SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996          Commission File No. 1-13082


                         KENNETH COLE PRODUCTIONS, INC.
             (Exact name of Registrant as specified in its charter)

            New York                                            13-3131650
(State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                           Identification Number)

                    152 West 57th Street, New York, NY 10019
                    (Address of Principal Executive Offices)

                                 (212) 265-1500
                          Registrant's telephone number

           Securities registered pursuant to Section 12(b) of the Act:

                                                          Name of Each Exchange
         Title of Each Class                                 on Which Registered
         -------------------                                 -------------------

 Class A common stock, par value $.01 per share          New York Stock Exchange

          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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  lll of this  Form  10-K or any
amendment to this Form 10-K. ( X )

     Aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant as of the close of business on March 24, 1997: $ 138,039,544

     Number of shares of Class A Common Stock, $.01 par value, outstanding as of
the close of business on March 24, 1997: 7,363,946

     Number of shares of Class B Common Stock, $.01 par value, outstanding as of
the close of business on March 24, 1997: 5,785,398

                       DOCUMENTS INCORPORATED BY REFERENCE

The  information  required  by Part III of Form 10-K is  incorporated  herein by
reference to the  Registrant's  definitive  proxy  statement to be mailed to the
stockholders of the Registrant by April 29, 1997

<PAGE>



                         Kenneth Cole Productions, Inc.
                                TABLE OF CONTENTS

                                     PART 1
<TABLE>
<CAPTION>

            Item                                                                         Page
---------------------------------------------------------------------------------------------
<S>         <C>                                                                           <C>
Item 1      Business                                                                       3

Item 2      Properties                                                                    12

Item 3      Legal Proceedings                                                             12

Item 4      Submission of Matters to a Vote of Security Holders                           12

                                       PART ll

Item 5      Market for Registrant's Common Equity and Related Stockholder
            Matters                                                                       13

Item 6      Selected Financial Data                                                       14

Item 7      Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                         16

Item 8      Financial Statements and Supplementary Data                                   18

Item 9      Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                                          18

                                      PART lll

Item 10     Directors and Executive Officers of the Registrant                            19

Item 11     Executive Compensation                                                        19

Item 12     Security Ownership of Certain Beneficial Owners and Management                19

Item 13     Certain Relationships and Related Transactions                                19

                                       PART lV

Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K               20


</TABLE>





<PAGE>


Important Factors Relating to Forward Looking Statements

     The  Private  Securities  Litigation  Reform  Act of 1995  provides a "safe
harbor"  for  forward-looking   statements  so  long  as  those  statements  are
identified as  forward-looking  and are  accompanied  by  meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ  materially from those projected in such  statements.  In connection with
certain forward-looking  statements contained in this Annual Report on Form 10-K
("Annual  Report")  and those  that may be made in the future by or on behalf of
the Company  which are  identified  as  forward-looking,  the Company notes that
there are various  factors that could cause actual results to differ  materially
from those set forth in any such forward-looking statements. The forward-looking
statements  contained in this Annual Report were prepared by management  and are
qualified  by, and  subject to,  significant  business,  economic,  competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or  impossible  to  predict  and many of which are  beyond  the  control  of the
Company.  Accordingly,  there  can  be no  assurance  that  the  forward-looking
statements  contained  in this  Annual  Report  will be  realized or that actual
results will not be significantly  higher or lower. The statements have not been
audited by,  examined by,  compiled by or subject to  agreed-upon  procedures by
independent  accountants,  and no third  party  has  independently  verified  or
reviewed such  statements.  Readers of this Annual Report should  consider these
facts in evaluating the information contained herein. In addition,  the business
and  operations of the Company are subject to  substantial  risks which increase
the uncertainty  inherent in the  forward-looking  statements  contained in this
Annual Report. The inclusion of the forward-looking statements contained in this
Annual Report should not be regarded as a  representation  by the Company or any
other person that the forward-looking statements contained in this Annual Report
will be achieved.  In light of the foregoing,  readers of this Annual Report are
cautioned  not  to  place  undue  reliance  on  the  forward-looking  statements
contained herein.


