby minimizing
inventory risk.
 
  Detailed marketing plans are prepared on a yearly basis and are coordinated
with senior management of major retail customers. Plans are based on
purchases, expected sales growth and profitability, and consist of a blend of
advertising, promotion, in-store presentation and training of sales personnel.
The strategy of the Company is to not only sell its products at wholesale, but
to follow the sale through to the ultimate consumer. The Company believes that
this approach ensures steady, consistent growth by building its consumer base.
The retail account sales force consists of an outside sales team, showroom
personnel and customer service representatives. The outside sales team is
comprised of 35 field representatives employed by the Company who live and
work in key retail cities. They are experienced individuals with strong retail
or wholesale backgrounds, and they are directly accountable for the
performance of their assigned retail stores. The function of the outside sales
team is to establish and maintain in-store boutique presentations, to develop
close working relationships with store management, to develop key sales people
into St. John specialists, and to be skilled and knowledgeable trainers in
fashion, style and fit. The Company also has showroom personnel positioned at
its showrooms in Irvine, Dallas and New York who present the collection to
retail accounts. The Company's customer service representatives who are also
located at the showrooms maintain computerized shipping and order records and
keep daily or weekly information on each store's retail sales and styles sold.
 
  The Company also believes it is necessary to have top sales people employed
by its retail customers' stores as designated St. John specialists. The
Company has developed programs through which the stores and the Company
sponsor the training of sales people at the Company's headquarters and
establish incentive goals for each sales person. Information from the
Company's sales force and communication with these specialists give the
Company firsthand knowledge of consumer reaction to style, fit and fashion.
The specialist programs vary and are tailored to the individual retail store.
The Company is involved in the hiring and the supervision of the specialists.
The St. John specialist position is viewed as highly desirable for its
management attention and rewards.
 
  In keeping with its exclusive upscale image, the Company advertises in both
national and international fashion magazines. Management believes that this
advertising approach enhances the Company's image. The Company's advertising
features Kelly Gray as its Signature Model. The Company designs and produces
seasonal exclusive St. John catalogs, which are distributed at the discretion
of individual specialty retailers. Distribution is usually limited to target
repeat purchasers or those who meet the Company's consumer profile.
 
COMPANY OWNED STORES
 
  In order to diversify its product distribution and enhance name recognition,
the Company began opening its own retail boutiques in 1989 and currently
operates eighteen such boutiques. During fiscal 1997, the Company relocated
its retail boutique locations in both Dallas and Palm Beach to new, larger
facilities. This move increased the square footage of the boutiques by 1,700
and 3,400 square feet, respectively. Subsequent to the end of fiscal 1997, the
Company opened its eighteenth boutique in Aspen, Colorado. The Company also
operates seven outlet stores for off-price inventory, which includes unsold
items from its boutiques, seconds and design samples. In fiscal years 1997 and
1996, Company owned retail boutiques and outlet stores represented 26.5% and
25.3% of net sales, respectively. The Company believes its retail boutiques
have not adversely affected sales of its products by specialty retailers.
 
                                       4
<PAGE>
 
  During fiscal 1997, the Company formed Amen Wardy Home Stores, LLC, a new
entity which is 51 percent owned. The new entity was established to operate
home furnishing boutiques under the name of Amen Wardy Home. The Amen Wardy
Home boutiques will sell upscale home furnishing and gift items. Two boutiques
were open prior to the end of fiscal 1997, including locations in Dallas and
Boston.
 
MANUFACTURING
 
  The Company has developed a vertically integrated manufacturing process
which it believes is critical to its success. This process assures greater
quality control, enhances manufacturing flexibility and reduces the lead time
of the manufacturing cycle. The Company twists, dyes and knits its yarn, as
well as constructs, presses and finishes its knit products, in its six
facilities located in Southern California. The Company manufactures its
knitwear using the computer aided manufacturing capabilities of its electronic
knitting machines and a skilled labor force. The Company also manufactures its
own jewelry and hardware for its products. Since the Company manufactures
products primarily based on orders received from retailers, the Company
maintains limited inventories of finished goods. During fiscal 1997,
approximately 94% of the Company's products were manufactured at the Company's
own facilities, while the remaining 6% of the Company's products, consisting
principally of the Griffith & Gray and shoe product lines, as well as
handbags, scarves, belts and fragrance, were manufactured by outside
contractors primarily in Europe.
 
  The basic raw materials for the Company's knitted apparel products consist
of wool originating from Australia and viscose rayon from Germany and Japan.
The manufacturing process begins when the wool and rayon are twisted together
on the Company's precision twisting machines. The twisted yarn is transferred
to the Company's dye house for dyeing. Yarn is dyed, based on garment orders
received. The dyed yarn is knitted to create apparel products on the Company's
computerized electronic knitting machines. The knitted pieces, or blankets,
are assembled and finished in the Company's linking, seaming and hand
finishing facilities. The Company's jewelry and hardware manufacturing plant
produces the buttons and buckles for garments, as well as bracelets, earrings,
necklaces, chokers, pins and other accessories. During fiscal 1997, the
Company began to manufacture more of its woven products in its manufacturing
facilities, including both the Sport and Coat Collection lines. In addition,
the Company manufactures blouses, jeans and certain scarves in its own
facilities.
 
  The Company's production staff coordinates all apparel manufacturing. The
vertical integration and constant monitoring of the manufacturing process
allows for timely reaction to styles or groups of styles that are in high
demand. This response time would be more difficult if the Company had to rely
on outside contractors.
 
  The Company's vertically integrated jewelry and hardware manufacturing
facility was completed in December 1991. This facility allows for extensive
product development by the Company's creative design team, quality control
over all phases of jewelry manufacturing and quick response to production
requirements. Subsequent to the end of fiscal 1997, the Company purchased land
and started construction on a new jewelry and hardware manufacturing facility
located in Mexico. The new facility will be completed during fiscal 1998 and
will give the Company additional manufacturing capacity as well as lower the
cost of certain jewelry and hardware components.
 
QUALITY CONTROL
 
  The Company has achieved its quality reputation by vertically integrating
manufacturing processes and maintaining strict control over its operations.
The Company's expansion into dyeing, yarn twisting and jewelry and hardware
manufacturing was due primarily to the inability of outside suppliers to
provide products meeting the Company's standards on a consistent and timely
basis. The Company's comprehensive quality control program is designed to
ensure that all finished goods meet the Company's standards. During the
manufacturing processes, every garment is individually inspected.
 
  As noted above, the Company does use outside contractors primarily for the
manufacturing of its shoes, handbags and woven products. The Company has
instituted procedures to maintain the quality of products manufactured by
outside contractors.
 
                                       5
<PAGE>
 
SUPPLIERS
 
  In the production of its knitwear, the Company uses the highest quality
wool, primarily from Australia. Generally, a wool commitment is taken with the
Company's primary U.S. spinner for a set quantity of wool based on the
Company's forecasted wool requirements for approximately one year. Other
spinners are available, both domestically and internationally, with comparable
pricing for spun Australian wool yarn. The Company also has yarn suppliers in
Europe and Asia. The Company generally maintains an inventory of twisted yarn
sufficient for approximately six weeks of production to protect it from
potential interruptions in the flow of raw materials. Rayon is available in
raw or dyed form from various European and Japanese suppliers. The Company
purchases fabric from various suppliers and has little difficulty in
satisfying its fabric requirements from Europe and Asia. Crystals, glass
beadings, pearls and raw materials used in manufacturing of paillettes are
purchased from certain suppliers in Europe. The Company believes there are
alternative sources for certain of these specialized items.
 
TRADEMARKS
 
  The Company owns and utilizes several trademarks, principal among which are
St. John(R), Marie St. John(R), SJK(R), St. John Boutiques(R) and Griffith
Gray(R). The St. John(R) trademark is registered with the United States Patent
and Trademark Office and in several other major jurisdictions in the world.
The Company does not own the rights to sell its knitwear products under the
St. John(R) trademark in Japan. Sales of the Company's products in Japan are
made under the trademark Marie Gray for Best International(R), which is also
owned by the Company. The Company regards its trademarks and other proprietary
rights as valuable assets and believes that they have significant value in the
marketing of its products. The Company vigorously protects its trademarks
against infringement.
 
REGULATION
 
  Federal, state and local regulations relating to the work place and the
discharge of materials into the environment are continually changing;
therefore, it is difficult to gauge the total future impact of such
regulations on the Company. However, the Company does not expect existing
government regulations to have a material effect on the Company's competitive
position, operating results or planned capital expenditures.
 
SUBSIDIARIES
 
 St. John Knits International, Incorporated
 
  St. John Knits International, Incorporated ("International") is a foreign
sales corporation for the Company. International was incorporated during
fiscal 1997 in Barbados as a "large FSC" under Section 922 of the Internal
Revenue Code of 1986, as amended. International participates in certain of the
Company's foreign operations.
 
  Previously, the Company operated a "small FSC" under the name St. John Knits
International, Inc. This entity was dissolved during fiscal 1997.
 
 St. John Company, Ltd.
 
  St. John Company, Ltd. is a 51 percent owned subsidiary of the Company which
was incorporated during fiscal 1997 under the laws of Japan. St. John Company,
Ltd. is licensed by the Company to distribute the Company's products in Japan.
 