Item 1.  Business

General

     Kenneth Cole Productions, Inc. (the "Company") designs, sources and markets
a broad range of quality footwear,  handbags and accessories primarily under its
Kenneth Cole,  Unlisted and Kenneth Cole Reaction  brand names.  In addition,  a
variety of apparel and accessory products  utilizing its Kenneth Cole,  Unlisted
and Kenneth Cole Reaction  brand names are produced and sold pursuant to certain
license arrangements made with third parties. Licensed products for men include:
neckwear,  briefcases,  portfolios,  fabric outerwear,  jewelry, belts, scarves,
leather outerwear,  sunglasses,  eyewear, watches and luggage. Licensed products
for women  include:  hosiery,  small leather  goods,  belts,  scarves and wraps,
leather outerwear,  sunglasses, eyewear, watches and luggage. Kenneth D. Cole is
the Company's  President and Chief Executive Officer and provides leadership and
direction for all aspects of the design process.  The Company's branded products
are designed to appeal to fashion  conscious  consumers in the  bridge-designer,
better and junior market  segments.  These products  include core basics,  which
generally remain in demand from season to season, and fashion products which are
designed  to  establish  or  capitalize  on  market  trends.   The  Company  was
incorporated  in September 1982 under the name "Kenneth Cole,  Inc." and changed
its name to "Kenneth Cole Productions, Inc." in August 1983.

     The  Company  markets  its  products  to more  than  2,500  department  and
specialty store  locations,  and through its expanding base of retail and outlet
stores and its own consumer catalog. The Company plans to grow by broadening its
range of product  offerings and by increasing its  penetration and expanding its
channels  of  distribution.  Through the  expansion  of product  offerings,  the
Company  believes it will serve a wider variety of customer  needs.  The Company
believes the range of its product  offerings  distinguishes the Company from its
competitors in terms of product categories (men's and women's footwear, handbags
and  accessories),  prices  (from  "better"  to  "moderate")  and  styling.  The
diversity of the Company's  product mix provides  balance to its overall product
sales and  business  planning and  increases  sales  opportunities  to wholesale
customers which do not carry the Company's full range of products.

     During the past year, the Company  entered into several new product license
agreements including,  men's tailored clothing, men's jewelry, men's and women's
watches and,  most  recently,  men's  sportswear.  In addition to expanding  its
licensing  operations,  the Company continues to pursue strategies to expand its
distribution  within the  retailing  arena.  As of December 31, 1996 the Company
operated  35  specialty  retail and outlet  stores,  as  compared  with 24 as of
December  31,  1995,  and  plans to open  approximately  10 new  stores  and one
flagship  store during  1997. A flagship  store would be larger in size than the
Company's existing stores and would departmentalize its entire product offerings
including all licensed products. The Company believes that the sales of footwear
and accessories through its specialty retail and outlet stores increase consumer
awareness of the Company's brands.


                                       3
<PAGE>


Products

     The  Company  markets its  products  principally  under its  Kenneth  Cole,
Unlisted  and Kenneth Cole  Reaction  brand names.  The  Company's  products are
targeted to appeal to a different market segment within each brand.

   Kenneth Cole

     Kenneth Cole brand  products are generally  designed for the  urban-minded,
fashion conscious  consumer and targets  professional men and women. The Company
believes the Kenneth Cole brand has become a core resource for department stores
and shows significant  brand growth potential.  The product offering has evolved
from a very trendy  line to one with  broader  appeal,  including  both  fashion
forward  styling and core basics.  The Company is now leveraging the strength of
the name through brand extensions (e.g., Kenneth Cole Reaction),  in-store shops
and the licensing of many new product categories.

The  characteristics  of the products sold by the Company under its Kenneth Cole
brand name are summarized in the following table:

<TABLE>
<CAPTION>
                               Footwear                            Leathergoods
                    -------------------------------      ---------------------------------
                             Kenneth  Cole                         Kenneth Cole
                    -------------------------------      ---------------------------------
                         Women's         Men's               Handbags         Accessories
                    --------------- ---------------      ---------------   ---------------
<S>                 <C>             <C>                  <C>               <C>
Market:             Bridge-Designer Bridge-Designer      Bridge-Designer   Bridge-Designer

Retail Price Range: Better          Better               Better            Better
                    $90-$160        $130-$170            $90-$150          $40-$75
</TABLE>

     Kenneth Cole brand  women's  footwear  includes  dress,  casual and special
occasion  (e.g.,  bridal)  footwear.  Women's  footwear  manufactured  under the
Kenneth Cole label is generally  constructed with leather soles and linings, and
leather,  fabric,  satin  or  silk  uppers.  Women's  footwear  is  manufactured
primarily in Spain, because the capabilities of the manufacturers are consistent
with the quality requirements and image of Kenneth Cole brand footwear products.
The Company also sources a portion of its Kenneth  Cole brand  women's  footwear
from  manufacturers in Brazil due to the ability of those  manufacturers to meet
the Company's  quality  specifications  on a cost effective  basis.  The Company
sells  approximately  110 styles of Kenneth  Cole brand  women's  footwear  each
season.

     Kenneth  Cole brand men's  footwear is designed as  comfortable,  practical
shoes  intended  to be worn with  dress or casual  clothes.  Kenneth  Cole men's
footwear,  consistent with men's footwear in general,  is less style-driven than
women's footwear and is built around core basics with a fashion component.  As a
result,  the Company  offers  fewer  styles and makes fewer style  changes  from
season to  season.  The  men's  line is sold  through  open  stock  repenishment
programs.  Kenneth Cole men's footwear is manufactured  primarily in Italy.  The
Company sells  approximately 50 styles of Kenneth Cole brand men's footwear each
season.

     Kenneth Cole brand handbags are designed to be practical and versatile with
a contemporary and unstructured look. These products are generally  manufactured
with soft, high quality  leather.  Kenneth Cole brand handbags are  manufactured
primarily  in  India  because  of low  production  costs  and  the  presence  of
established quality leathergoods  manufacturers with skilled labor forces. These
operations  benefit  from their close  proximity  to  tanneries  for  processing
quality leather and the availability of other raw materials and components.  The
Company  believes  its  strong  factory  relationships  in India  have given the
Company the ability to achieve  excellent  value,  producing  comparable-quality
merchandise  priced below its competitors.  The Company sells  approximately 100
styles of Kenneth Cole handbags each season.

   Unlisted

     Unlisted brand footwear and  leathergoods  are designed and targeted to the
trendy,  15 to 30 year old junior  segment of the women's  market.  The Unlisted
brand was developed to expand the Company's  sales into more  moderately  priced
products  and  includes  approximately  45 styles of casual and dress  shoes per
season and approximately 60 styles of handbags per season. Unlisted footwear and
handbags are generally retailed in the moderate price range with footwear at $20
to $50 per pair,  and handbags at $30 to $50 each.  Unlisted  brand footwear and
handbags are manufactured  primarily in China. The production facilities located
in China are  generally  larger than  facilities  in other  countries and enable
manufactures  to produce  significant  quantities of moderately  priced  quality
footwear and handbags.

                                       4
<PAGE>

Kenneth Cole Reaction

     Kenneth Cole Reaction brand women's  footwear,  introduced in 1994, is more
casual in nature and includes  footwear styles that are constructed  with rubber
soles.  Kenneth  Cole  Reaction  branded  women's  footwear is designed  for the
workplace  as  well  as  outside  the  office,  with  an  emphasis  on  comfort,
contemporary   styling  and   perceived   value.   The   targeted   consumer  is
sophisticated,  influenced by brand  recognition  and demands a certain  quality
level that an established designer label ensures. Kenneth Cole Reaction footwear
is targeted to compete in the largest single  category of women's  footwear sold
in department stores, "women's better casual"  footwear.Kenneth Cole Reaction is
priced to sell below the price points of the Kenneth Cole line.  The majority of
the  line  retails  in  the  $60-80  price  range  and,  each  season,  includes
approximately 25 styles.

     Kenneth Cole Reaction branded men's footwear  combines an outdoor look with
more  fashionable  styling.  The line  retails in the  $90-130  price  range and
includes approximately 15 styles.

     Kenneth Cole Reaction  branded handbags are designed to be multi functional
with  a  contemporary   look  and  are  primarily  made  of  non-leather   trend
fabrications,  such as nylon,  microfiber and straw. Kenneth Cole Reaction brand
handbags  are one of the  fastest  growing  products of the  Company,  generally
retail in the  $40-$70  price  range and  include  approximately  35 styles each
season.