 Amen Wardy Home Stores, LLC
 
  Amen Wardy Home Stores, LLC ("Amen"), a Delaware limited liability company,
is a 51 percent owned subsidiary of the Company. Amen was formed during fiscal
1997 to operate retail home furnishing boutiques.
 
 St. John Trademarks, Inc.
 
  St. John Trademarks, Inc. is a wholly owned subsidiary of the Company. St.
John Trademarks, Inc. and the Company have entered into a partnership
organized under the laws of Luxembourg to hold certain of the Company's
proprietary rights.
 
                                       6
<PAGE>
 
 St. John--Varian Development Company
 
  Effective April 3, 1995, the Company formed a joint venture with an
unrelated third party to acquire a 175,000 square foot building located in
Irvine, California. The Company and the third party each hold a 50% interest
in the partnership. The partnership leases the building to the Company under a
lease agreement expiring in 2010.
 
 St. John--Italy, Inc.
 
  St. John--Italy, Inc., a California corporation, is a wholly owned
subsidiary of the Company. St. John--Italy, Inc. was incorporated during
fiscal 1996 to operate as a branch in Italy. During fiscal 1997, the entity
began operating as a buying office for the Company.
 
 St. John Knits AG
 
  St. John Knits AG is a wholly owned subsidiary of the Company which was
incorporated during fiscal 1996 under the laws of Switzerland. St. John Knits
AG operates a research and development facility and buying office located in
Switzerland.
 
 St. John de Mexico SA de CV
 
  St. John de Mexico SA de CV is a wholly owned subsidiary of the Company
which was incorporated during fiscal 1997 under the laws of Mexico. St. John
de Mexico will operate as a manufacturing entity within Mexico to assist in
the production of the Company's jewelry and hardware components.
 
COMPETITION
 
  The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater
financial resources than the Company. The Company competes primarily on the
basis of fashion, price and quality. The Company believes its competitive
advantages include its reputation for producing high quality, fashionable
products while maintaining a consistency of design and style. This high
quality and consistent design has resulted in the St. John name becoming
highly recognized and firmly established.
 
  The Company believes that its primary competition is not just other knitwear
manufacturers, but successful design houses such as Armani, Anne Klein,
Chanel, Donna Karan and Escada. The Company considers the risk of strong new
competitors to be limited due to barriers to entry such as significant start-
up costs and the long-term nature of supplier and customer relations. It has
been the Company's experience that during the past few years major retailers
have been increasingly unwilling to source products from suppliers who are not
well-capitalized or do not have established reputations for delivering quality
merchandise in a timely manner. However, there can be no assurances that
significant new competitors will not emerge in the future.
 
EMPLOYEES
 
  At November 2, 1997, the Company had approximately 3,255 full-time
employees, including 7 in executive positions, approximately 210 in design and
sample production, 2,370 in production, 80 in quality control, 265 in retail,
85 in sales and advertising, and the balance in clerical and office positions.
The Company is not party to any labor agreements, and none of its employees
are represented by a union. The Company believes a significant number of its
employees are highly skilled and that turnover among these employees has been
minimal. The Company considers its relationship with its employees to be good
and has not experienced any interruption of its operations due to labor
disputes.
 
BACKLOG
 
  At November 2, 1997, the Company had unfilled customer orders for the
cruise/spring season of approximately $97 million compared with approximately
$79 million as of November 3, 1996. Orders for the cruise/spring season are
generally shipped during November through April. The Company's experience has
been that the cancellations, rejections or returns of orders do not materially
reduce the amount of sales realized from its backlog.
 
                                       7
<PAGE>
 
ITEM 2. PROPERTIES
 
  The principal executive offices of the Company are located at 17422 Derian
Avenue, Irvine, California 92614.
 
COMPANY-OWNED PROPERTIES
 
  The general location, use and approximate size of the Company-owned
properties are set forth below:
 
<TABLE>
<CAPTION>
                                                                          APPROXIMATE
                                                                            AREA IN
        LOCATION                                USE                       SQUARE FEET
------------------------  ----------------------------------------------- -----------
<S>                       <C>                                             <C>
Irvine, California......  Design Facility, Showroom, Sewing, Warehousing,   110,500
                          Shipping
Van Nuys, California....  Assembling, Sewing                                 27,900
San Ysidro, California..  Assembling                                         27,300
Irvine,
 California/(1)/........  Under Construction                                 24,300
Irvine, California......  Knitting                                           20,500
</TABLE>
 
LEASED PROPERTIES
 
  The general location, use, approximate size and lease expiration date of the
Company's principal leased properties are set forth below:
 
<TABLE>
<CAPTION>
                                                                 APPROXIMATE   LEASE
                                                                   AREA IN   EXPIRATION
        LOCATION                           USE                   SQUARE FEET    DATE
------------------------  -------------------------------------- ----------- ----------
<S>                       <C>                                    <C>         <C>
Irvine,                   Knitting, Sewing, Finishing, Shipping,   175,000      7/10
 California/(2)/........  Administrative Offices
Irvine, California......  Corporate Headquarters, Showroom,         85,000      5/01
                          Twisting, Dyeing
Alhambra, California....  Assembling, Sewing                        41,000      8/01
Santa Ana, California...  Jewelry and Hardware Manufacturing        23,000      5/99
New York, New York......  Showroom                                  12,300     11/04
New York,                                                            7,500      6/11
 New York/(3)/..........  Retail Boutique
Beverly Hills,                                                       7,000      3/06
 California.............  Retail Boutique
New York, New                                                        6,200      6/01
 York/(3)/..............  Retail Boutique
Chicago, Illinois.......  Retail Boutique                            6,000      9/04
Las Vegas, Nevada/(4)/..  Retail Boutique                            5,500      1/08
Munich, Germany.........  Retail Boutique                            4,400      4/02
</TABLE>
--------
(1) The Company closed escrow on this property on October 30, 1997. Once
    renovation is complete, this property will give the Company additional
    office and manufacturing space.
(2) The Company leases this property from a general partnership in which the
    Company holds a 50% interest.
(3) The square footage of the retail boutique located on 5th Avenue in New
    York City is covered by these two leases.
(4) This lease was entered on December 10, 1997 for a new boutique location in
    Las Vegas, Nevada. It is anticipated that the new boutique will open
    during the second quarter of fiscal 1998.
 
  The Company believes that there are facilities available for lease in the
event that either the productive capacities of the Company's manufacturing
facilities need to be expanded or a current lease of a manufacturing facility
expires. The Company also leases space for thirteen additional retail
boutiques, two additional showrooms, one additional administrative facility,
seven outlet stores, four Amen Wardy Home stores and a storage facility
(aggregating approximately 135,000 square feet).
 
  The Company leases certain of its facilities from affiliates of the Company.
See "Certain Relationships and Related Transactions." The Company believes
that its existing facilities are well maintained and in good operating
condition.
 
                                       8
<PAGE>
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is not a party to any litigation which is individually or in the
aggregate material to the business of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
                                       9
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
      MATTERS
 
  The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "SJK." The high and low trading prices of the Company's Common
Stock during each quarter of fiscal years 1997 and 1996, and the dividends
paid per share were as follows:
 
<TABLE>
<CAPTION>
                                        FISCAL 1997            FISCAL 1996
                                   ---------------------- ----------------------
QUARTER                             HIGH   LOW   DIVIDEND  HIGH   LOW   DIVIDEND
-------                            ------ ------ -------- ------ ------ --------
<S>                                <C>    <C>    <C>      <C>    <C>    <C>
Fourth............................ $49.19 $38.50  $0.025  $51.75 $39.38  $0.025
Third............................. $54.50 $38.75  $0.025  $48.50 $29.50  $0.025
Second............................ $45.50 $37.50  $0.025  $34.38 $22.88  $0.025
First............................. $48.13 $41.13  $0.025  $27.13 $23.19  $0.025
</TABLE>
 
  All amounts have been adjusted for the 2-for-1 stock split which occurred
during the third quarter of fiscal 1996.
 
  As of January 28, 1998, the closing sales price for the Company's Common
Stock, as reported on the New York Stock Exchange, was $39.9375.
 
  During fiscal years 1997 and 1996, the Company paid in the aggregate $.10
per share in cash dividends to its shareholders. In addition, the Company
declared another quarterly dividend of $.025 per share on December 16, 1997 to
be paid in cash on February 14, 1998 to the shareholders of record on January
14, 1998. The Company's ability to pay other dividends will depend upon
limitations under applicable law and other factors the Board of Directors
deems relevant, including results of operations, financial condition and
capital and surplus requirements.
 
  As of January 28, 1998, the number of holders of record of the Company's
Common Stock was approximately 350, and there were approximately 11,500
beneficial owners of the Company's Common Stock.
 
                                      10
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data has been derived from the consolidated
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. This information should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto and Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
<TABLE>
<CAPTION>
                                              FISCAL YEAR ENDED
                         NOVEMBER 2, NOVEMBER 3, OCTOBER 29, OCTOBER 30, OCTOBER 31,
                            1997        1996        1995        1994        1993
                         ----------- ----------- ----------- ----------- -----------
                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                      <C>         <C>         <C>         <C>         <C>
INCOME STATEMENT DATA:
Net sales...............  $242,101    $202,951    $161,795    $127,953    $100,328
Cost of sales...........    99,545      88,871      74,252      59,179      48,590
                          --------    --------    --------    --------    --------
Gross profit............   142,556     114,080      87,543      68,774      51,738
Selling, general and
 administrative
 expenses...............    84,545      68,385      54,550      43,288      32,959
                          --------    --------    --------    --------    --------
Operating income........    58,011      45,695      32,993      25,486      18,779
Other income............       713       1,355         803         340         272
                          --------    --------    --------    --------    --------
Income before income
 taxes..................    58,724      47,050      33,796      25,826      19,051
Income taxes............    24,300      19,929      14,243      10,880       7,992
                          --------    --------    --------    --------    --------
Net income..............  $ 34,424    $ 27,121    $ 19,553    $ 14,946    $ 11,059
                          ========    ========    ========    ========    ========
Net income per
 share/(1)/.............  $   2.01    $   1.59    $   1.19    $   0.91    $   0.67
                          ========    ========    ========    ========    ========
Dividends per
 share/(1)(2)/..........  $   0.10    $   0.10    $   0.10    $  0.075         --
                          ========    ========    ========    ========    ========
Weighted average shares
 outstanding/(1)/.......    17,134      17,016      16,433      16,396      16,392
                          ========    ========    ========    ========    ========
</TABLE>
 
<TABLE>
<CAPTION>
                         NOVEMBER 2, NOVEMBER 3, OCTOBER 29, OCTOBER 30, OCTOBER 31,
                            1997        1996        1995        1994        1993
                         ----------- ----------- ----------- ----------- -----------
                                               (IN THOUSANDS)
<S>                      <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Working capital.........  $ 69,693    $ 49,628     $38,130     $31,442     $22,280
Total assets............   153,904     116,494      85,973      62,634      46,262
Total debt..............       --          --          --          --          --
Shareholders' equity....   130,680      97,093      69,227      50,530      36,580
</TABLE>
--------
(1) Net income per share, dividends per share and weighted average shares
    outstanding have been adjusted for the 2-for-1 stock split which occurred
    during the third quarter of fiscal 1996.
(2) During fiscal 1993, the Company paid a special cash dividend of $5,000,000
    to all shareholders of record on February 8, 1993 (i.e., the shareholders
    of the Company prior to its initial public offering). Due to the one-time
    nature of this special cash dividend, it is not reflected as dividends per
    share in this table.
 
                                      11
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
  Management's discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes related thereto.
 
RESULTS OF OPERATIONS
 
  The following table is derived from the Company's Consolidated Statements of
Income and sets forth, for the periods indicated, the results of operations as
a percentage of net sales:
 
<TABLE>
<CAPTION>
                                                 PERCENTAGE OF NET SALES
                                                    FISCAL YEAR ENDED
                                           -----------------------------------
                                           NOVEMBER 2, NOVEMBER 3, OCTOBER 29,
                                              1997        1996        1995
                                           ----------- ----------- -----------
<S>                                        <C>         <C>         <C>
Net sales.................................    100.0%      100.0%      100.0%
Cost of sales.............................     41.1        43.8        45.9
                                              -----       -----       -----
Gross profit..............................     58.9        56.2        54.1
Selling, general and administrative ex-
 penses...................................     34.9        33.7        33.7
                                              -----       -----       -----
Operating income..........................     24.0        22.5        20.4
Other income..............................      0.3         0.7         0.5
                                              -----       -----       -----
Income before income taxes................     24.3        23.2        20.9
Income taxes..............................     10.0         9.8         8.8
                                              -----       -----       -----
Net income................................     14.3%       13.4%       12.1%
                                              =====       =====       =====
</TABLE>
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
  Net sales for fiscal 1997 increased by $39,150,000, or 19.3% over fiscal
1996. This increase was principally attributable to (i) an increase in sales
to existing domestic retail customers of approximately $23,017,000, (ii) an
increase in sales by Company owned retail stores of approximately $12,820,000,
due in part to the expansion of the New York boutique, which was completed in
October 1996, and the addition of one retail boutique and two retail outlet
stores since the beginning of fiscal 1996 and (iii) an increase in sales to
international retail customers of $3,313,000. Net sales increased primarily as
a result of increased unit sales of various product lines.
 
  Gross profit for fiscal 1997 increased by $28,476,000, or 25.0% as compared
with fiscal 1996, and increased as a percentage of net sales to 58.9% from
56.2%. This increase in the gross profit margin was primarily due to an
increase in the number of garments being produced and sold without a
corresponding increase in the production costs, due in part to the fixed
nature of certain costs.
 
  Selling, general and administrative expenses for fiscal 1997 increased by
$16,160,000, or 23.6% over fiscal 1996, and increased as a percentage of net
sales to 34.9% from 33.7%. This increase was primarily due to (i) an increase
in promotion and advertising expenses related to an expansion of the Company's
advertising program, (ii) an increase in salaries due to the Company's
continued effort to build its sales and marketing team and (iii) an expansion
of the Company's sales to foreign customers which include, among other things,
import duty, sales commissions, and additional freight charges.
 
  Operating income for fiscal 1997 increased by $12,316,000 or 27.0% over
fiscal 1996. Operating income as percentage of net sales increased to 24.0%
from 22.5% during the same period. This increase in operating income as a
percentage of net sales was due to the increase in the gross profit margin
which was partially offset by the increase in selling, general and
administrative expenses as a percentage of net sales.
 
  Other income for fiscal 1997 decreased by $642,000 as compared with fiscal
1996. This decrease was primarily due to the receipt of a workers'
compensation insurance dividend of $316,000 during the first quarter of fiscal
1996, which related to the policy period ended December 31, 1994.
 
                                      12
<PAGE>
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
  Net sales for fiscal 1996 increased by $41,156,000, or 25.4% over fiscal
1995. This increase was principally attributable to (i) an increase in sales
to existing domestic retail customers of approximately $23,992,000, (ii) an
increase in sales by Company owned retail stores of approximately $12,503,000,
due in part to the addition of three retail boutiques and two retail outlet
stores since the beginning of fiscal 1995 and (iii) an increase in sales to
international retail customers of $4,661,000. Net sales increased primarily as
a result of increased unit sales of various product lines.
 
  Gross profit for fiscal 1996 increased by $26,537,000, or 30.3% as compared
with fiscal 1995, and increased as a percentage of net sales to 56.2% from
54.1%. This increase in the gross profit margin was due to (i) an increase in
the number of garments being produced and sold without a corresponding
increase in the production costs, due in part to the fixed nature of certain
costs, and (ii) an increase in the gross profit margin recorded for the
Company owned retail stores ("Retail Division").
 
  Selling, general and administrative expenses for fiscal 1996 increased by
$13,835,000, or 25.4% over fiscal 1995, yet stayed constant as a percentage of
net sales at 33.7%. The Company experienced a decrease in the selling, general
and administrative expenses as a percentage of net sales due to an increase in
the net sales during fiscal 1996 without a corresponding increase in selling,
general and administrative expenses, which was offset by (i) an increase in
advertising expense due to the expansion of the Company's advertising program,
(ii) an expansion of the Company's sales to foreign customers which include,
among other things, import duty, sales commissions, and additional freight
charges; and (iii) the higher selling, general and administrative expenses as
a percentage of sales reported by the Retail Division.
 
  Operating income for fiscal 1996 increased by $12,702,000, or 38.5% over
fiscal 1995. Operating income as percentage of net sales increased to 22.5%
from 20.4% during the same period. This increase in operating income as a
percentage of net sales was due to the increase in the gross profit margin.
 
  Other income for fiscal 1996 increased by $552,000 as compared with fiscal
1995. This increase was primarily due to the receipt of a workers'
compensation insurance dividend of $316,000 which related to the policy period
ended December 31, 1994. In addition, the Company reported higher interest
income due to the increase in its invested cash balances.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventory and accounts receivable, and for the
purchase of property and equipment. During fiscal 1997, cash provided by
operating activities was $30,459,000. Cash provided by operating activities
was primarily generated by net income and an increase in accounts payable,
while cash used in operating activities was primarily used to fund the
increases in accounts receivable and inventories. Cash used in investing
activities was $21,542,000 during fiscal 1997. The principal use of cash in
investing activities was for (i) the construction of the new design center,
(ii) the purchase of 40 computerized knitting machines, (iii) the purchase of
1.8 acres of land including a 24,300 square foot building in Irvine,
California to be used for future expansion, (iv) the construction of
improvements for two new manufacturing facilities in Southern California and
(v) the construction of leasehold improvements for new boutique locations in
Dallas and Palm Beach.
 
  During fiscal 1997, the Company purchased the trademark Marie Gray for Best
International(R) from its distributor in Japan. In addition, the Company
formed St. John Company, Ltd. in Japan to operate as a 51 percent owned
subsidiary to distribute the Company's products in Japan. The Company also
formed Amen Wardy Home Stores, LLC, which currently operates two home
furnishing stores under the name Amen Wardy Home.
 
                                      13
<PAGE>
 
  The Company anticipates purchasing property and equipment of approximately
$20,000,000 during 1998. The estimated $20,000,000 will be used principally
for (i) the purchase of computerized knitting machines, (ii) the purchase of
property and the construction of improvements for a jewelry manufacturing
facility in Mexico, (iii) upgrades to the Company's computer systems and (iv)
the construction of leasehold improvements for new boutique locations in both
Hawaii and Las Vegas.
 