Divisions

     The  Company  distributes  its  products  through  wholesale   distribution
channels and its own Kenneth Cole retail and outlet  stores.  During the periods
presented  below,  the  percentage  of net sales  contributed  by the  Company's
wholesale (including catalog) and retail divisions were as follows:

                                      Year Ended
                                     December 31
                        ------------------------------------
                        1996            1995            1994
                        ----            ----            ----

   Wholesale             78%             84%             90%
   Retail                22              16              10
   Total                100%            100%            100%
                        ===             ===             ===

Wholesale Operations

     The  Company's   wholesale   strategy  is  to  provide  affordable  fashion
accessories  as  well as  marketing  and  management  support  to its  wholesale
customers.   The  Company  provides  this  support  by  producing  strong  image
advertising  campaigns,  offering  creative,  quality  products and  maintaining
adequate  inventory  levels of new products as well as products  included in the
Company's open its products stock  program.  The Company  employs 16 independent
wholesale agents to sell its products and to manage its  relationships  with its
wholesale   customers,   including   analyzing  and  monitoring   their  selling
information.

     The Company's  products are distributed to more than 800 wholesale accounts
for sale in more than 2,500 store  locations in the United  States.  The Company
markets its branded products to major department stores and chains,  such as the
department  store  divisions of Dayton Hudson  Corporation,  Dillard  Department
Stores, Inc., Federated Department Stores (including Macy's, Bloomingdales,  and
Burdines),  The May  Department  Stores  Company  (including  Lord & Taylor  and
Foley's) and Nordstrom,  Inc., and upscale specialty  retailers,  such as Neiman
Marcus and Saks Fifth  Avenue.  In  addition,  the Company  sells  out-of-season
branded  products and overruns  principally to The Marmaxx Group  (formerly T.J.
Maxx and Marshalls) and through the Company's  outlet stores.  In addition,  the
Company  sells its  products,  directly or through  distributors,  to  wholesale
customers in Australia,  Canada, Hong Kong, Japan, Thailand, the Philippines and
Singapore.

     The Company markets its product lines and introduces new styles at separate
industry-wide footwear and leathergoods shows which occur several times annually
in New York and Las Vegas and at regional shows throughout the year. These shows
also afford the Company the  opportunity  to assess  preliminary  demand for its
products.  After each show, the Company's wholesale agents and corporate account
specialists  visit customers to review the Company's product lines and to secure
purchase  commitments.  The  Company's  products are also  displayed at separate
leathergoods and footwear showrooms in New York.


                                       5
<PAGE>

     Private Label

     In  response to the  growing  demand  among  retailers  for  private  label
products,  the Company designs,  develops and sources private label footwear and
leathergoods  for selected  retailers.  These private label  customers  include,
among others, major retailers that do not purchase the Company's brands, such as
Sears,  Roebuck and Co., J.C. Penney, and Mervyns.  Private label footwear sales
commenced in 1992 and private label handbag sales commenced in January 1994.

     The retail industry has experienced  significant  changes and  difficulties
over the past several years,  including  consolidation  of ownership,  increased
centralization   of   buying   decisions,   restructurings,   bankruptcies   and
liquidations.  Although  to date  these  developments  have  not had a  material
adverse effect on the Company,  the Company cannot predict what effect,  if any,
continued  changes within the retail industry will have on the Company's results
from operations.

Retail Operations

     The Company  continues to pursue  several  strategies to enhance and expand
its retail  operations.  At December 31, 1996 the Company  operated 24 specialty
retail  stores and 10 outlet  stores  under the Kenneth Cole name and one outlet
store under the Unlisted name.

     The  Company's  retail stores are  primarily  operated to develop  consumer
recognition  of its brand  names and to  provide a  showcase  for  Kenneth  Cole
branded products marketed by the Company and its licensees. The Company believes
that these stores compliment its wholesale business by building brand awareness.
In addition,  Kenneth Cole retail stores  enable the company to reach  consumers
who prefer the environment of a specialty store. Approximately 20% to 25% of the
Company's  retail store products are sourced  exclusively  for such stores which
differentiates  the  product  mix of  its  stores  from  that  of its  wholesale
customers.  The Company opened seven retail stores in 1996 and plans to open 5-6
new stores in 1997.