  As of November 2, 1997, the Company had approximately $69,693,000 in working
capital and $16,618,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25,000,000 bank line of credit ("Line of Credit"). Subsequent to the
end of fiscal 1997, the Company amended the Line of Credit to extend the
expiration date to March 1, 2000. The Line of Credit is unsecured and
borrowings thereunder bear interest at the Company's choice of the bank's
reference rate (8.5 percent at November 2, 1997) or an offshore rate plus 1.5
percent. As of November 2, 1997, no amounts were outstanding under the Line of
Credit. The Company invests its excess funds primarily in a money market fund,
investment grade commercial paper, adjustable rate tax deferred municipal
obligations collateralized by letters of credit issued by financial
institutions and tax exempt municipal bonds.
 
  The Company believes it will be able to finance its working capital and
capital expenditure requirements on both a short-term and long-term basis with
internally generated funds.
 
  The Company paid approximately $1,661,000 in dividends to its shareholders
during fiscal 1997. On December 16, 1997, the Company declared another
quarterly cash dividend of $0.025 per outstanding share to be paid on February
14, 1998 to shareholders of record on January 14, 1998. Future dividends by
the Company remain subject to limitations under applicable law and other
factors the Board of Directors deems relevant, including results of
operations, financial condition and capital requirements.
 
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
 
  See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements and supplementary data filed with this
report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 2, 1997, under the
captions "Election of Directors" and "Executive Officers," and is incorporated
herein by this reference as if set forth in full herein.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 2, 1997 under the
captions "Executive Compensation and Other Information," "Election of
Directors," "Compensation Report," and "Company Stock Price Performance," and
is incorporated herein by this reference as if set forth in full herein.
 
                                      14
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 2, 1997 under the
caption "Security Ownership of Certain Beneficial Owners and Management," and
is incorporated herein by this reference as if set forth in full herein.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Shareholders to be
filed with the Commission within 120 days of November 2, 1997 under the
caption "Certain Transactions," and is incorporated herein by this reference
as if set forth in full herein.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) The following documents are filed as part of this report:
 
    1. Consolidated Financial Statements--See "Index to Consolidated
  Financial Statements"
 
    2. Consolidated Financial Statement Schedule--See "Index to Consolidated
  Financial Statements"
 
    3. Exhibits--See "Exhibit Index"
 
  (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended November 2, 1997.
 
                                      15
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..................................  17
 
CONSOLIDATED FINANCIAL STATEMENTS
  Consolidated Balance Sheets at November 2, 1997 and November 3, 1996....  18
  Consolidated Statements of Income for the years ended November 2, 1997,
   November 3, 1996 and October 29, 1995..................................  19
  Consolidated Statements of Shareholders' Equity for the years ended
   November 2, 1997, November 3, 1996 and October 29, 1995................  20
  Consolidated Statements of Cash Flows for the years ended November 2,
   1997, November 3, 1996 and October 29, 1995............................  21
  Notes to Consolidated Financial Statements..............................  22
 
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Schedule II--Valuation and Qualifying Account...........................  30
</TABLE>
 
                                       16
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To St. John Knits, Inc.:
 
  We have audited the accompanying consolidated balance sheets of ST. JOHN
KNITS, INC. (a California corporation) and subsidiaries as of November 2, 1997
and November 3, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended November 2, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of St. John Knits, Inc. and subsidiaries as of November 2, 1997 and
November 3, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended November 2, 1997 in conformity
with generally accepted accounting principles.
 
  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
 
 
                                          Arthur Andersen LLP
 
Orange County, California
December 17, 1997
 
                                      17
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                     NOVEMBER 2,   NOVEMBER 3,
                    A S S E T S                          1997          1996
                    -----------                      ------------  ------------
<S>                                                  <C>           <C>
Current assets:
  Cash and cash equivalents......................... $ 14,266,564  $  6,186,057
  Investments.......................................    2,351,765     4,222,516
  Accounts receivable, net..........................   36,572,423    28,093,606
  Inventories.......................................   30,736,980    23,619,054
  Deferred income tax benefit.......................    5,793,961     5,493,961
  Other.............................................    2,591,742     1,269,382
                                                     ------------  ------------
    Total current assets............................   92,313,435    68,884,576
Property and equipment:
  Machinery and equipment...........................   35,903,659    29,930,228
  Leasehold improvements............................   25,351,868    22,636,537
  Buildings.........................................   11,572,917           --
  Furniture and fixtures............................    5,434,754     4,427,249
  Land..............................................    3,536,606     3,461,103
  Construction in progress..........................    4,225,573     6,797,018
                                                     ------------  ------------
                                                       86,025,377    67,252,135
  Less--Accumulated depreciation and amortization...   28,222,633    23,351,904
                                                     ------------  ------------
                                                       57,802,744    43,900,231
                                                     ------------  ------------
Other assets........................................    3,787,396     3,709,316
                                                     ------------  ------------
                                                     $153,903,575  $116,494,123
                                                     ============  ============
<CAPTION>
        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------
<S>                                                  <C>           <C>
Current liabilities:
  Accounts payable.................................. $ 10,034,396  $  5,404,401
  Accrued expenses..................................   10,504,934    11,508,469
  Income taxes payable..............................    2,081,242     2,344,000
                                                     ------------  ------------
    Total current liabilities.......................   22,620,572    19,256,870
                                                     ------------  ------------
Minority interest...................................      602,910           --
                                                     ------------  ------------
Deferred income tax liability.......................          --        143,941
                                                     ------------  ------------
Commitments (Note 7)
Shareholders' equity:
  Preferred Stock, no par value: Authorized--
   2,000,000 shares, issued and outstanding--none...          --            --
  Common Stock, no par value: Authorized--40,000,000
   shares, issued and outstanding--16,634,548 and
   16,599,064 shares, respectively..................      502,799       502,799
  Additional paid-in capital........................   18,929,541    18,085,151
  Cumulative Translation Adjustment.................      (19,351)          --
  Retained earnings.................................  111,267,104    78,505,362
                                                     ------------  ------------
                                                      130,680,093    97,093,312
                                                     ------------  ------------
                                                     $153,903,575  $116,494,123
                                                     ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       18
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED
                                        --------------------------------------
                                        NOVEMBER 2,  NOVEMBER 3,  OCTOBER 29,
                                            1997         1996         1995
                                        ------------ ------------ ------------
<S>                                     <C>          <C>          <C>
Net sales.............................. $242,100,843 $202,951,000 $161,794,890
Cost of sales..........................   99,545,173   88,870,838   74,252,002
                                        ------------ ------------ ------------
Gross profit...........................  142,555,670  114,080,162   87,542,888
Selling, general and administrative
 expenses..............................   84,544,884   68,385,089   54,550,191
                                        ------------ ------------ ------------
Operating income.......................   58,010,786   45,695,073   32,992,697
Other income...........................      712,694    1,355,234      803,455
                                        ------------ ------------ ------------
Income before income taxes.............   58,723,480   47,050,307   33,796,152
Income taxes...........................   24,299,829   19,928,645   14,242,838
                                        ------------ ------------ ------------
Net income............................. $ 34,423,651 $ 27,121,662 $ 19,553,314
                                        ============ ============ ============
Net income per share................... $       2.01 $       1.59 $       1.19
                                        ============ ============ ============
Dividends per share.................... $       0.10 $       0.10 $       0.10
                                        ============ ============ ============
Weighted average common shares
 and equivalents outstanding...........   17,133,631   17,015,991   16,432,884
                                        ============ ============ ============
</TABLE>
 
 
                            See accompanying notes.
 
                                       19
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                               PREFERRED
                                 STOCK        COMMON STOCK
                             ------------- -------------------
                             NUMBER          NUMBER            ADDITIONAL  CUMULATIVE
                               OF              OF                PAID-IN   TRANSLATION   RETAINED
                             SHARES AMOUNT   SHARES    AMOUNT    CAPITAL   ADJUSTMENT    EARNINGS       TOTAL
                             ------ ------ ---------- -------- ----------- ----------- ------------  ------------
<S>                          <C>    <C>    <C>        <C>      <C>         <C>         <C>           <C>
Balance, October 30, 1994..    --     --   16,413,536 $502,799 $14,899,340  $    --    $ 35,127,550  $ 50,529,689
  Dividends declared
   ($.10 per share)........    --     --          --       --          --        --      (1,643,816)   (1,643,816)
  Shares issued upon
   exercise of options
   including tax benefit...    --     --       55,198      --      788,053       --             --        788,053
  Net income...............    --     --          --       --          --        --      19,553,314    19,553,314
                              ----   ----  ---------- -------- -----------  --------   ------------  ------------
Balance, October 29, 1995..    --     --   16,468,734  502,799  15,687,393       --      53,037,048    69,227,240
  Dividends declared
   ($.10 per share)........    --     --          --       --          --        --      (1,653,348)   (1,653,348)
  Shares issued upon
   exercise of options
   including tax benefit...    --     --      130,330      --    2,397,758       --             --      2,397,758
  Net income...............    --     --          --       --          --        --      27,121,662    27,121,662
                              ----   ----  ---------- -------- -----------  --------   ------------  ------------
Balance, November 3, 1996..    --     --   16,599,064  502,799  18,085,151       --      78,505,362    97,093,312
  Dividends declared
   ($.10 per share)........    --     --          --       --          --        --      (1,661,909)   (1,661,909)
  Shares issued upon
   exercise of options
   including tax benefit...    --     --       35,484      --      844,390       --             --        844,390
  Foreign currency
   translation adjustment..    --     --          --       --          --    (19,351)           --        (19,351)
  Net income...............    --     --          --       --          --        --      34,423,651    34,423,651
                              ----   ----  ---------- -------- -----------  --------   ------------  ------------
Balance November 2, 1997...    --     --   16,634,548 $502,799 $18,929,541  $(19,351)  $111,267,104  $130,680,093
                              ====   ====  ========== ======== ===========  ========   ============  ============
</TABLE>
 
 
                            See accompanying notes.
 
                                       20
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED
                                       ----------------------------------------
                                       NOVEMBER 2,   NOVEMBER 3,   OCTOBER 29,
                                           1997          1996          1995
                                       ------------  ------------  ------------
<S>                                    <C>           <C>           <C>
Cash flows from operating activities:
  Net income.........................  $ 34,423,651  $ 27,121,662  $ 19,553,314
  Adjustments to reconcile net income
   to net cash provided
   by operating activities:
    Depreciation and amortization....     8,858,703     7,042,376     5,312,723
    Net increase in deferred income
     tax benefit.....................      (300,000)   (1,925,194)   (2,726,482)
    Loss on disposal of property and
     equipment.......................       215,810        42,792       237,401
    Partnership losses...............       351,165       224,368       145,714
    Minority interest in income of
     consolidated subsidiaries.......       602,910           --            --
    Increase in accounts receivable..    (8,478,817)   (6,969,300)   (4,760,170)
    Increase in inventories..........    (7,117,926)   (8,710,012)   (4,176,690)
    (Increase) decrease in other
     current assets..................    (1,322,360)   (1,022,146)       46,471
    (Increase) decrease in other
     assets..........................         6,700    (1,501,100)      (41,860)
    Increase in accounts payable.....     4,629,995       923,607       357,644
    Increase (decrease) in accrued
     expenses........................    (1,004,422)    2,343,116     1,325,607
    Increase (decrease) in income
     taxes payable...................      (262,758)     (729,125)    2,740,807
    Decrease in deferred income tax
     liability.......................      (143,941)          --            --
                                       ------------  ------------  ------------
      Net cash provided by operating
       activities....................    30,458,710    16,841,044    18,014,479
                                       ------------  ------------  ------------
Cash flows from investing activities:
  Proceeds from sale of property and
   equipment.........................        84,641        60,294        60,351
  Purchase of property and
   equipment.........................   (22,751,076)  (21,400,369)  (17,571,067)
  Purchase of trademarks.............      (747,928)          --            --
  Purchase of short-term
   investments.......................      (204,959)     (347,006)     (244,551)
  Sale of short-term investments.....     2,075,710     2,524,182           --
  Capital contributions to
   partnership.......................       (67,108)     (995,869)          --
  Capital distributions from
   partnership.......................        68,500        44,500        41,000
                                       ------------  ------------  ------------
      Net cash used in investing
       activities....................   (21,542,220)  (20,114,268)  (17,714,267)
                                       ------------  ------------  ------------
Cash flows from financing activities:
  Dividends paid.....................    (1,661,022)   (1,650,090)   (1,232,097)
  Issuance of common stock...........       844,390     2,397,758       788,053
                                       ------------  ------------  ------------
      Net cash provided by (used in)
       financing activities..........      (816,632)      747,668      (444,044)
                                       ------------  ------------  ------------
Effect of exchange rate changes......       (19,351)          --            --
                                       ------------  ------------  ------------
Net increase (decrease) in cash and
 cash equivalents....................     8,080,507    (2,525,556)     (143,832)
Beginning balance, cash and cash
 equivalents.........................     6,186,057     8,711,613     8,855,445
                                       ------------  ------------  ------------
Ending balance, cash and cash
 equivalents.........................  $ 14,266,564  $  6,186,057  $  8,711,613
                                       ============  ============  ============
Supplemental disclosures of cash flow
 information:
  Cash received during the year for
   interest income...................  $    988,272  $    717,099  $    559,548
                                       ============  ============  ============
  Cash paid during the year for:
    Interest expense.................  $     46,954  $        --   $      1,438
                                       ============  ============  ============
    Income taxes.....................  $ 24,526,911  $ 20,565,267  $ 13,991,651
                                       ============  ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       21
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
1. COMPANY BACKGROUND AND BASIS OF PRESENTATION
 
  The consolidated financial statements include the accounts of St. John
Knits, Inc. (St. John) and its subsidiaries. St. John and its subsidiaries are
collectively referred to herein as "the Company." All interdivisional and
intercompany transactions and accounts have been eliminated. The Company is a
leading designer, manufacturer and marketer of women's clothing and
accessories. The Company's products are distributed primarily through
specialty retailers and the Company's own retail boutiques.
 
  During fiscal 1997 the Company formed St. John Company, Ltd. in Japan to
operate as a 51 percent owned subsidiary to distribute the Company's products
in Japan. The Company also formed Amen Wardy Home Stores, LLC, which is also
51 percent owned and currently operates two home furnishing boutiques under
the name Amen Wardy Home. The operations of both entities are included in the
accompanying consolidated financial statements.
 
2. SUMMARY OF ACCOUNTING POLICIES
 
 a. Definition of Fiscal Year
 
  The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. Accordingly, fiscal years 1997, 1996 and
1995 ended on November 2, November 3 and October 29, respectively. Fiscal
years 1997 and 1995 were comprised of 52 weeks, and fiscal year 1996 was
comprised of 53 weeks.
 
 b. Use of Estimates
 
  The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain 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. Actual results may differ from those
estimates.
 
 c. Revenue Recognition
 
  Revenue on sales to specialty retailers is recognized when the goods are
shipped. The Company establishes liabilities for estimated returns and
allowances at the time of shipment. The Company also provides for estimated
discounts when recording sales. Retail sales are recognized at the point of
sale. The Company establishes liabilities for estimated returns at the retail
stores. Accounts receivable are shown net of allowances for discounts and
uncollectible accounts of $2,543,000 and $905,000 in fiscal year 1997, and
$1,938,000 and $750,000 in fiscal year 1996, respectively.
 
 d. Inventories
 
  Inventories are valued at the lower of cost or market. During fiscal 1997
the Company elected to change its method of accounting for its inventory from
the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
This change did not have a material effect on the financial statements for any
year presented. Therefore, the cumulative effect ($363,000) was reflected in
the fiscal year 1997 financial statements as a reduction of cost of goods
sold.
 
                                      22
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
  Inventories are comprised of the following:
<TABLE>
<CAPTION>
                                                           1997        1996
                                                        ----------- -----------
     <S>                                                <C>         <C>
     Raw materials..................................... $10,362,158 $ 7,510,657
     Work in process...................................   6,451,053   6,828,142
     Finished products.................................  13,923,769   9,642,902
                                                        ----------- -----------
     Inventories at FIFO...............................  30,736,980  23,981,701
     LIFO reserve......................................         --     (362,647)
                                                        ----------- -----------
                                                        $30,736,980 $23,619,054
                                                        =========== ===========
</TABLE>
 
 e. Property and Equipment
 
  Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method to provide for the retirement of
property and equipment at the end of their estimated useful lives, which range
from three to thirty-nine years.
 
 f. Cash and Cash Equivalents
 
  For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments purchased with a maturity of three months
or less.
 
 g. Foreign Exchange Transactions and Contracts
 
  The Company enters into foreign exchange contracts as a hedge against
exchange rate risk on the collection of certain accounts receivable
denominated in a foreign currency. Market value gains and losses are
recognized as the contracts mature, and exchange adjustments resulting from
foreign currency transactions are offset by exchange gains or losses
recognized from such contracts. All amounts are translated into U.S. dollars
at current exchange rates when recorded.
 
 h. Income Taxes
 
  The Company utilizes the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
 
 i. Earnings per Share
 
  Earnings per share for fiscal years 1997, 1996 and 1995 were calculated
based on the weighted average number of common and equivalent shares
outstanding during the periods. Equivalent shares were determined by using the
treasury stock method, which assumes that all dilutive securities were
exercised and that the proceeds received were applied to repurchase
outstanding shares at the average market price during the period.
 
  In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which is required to be adopted by the Company
during fiscal 1998. At that time, the Company will be required to change the
method used to compute earnings per share and to restate all prior periods
presented. Under the new requirements, primary earnings per share will be
replaced with basic earnings per share. Basic earnings per share excludes the
dilutive effect of common stock equivalents, including stock options. Had
earnings per share been calculated under the provisions of the new standard,
basic earnings per share would have increased to $2.07, $1.63 and $1.19 for
fiscal years 1997, 1996 and 1995, respectively. Diluted earnings per share
would remain the same as net income per share as reflected in the accompanying
Consolidated Statements of Income.
 
                                      23
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
 j. Two-for-one Stock Split
 
  On March 12, 1996, the Board of Directors declared a two-for-one common
stock split which was distributed on May 6, 1996 to shareholders of record at
the close of business on April 8, 1996. All share and per share data included
in the consolidated financial statements and accompanying notes have been
adjusted to reflect the stock split.
 
 k. Foreign Currency Translation
 
  The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to U.S. dollars in accordance with SFAS
No. 52. Substantially all assets and liabilities of the Company's foreign
subsidiaries are translated at year-end exchange rates, while revenue and
expenses are translated at average exchange rates prevailing during the year.
Adjustments for foreign currency translation fluctuations are excluded from
net income and are deferred as a separate component of consolidated
shareholders' equity.
 
 l. Advertising and Promotion
 
  All costs associated with advertising and promotion of the Company's
products are expensed as incurred.
 
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amounts of cash and cash equivalents approximate fair value.
Investments consist primarily of municipal bonds with maturity dates of less
than six months and other short-term investments with carrying amounts which
approximate fair value.
 
  The Company holds various foreign exchange contracts. At November 2, 1997,
the Company had contracts maturing through November 10, 1998 to sell 10.9
million deutsche marks and 670,000 British pounds at rates ranging from 1.55
to 1.71 deutsche marks to the U.S. dollar and 1.62 to 1.66 U.S. dollars to the
British pound. At November 3, 1996, the Company had contracts maturing through
April 30, 1997 to sell 2.4 million deutsche marks at rates ranging from 1.47
to 1.48 deutsche marks to the U.S. dollar.
 
  The estimated fair values of the Company's foreign exchange contracts are as
follows:
 
<TABLE>
<CAPTION>
                                          NOVEMBER 2, 1997   NOVEMBER 3, 1996
                                          -----------------  -----------------
                                          CARRYING   FAIR    CARRYING   FAIR
                                           VALUE    VALUE     VALUE    VALUE
                                          -------- --------  -------- --------
<S>                                       <C>      <C>       <C>      <C>
Foreign exchange contracts...............   --     $(94,040)   --     $(44,927)
</TABLE>
 
  During fiscal 1996, the Company adopted SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." It
is the Company's policy to reduce the effects of fluctuations in foreign
currency exchange rates associated with its sale of goods denominated in
foreign currency by entering into forward contracts. The Company enters into
contracts to sell foreign currencies in the future only to protect the U.S.
dollar value of certain investments and future foreign currency transactions.
The Company does not engage in speculation. The gains and losses on these
contracts are included in income and offset the foreign exchange gains and
losses on the underlying transactions.
 
                                      24
<PAGE>
 
                              ST. JOHN KNITS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
4. ACCRUED EXPENSES
 
  Accrued expenses for fiscal years 1997 and 1996 are comprised of the
following:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                        ----------- -----------
     <S>                                                <C>         <C>
     Wages and benefits................................ $ 4,013,350 $ 2,978,650
     Workers' compensation.............................     796,382     455,539
     Insurance.........................................     250,000     716,028
     Profit-sharing plan contribution..................     500,000     500,000
     Promotional and advertising allowance.............   1,741,896   1,952,423
     Other.............................................   3,203,306   4,905,829
                                                        ----------- -----------
                                                        $10,504,934 $11,508,469
                                                        =========== ===========
</TABLE>
 
5. INCOME TAXES
 
  The provision for income taxes for fiscal years 1997, 1996 and 1995, consists
of the following:
 
<TABLE>
<CAPTION>
                                              1997        1996         1995
                                           ----------- -----------  -----------
     <S>                                   <C>         <C>          <C>
     Current:
       Federal............................ $18,878,088 $16,434,369  $13,250,535
       State..............................   5,335,096   4,277,275    3,718,785
                                           ----------- -----------  -----------
                                            24,213,184  20,711,644   16,969,320
     Deferred provision (benefit).........      86,645    (782,999)  (2,726,482)
                                           ----------- -----------  -----------
                                           $24,299,829 $19,928,645  $14,242,838
                                           =========== ===========  ===========
</TABLE>
 
  The components of the deferred income tax provision (benefit) for fiscal
years 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                          1997        1996
                                                        ---------  -----------
     <S>                                                <C>        <C>
     Allowance for uncollectible accounts.............. $  57,083  $       --
     Inventory adjustments to market...................   609,067   (1,286,168)
     Accrued expenses..................................  (429,750)     374,841
     Depreciation......................................  (149,755)     128,328
                                                        ---------  -----------
                                                        $  86,645  $  (782,999)
                                                        =========  ===========
</TABLE>
 
                                       25
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
  The components of the Company's deferred income tax benefit (liability) as
of November 2, 1997 and November 3, 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                            1997       1996
                                                         ---------- ----------
     <S>                                                 <C>        <C>
     Deferred tax assets:
     Tax basis adjustments to inventory................. $1,952,210 $1,542,210
     Allowance for uncollectible accounts...............    364,583    307,500
     Inventory adjustments to market....................  2,952,273  2,753,206
     Accrued expenses...................................    524,895    891,045
                                                         ---------- ----------
                                                         $5,793,961 $5,493,961
                                                         ========== ==========
     Deferred tax liabilities:
     Depreciation....................................... $      --  $ (182,780)
     Other..............................................        --      38,839
                                                         ---------- ----------
                                                         $      --  $ (143,941)
                                                         ========== ==========
</TABLE>
 
  The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the income before provision
for income taxes for fiscal years 1997, 1996 and 1995 as follows:
 
<TABLE>
<CAPTION>
                                             1997        1996        1995
                                          ----------- ----------- -----------
     <S>                                  <C>         <C>         <C>
     Income tax provision computed at
      statutory rate..................... $20,553,218 $16,467,607 $11,828,653
     State taxes, net of federal
      benefit............................   3,549,834   2,844,192   2,262,653
     Other...............................     196,777     616,846     151,532
                                          ----------- ----------- -----------
     Tax provision....................... $24,299,829 $19,928,645 $14,242,838
                                          =========== =========== ===========
</TABLE>
 
6. BENEFIT PLANS
 
  The Company is self-insured for a portion of its medical benefits programs.
Amounts charged to expense for health benefits were $3,110,000, $3,137,000 and
$3,114,000 for fiscal years 1997, 1996 and 1995, respectively, and were based
on actual and estimated claims incurred. The current liability for health
benefits is included in current liabilities on the accompanying consolidated
balance sheets. The Company maintains excess insurance coverage on an
individual and an aggregate basis.
 
  The Company maintains a qualified profit-sharing plan for the benefit of all
eligible employees. This plan contemplates the sharing of profits annually at
the discretion of the Board of Directors and is funded by cash contributions.
The contribution to this plan was $500,000, in each of the fiscal years 1997,
1996 and 1995.
 
  The Company has one stock option plan, the 1993 St. John Knits, Inc. Stock
Option Plan (the "Plan"). Options granted under the Plan may be either
incentive or nonstatutory stock options. The Company accounts for the Plan
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized for fiscal years 1997 and 1996.
 
  SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to that of the Company. Adoption of SFAS No. 123 is optional for
employee stock option grants, however pro forma disclosure as if the Company
had adopted the cost recognition method is required. Had compensation cost for
stock options awarded under the
 
                                      26
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
Plan been determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have reflected the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                            1997        1996
                                                         ----------- -----------
     <C>                   <S>                           <C>         <C>
     Net income:           As reported.................  $34,423,651 $27,121,662
                           Pro forma...................  $33,605,519 $27,085,063
     Net income per share: As reported.................        $2.01       $1.59
                           Pro forma...................        $1.96       $1.59
</TABLE>
 
  The Company may grant up to 1,600,000 options under the Plan. The Company
has granted 1,098,000 options through November 2, 1997. The options are
primarily issued at fair market value with exercise prices equal to the
Company's stock price at the date of grant. Options generally vest over three
years; are exercisable in whole or in installments; and expire ten years from
date of grant.
 
  The following is a summary of the activity in the Plan for fiscal years
1997, 1996, and 1995:
 
<TABLE>
<CAPTION>
                                                        1997              1996               1995
                                                  ----------------- ------------------ -----------------
                                                           WEIGHTED           WEIGHTED          WEIGHTED
                                                           AVERAGE            AVERAGE           AVERAGE
                                                           EXERCISE           EXERCISE          EXERCISE
                                                  SHARES    PRICE    SHARES    PRICE   SHARES    PRICE
                                                  -------  -------- --------  -------- -------  --------
<S>                                               <C>      <C>      <C>       <C>      <C>      <C>
Outstanding, beginning of year..................  681,472   $ 9.45   784,470   $ 8.81  812,668   $ 8.58
Granted.........................................  197,000    42.27    28,000    23.04   39,000    16.65
Exercised.......................................  (35,484)    8.50  (130,330)    8.50  (55,198)    8.50
Forfeited.......................................      --       --       (668)    8.50  (12,000)   20.17
                                                  -------   ------  --------   ------  -------   ------
Outstanding, end of year........................  842,988   $17.16   681,472   $ 9.45  784,470   $ 8.81
                                                  =======   ======  ========   ======  =======   ======
Exercisable, end of year........................  668,644   $11.28   625,458   $ 8.68  469,110   $ 8.57
Weighted average fair value of options granted..            $17.93             $ 8.80
</TABLE>
 
  The following is a detail of the stock options outstanding at November 2,
1997, including weighted average contractual life and exercise price
information:
 
<TABLE>
<CAPTION>
                                                   WEIGHTED AVERAGE
                                               -------------------------
         RANGE OF        OPTIONS     OPTIONS      REMAINING     EXERCISE
     EXERCISE PRICES   OUTSTANDING EXERCISABLE CONTRACTUAL LIFE  PRICE
     ---------------   ----------- ----------- ---------------- --------
     <S>               <C>         <C>         <C>              <C>
          $8.50          586,988     584,977         5.38        $ 8.50
     $15.06 to $23.25     59,000      33,667         7.78         19.52
     $39.13 to $45.75    197,000      50,000         9.49         42.27
     ----------------    -------     -------         ----        ------
     
     $8.50 to $45.75     842,988     668,644         6.51        $11.28
     ===============     =======     =======         ====        ======
               
</TABLE>
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions used for the
grants in fiscal years 1997 and 1996: weighted average risk-free interest rate
of 6.32% and 5.45%; weighted average volatility of 31.0% and 29.1%; expected
life of 6 years; and weighted average dividend yield of 0.2373% and 0.4341%.
Options granted in 1997 and 1996 have a weighted average contractual life of
9.48 and 8.23 years, respectively.
 
                                      27
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
7. COMMITMENTS
 
  The Company has entered into various leases for manufacturing, showroom,
warehouse, retail and office locations, including leases with related parties
(Note 9). The leases expire at various dates through the year 2011 and certain
leases contain renewal options. Rental expense under these leases was
approximately $9,474,000, $8,094,000 and $6,554,000 in fiscal years 1997, 1996
and 1995, respectively.
 
  The following is a schedule of future minimum rental payments required under
noncancellable operating leases as of November 2, 1997:
 
<TABLE>
     <S>                                                             <C>
     1998........................................................... $10,463,000
     1999...........................................................  10,323,000
     2000...........................................................  10,274,000
     2001...........................................................   9,203,000
     2002...........................................................   7,199,000
     Thereafter.....................................................  37,277,000
                                                                     -----------
                                                                     $84,739,000
                                                                     ===========
</TABLE>
 
  The Company has various employment contracts with certain key employees,
which expire at various times through June 1, 1999. These agreements provide
for total annual compensation aggregating $3,545,000 and the payment of
severance benefits upon the termination of employment.
 
  As of November 2, 1997 and November 3, 1996, the Company's commitments to
purchase wool yarn were approximately $11,847,000 and $11,047,000
respectively. In addition, the Company currently has a commitment to purchase
22 computerized knitting machines at a total cost of approximately $2,326,000.
 
8. LINE OF CREDIT
 
  The Company has a line of credit agreement with a bank. The agreement
provides for a $25,000,000 line of credit that matures March 1, 2000.
Borrowings under the line bear interest at the bank's reference rate
(8.5 percent at November 2, 1997) or an offshore rate plus 1.5 percent. The
agreement contains covenants, which, among other matters, restrict capital
expenditures, dividends, investments, loans and advances and require the
maintenance of certain financial ratios. No amounts were due under this line
of credit at either November 2, 1997 or November 3, 1996. Letters of credit
outstanding under the line of credit totaled $330,931 and $506,000 at November
2, 1997 and November 3, 1996, respectively.
 
9. RELATED-PARTY TRANSACTIONS
 
  The Company leases its corporate headquarters/manufacturing facility and one
other manufacturing facility from partnerships in which a shareholder of the
Company is a significant partner. The annual payments on these leases were
approximately $884,000, $966,000 and $902,000 in fiscal years 1997, 1996 and
1995, respectively. The leases expire at various dates during fiscal year 2001
and are included in the future minimum rental payments disclosure (Note 7).
 
  The Company periodically rents personal property provided by a company that
is owned by a shareholder. Rental payments for the use of such equipment were
approximately $30,000, $37,000 and $3,000 in fiscal years 1997, 1996 and 1995,
respectively.
 
                                      28
<PAGE>
 
                             ST. JOHN KNITS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
            NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
 
  At November 2, 1997 and November 3, 1996, the Company held a 50 percent
ownership interest in a partnership which leases transportation equipment to
the Company. The holder of the other 50 percent ownership interest is a
corporation which is wholly-owned by one of the Company's shareholders. During
fiscal 1996, the Company made net capital contributions to the partnership of
approximately $951,000. At November 2, 1997 and November 3, 1996, the
Company's investment in this partnership, net of partnership losses, was
approximately $1,270,000 and $1,622,000, respectively, and is included on the
accompanying consolidated balance sheets within the caption "Other Assets."
During fiscal years 1997, 1996 and 1995, the Company made lease payments to
the partnership of $840,000, $572,000 and $240,000, respectively. During the
same years, the Company reported net losses from the activities of the
partnership of $351,000, $224,000 and $146,000, respectively.
 
10. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
 
  A substantial portion of the Company's sales are made to three major
customers. These three customers accounted for 17, 15 and 15 percent of net
sales during fiscal 1997, 18, 15 and 15 percent of net sales during fiscal
1996 and 21, 16 and 15 percent during fiscal 1995. The loss of any one of
these customers could have an adverse affect on the Company's business.
 
  The Company sells primarily to specialty apparel retailers; thus, the risk
of collection losses is concentrated in this industry. Management believes
that the Company's credit and collection policies are adequate to prevent
significant collection losses and that the allowance for uncollectible
accounts is adequate at November 2, 1997 and November 3, 1996.
 
11. RESULTS BY QUARTER (UNAUDITED)
 
  The unaudited results by quarter for fiscal years 1997 and 1996 are shown
below:
 
<TABLE>
<CAPTION>
                                                 FIRST  SECOND   THIRD  FOURTH
                                                QUARTER QUARTER QUARTER QUARTER
                                                ------- ------- ------- -------
                                                (IN THOUSANDS, EXCEPT PER SHARE
                                                           AMOUNTS)
<S>                                             <C>     <C>     <C>     <C>
Year ended November 2, 1997
  Net sales.................................... $56,175 $59,563 $54,811 $71,552
  Gross profit.................................  31,756  35,871  32,163  42,767
  Net income...................................   7,383   8,874   7,201  10,965
  Net income per share.........................    0.43    0.52    0.42    0.64
Year ended November 3, 1996
  Net sales.................................... $45,259 $50,028 $46,525 $61,139
  Gross profit.................................  24,577  27,640  26,485  35,378
  Net income...................................   5,687   6,784   6,015   8,636
  Net income per share.........................    0.35    0.40    0.35    0.50
</TABLE>
 
                                      29
<PAGE>
 
                                                                     SCHEDULE II
 
                              ST. JOHN KNITS, INC.
 
                        VALUATION AND QUALIFYING ACCOUNT
 
                  FOR THE FISCAL YEARS ENDED NOVEMBER 2, 1997,
                     NOVEMBER 3, 1996 AND OCTOBER 29, 1995
 
<TABLE>
<CAPTION>
                                  BALANCE AT  CHARGED TO            BALANCE AT
                                 BEGINNING OF COSTS AND               END OF
                                 FISCAL YEAR   EXPENSES  DEDUCTIONS FISCAL YEAR
                                 ------------ ---------- ---------- -----------
<S>                              <C>          <C>        <C>        <C>
Allowance for Uncollectible
 Accounts:
  Fiscal year ended November 2,
   1997.........................   $750,000    $369,987   $214,987   $905,000
  Fiscal year ended November 3,
   1996.........................   $750,000    $ 88,547   $ 88,547   $750,000
  Fiscal year ended October 29,
   1995.........................   $550,000    $216,821   $ 16,821   $750,000
</TABLE>
 
                                       30
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
Date: January 28, 1997
 
                                          ST. JOHN KNITS, INC. (Registrant)
 
                                                    /s/ ROBERT E. GRAY
                                          By:__________________________________
                                                      Robert E. Gray
                                                 Chairman of the Board and
                                                  Chief Executive Officer
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 
 
           SIGNATURE                         TITLE                     DATE
           ---------                         -----                     ----
<C>                                <S>                           <C>  
      /s/ ROBERT E. GRAY           Chairman of the Board         January 28, 1998
-------------------------------    and Chief Executive
        Robert E. Gray             Officer (Principal
                                   Executive Officer)
 
    /s/ MARIE ST. JOHN GRAY        Vice Chairman of the          January 28, 1998
-------------------------------    Board, Chief Designer
      Marie St. John Gray          and Secretary
 
       /s/ KELLY A. GRAY           Director and President        January 28, 1998
-------------------------------
         Kelly A. Gray
 
      /s/ ROGER G. RUPPERT         Director, Senior Vice         January 28, 1998
-------------------------------    President-Finance and
        Roger G. Ruppert           Chief Financial Officer
                                   (Principal Financial
                                   Officer and Principal
                                   Accounting Officer)
 
      /s/ DAVID A. KRINSKY         Director                      January 28, 1998
-------------------------------
        David A. Krinsky
 
  /s/ RICHARD A. GADBOIS, III      Director                      January 28, 1998
-------------------------------
    Richard A. Gadbois, III
</TABLE> 
 
                                      31
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                     SEQUENTIAL
 EXHIBIT                                                                PAGE
 NUMBER                         DESCRIPTION                            NUMBER
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
   3.1   Articles of Incorporation of the Company(1)
   3.2   Bylaws of the Company(1)
  10.1   Lease Amendment Agreement dated April 1, 1997 between the
         Company and G.M. Properties (increasing the space of the
         corporate headquarters, warehousing and manufacturing
         facility) (incorporated by reference to Exhibit 10.3 of
         the Company's Quarterly Report on Form 10-Q for the
         quarter ended May 4, 1997 (File No. 1-11752))
  10.2   Retail Lease dated August 8, 1995 by and between the
         Company and Wilshire Roxbury Enterprises, a California
         Limited Partnership (Beverly Hills Boutique)(4)
  10.3   Agreement of Lease dated as of December 31, 1995 by and
         between the Company and Rolex Realty Company, Inc. (New
         York Boutique)(4)
  10.4   Lease dated June 1, 1986 between G.M. Properties and the
         Company (Corporate Headquarters)(1)
  10.5   Industrial Real Estate Lease dated November 13, 1985
         between the Alhambra Partners, a California Limited
         Partnership, and the Company, together with Amendment No.
         1 to Industrial Real Estate Lease dated November 13, 1985
         and Option to Extend Term dated November 13, 1985
         (Assembling, Sewing)(1)
  10.6   Agreement of Lease dated March 1, 1991 by and between the
         Company and Broadway and 41st Associates Limited
         Partnership, as amended by letter agreements dated March
         4, 1991, November 6, 1991, and November 7, 1991, and as
         further amended by Lease Extension and Modification
         Agreement dated October 22, 1993 (New York Showroom)(1)
  10.7   Agreement of Lease dated October 22, 1993 by and between
         the Company and Broadway and 41st Associates Limited
         Partnership (New York Showroom)(2)
 *10.8   Description of Directors Compensation Plan(5)
  10.9   Agreement of Lease dated January 11, 1991 by and between
         Rolex Realty Company, Inc. and the Company together with
         Lease Modification Agreement dated January 11, 1991 and
         Second Lease Modification Agreement dated April 12, 1991
         (New York Boutique)(1)
  10.10  Amended and Restated Agreement of Limited Partnership of
         SJA 1&2, Ltd. dated October 31, 1993 by and between the
         Company and Ocean Air Charters, Inc.(2)
 *10.11  Employment Agreement dated as of June 1, 1995 between the
         Company and Robert E. Gray(4)
 *10.12  Employment Agreement dated as of January 1, 1998 between
         the Company and Marie St. John Gray(6)
  10.13  Product Design and Development Agreement dated August 5,
         1997 among the Company, Amen Wardy, Sr. and Amen Wardy,
         Jr. (incorporated by reference to Exhibit 10.5 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended August 3, 1997 (File No. 1-11752))
 *10.14  Employment Agreement dated as of January 1, 1998 between
         the Company and Kelly A. Gray(6)
 *10.15  First Amendment to Employment Agreement dated May 2, 1997
         between the Company and Robert E. Gray (incorporated by
         reference to Exhibit 10.4 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended May 4, 1997
         (File No. 1-11752))
 *10.16  Employment Agreement dated as of January 1, 1998 between
         the Company and Roger G. Ruppert(6)
 *10.17  Employment Agreement dated as of January 1, 1998 between
         the Company and Karla R. Guyer(6)
  10.18  St. John Knits, Inc. Employees' Profit Sharing Plan dated
         as of August 21, 1995(4)
</TABLE>
 
                                       32
<PAGE>
 
<TABLE>
<CAPTION>
                                                                     SEQUENTIAL
 EXHIBIT                                                                PAGE
 NUMBER                         DESCRIPTION                            NUMBER
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
  10.19  Aircraft Lease dated April 1, 1997 by and between the
         Company and Ocean Air Charters, Inc. as Trustee of the
         SJA 1&2, Ltd. Trust (Lease for Company airplane)
         (incorporated by reference to Exhibit 10.1 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended May 4, 1997 (File No. 1-11752))
 *10.20  1993 Stock Option Plan(1)
 *10.21  Form of Indemnity Agreement by and between the Company
         and each of its directors and officers(1)
  10.22  Agreement to Form Partnership and Escrow Instructions
         dated November 7, 1994 by and between the Company and
         Varian Associates, a California General Partnership(3)
  10.23  Wool Yarn Purchase Agreement dated September 19, 1996, by
         and between the Company and the Kent Manufacturing
         Company(5)
  10.24  Agreement effective as of September 1, 1993 by and among
         the Company, Escada A.G. and Amira Verwaltungs A.G.
         (assumption of lease by the Company)(2)
  10.25  Lease dated September 26, 1994 by and between the Company
         and La Salle National Bank, as Trustee under Trust
         Agreement dated October 8, 1974, known as Trust Number
         48163 (Chicago Boutique)(3)
  10.26  Distribution Agreement dated June 11, 1997 by and between
         the Company and Gary Farn, Ltd. (incorporated by
         reference to Exhibit 10.1 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended August 3, 1997
         (File No. 1-11752))
  10.27  Business Loan Agreement dated December 15, 1995 by and
         between the Company and Bank of America National Trust
         and Savings Association(4)
  10.28  General Partnership Agreement of St. John-Varian
         Development Company dated April 3, 1995 by and between
         the Company and Varian Associates, a California General
         Partnership(4)
  10.29  Lease Agreement dated April 3, 1995 by and between the
         Company and St. John-Varian Development Company
         (Knitting, Sewing, Finishing, Shipping, Administrative
         Offices)(4)
  10.30  Joint Venture Agreement dated July 17, 1997 between the
         Company and Commercial Development Co., Ltd.
         (incorporated by reference to Exhibit 10.2 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended August 3, 1997 (File No. 1-11752))
  10.31  Agreement for Purchase and Sale of Real Property and
         Joint Escrow Instruction dated as of January 15, 1996
         between the Company and Baxter Healthcare Corporation
         (Storage)(5)
  10.32  Lease Extension Agreement dated February 6, 1996 between
         the Company and G.M. Properties (extending the lease for
         the Company's current Corporate Headquarters)(5)
 *10.33  Employment Agreement dated July 22, 1996 between the
         Company and David Frankel(5)
  10.34  Lease Extension Agreement dated as of September 1, 1996
         between the Company and Alhambra Partners (extending the
         lease for one of the Company's Assembling and Sewing
         facilities)(5)
  10.35  License and Distribution Agreement dated as of August 1,
         1997 between the Company and St. John Co., Ltd.
         (incorporated by reference to Exhibit 10.3 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended August 3, 1997 (File No. 1-11752))
  10.36  Agreement for Purchase and Sale of Real Property and
         Joint Escrow Instruction dated as of March 12, 1996 by
         and between the Company and Baxter Healthcare Corporation
         (Design/Manufacturing)(5)
  10.37  Amendment No. 1 to Business Loan Agreement dated as of
         April 26, 1996 by and between the Company and Bank of
         America National Trust and Savings Association(5)
 *10.38  Amendment No. I to the St. John Knits, Inc. 1993 Stock
         Option Plan(5)
  10.39  Asset Purchase Agreement dated as of August 29, 1996
         among the Company, Jakob Schlaepfer & Co. AG and Jakob
         Schlaepfer, Inc.(5)
</TABLE>
 
                                       33
<PAGE>
 
<TABLE>
<CAPTION>
                                                                     SEQUENTIAL
 EXHIBIT                                                                PAGE
 NUMBER                         DESCRIPTION                            NUMBER
 -------                        -----------                          ----------
 <C>     <S>                                                         <C>
  10.40  Amendment No.2 to Business Loan Agreement between the
         Company and Bank of America National Trust and Savings
         Association(5)
  10.41  Manufacturing and Supply Agreement dated as of November
         9, 1996 by and between the Company and Calzaturificio
         M.A.B. S.p.A.(5)
  10.42  Limited Liability Company Agreement for Amen Wardy Home
         Stores, LLC dated August 5, 1997, among the Company, AWH
         Direct, LLC, Amen Wardy, Sr., Amen Wardy, Jr., Amen Wardy
         Home, Inc., Bob Hightower and Amen Wardy Home Stores, LLC
         (incorporated by reference to Exhibit 10.4 of the
         Company's Quarterly Report on Form 10-Q for the quarter
         ended August 3, 1997 (File No. 1-11752))
  10.43  Sales Representative Agreement dated November 13, 1996 by
         and between the Company and Hilda Chang(5)
 *10.44  Consulting Agreement dated as of December 1, 1997 between
         the Company and Robert C. Davis(6)
  10.45  Wool Yarn Purchase Agreement dated August 27, 1997 by and
         between the Company and Kent Manufacturing Company(6)
  10.46  Wool Yarn Purchase Agreement dated September 1, 1997 by
         and between the Company and Kent Manufacturing Company(6)
  10.47  Amendment No. 3 to Business Loan Agreement between the
         Company and Bank of America National Trust and Savings
         Association(6)
  10.48  Lease Agreement dated December 10, 1997 by and between
         the Company and Forum Developers Limited Partnership, A
         Nevada Limited Partnership (Las Vegas Boutique)(6)
  10.49  Amendment No. 4 to Business Loan Agreement between the
         Company and Bank America National Trust and Savings
         Association(6)
  10.50  Unit Price Construction Agreement between St. John de
         Mexico, S.A. de C.V. and Administration Tijuana
         Industrial, S.A. de C.V.(6)
  23.1   Consent of Arthur Andersen LLP, Independent Public
         Accountants(6)
  27.1   Financial Data Schedule(6)
</TABLE>
--------
(1) Incorporated by reference to Exhibit of same number to the Company's
    Registration Statement on Form S-1, as amended (file no. 33-57128) on file
    with the Securities and Exchange Commission.
(2) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 31, 1993 on file
    with the Securities and Exchange Commission.
(3) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 30, 1994 on file
    with the Securities and Exchange Commission.
(4) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended October 29, 1995 on file
    with the Securities and Exchange Commission.
(5) Incorporated by reference to Exhibit of same number to the Company's
    Report on Form 10-K for the Fiscal Year ended November 3, 1996 on file
    with the Securities and Exchange Commission.
(6) Filed herewith.
 
 *  A management contract or compensatory plan or arrangement.
 
                                      34