     At December  31, 1996,  the Company  operated  eleven  outlet  stores.  The
Company  establishes  its  outlet  stores to enable it to sell a portion  of its
excess  wholesale  inventory and to dispose of excess  inventory from its retail
stores and catalog  distribution  in a manner which it believes does not have an
adverse impact on its wholesale  customers and the Company's retail  operations.
The Company generally does not make a style available in its outlet stores or to
off-price retailers until wholesale customers have taken their first markdown on
that style. The Company  anticipates that as higher levels of sales are achieved
and  additional  retail  stores are opened,  it will require  additional  outlet
stores.  The Company opened four outlet stores in 1996 and plans to open 4-5 new
stores in 1997.

     The Company  believes that the Kenneth Cole brand name has  developed  into
the upper  echelon  of  American  designers  and seeks to propel  the brand into
global  recognition.  As such,  the company is planning to open a flagship store
that will serve as a showcase for all of its  products  and further  enhance the
strength of the Kenneth Cole brand name.

     The success of its stores,  and the opening and success of any stores to be
opened this year and in future years, will depend on various factors,  including
general  economic and  business  conditions  affecting  consumer  spending,  the
acceptance  by consumers of the  Company's  retail  concept,  the ability of the
Company to manage such expansion and hire and train personnel,  the availability
of  desirable  locations,  the  negotiation  of  acceptable  lease terms for new
locations and the expansion of the Company's  management  information systems to
support  the growth of its retail  operations.  The  Company  believes  that its
retail stores further  enhance the Company's  image and represent an opportunity
for revenue and earnings growth.

Licensing

     The  Company  views  entering  into  licensing  agreements  as a vehicle to
further  extend its product  offerings  and enhance  consumer  awareness  of its
brands.  The  Company  considers  entering  into  licensing,  joint  venture and
distribution  agreements with respect to certain  products if such  arrangements
provide more effective  sourcing,  marketing and  distribution  of such products
than could be achieved internally. The Company continues to pursue opportunities
in new product categories which are believed to be complimentary to its existing
product lines.

     Licensees range from small to medium size  manufacturers to companies which
are among the  industry  leaders in their  respective  product  categories.  The
Company  selects  licensees  that it believes  can  produce and service


                                       6
<PAGE>

quality fashion products  consistent with the Kenneth Cole, Unlisted and Kenneth
Cole Reaction brand images. The Company's licensing department  communicates the
Company's  design  ideas  to and  coordinates  all  marketing  efforts  with its
licensees.  The Company  generally  grants licenses for three to five years with
renewal options, limits licensees to certain territorial rights, and retains the
right to  terminate  the  license  if  certain  specified  sales  levels are not
attained.  Each  license  provides  that the  Company  has the right to  review,
inspect and/or  approve all designs,  the quality of the products and any use of
its trademarks.

     The following table summarizes the Company's licensed product categories:

<TABLE>
<CAPTION>
Product Category                       Kenneth Cole        Reaction         Unlisted
----------------                       ------------        --------         --------
<S>                                         <C>               <C>             <C>
Men's Neckwear                              X
Men's Scarves                               X
Men's Tailored Clothing                     X
Men's Jewelry                               X
Men's and Women's Optical Frames            X
Women's Hosiery                             X
Women's Scarves & Wraps                     X
Men's Sportswear                            X                 X
Men's Leather & Fabric Outerwear            X                 X
Men's/Women's Watches                       X                 X
Women's Leather & Fabric Outerwear          X                 X
Luggage/Men's Small Leather Goods           X                 X
Men's/Women's Sunglasses                    X                 X                X
Women's Small Leather Goods                 X                 X                X
Men's/Women's Belts                         X                                  X
</TABLE>

     All of the Company's  licensees and distributors are required to contribute
a  percentage  of their net sales of Kenneth Cole  products,  subject to minimum
amounts, to the advertisement and promotion of the Kenneth Cole Trademark.

International

     The  Company  sells its  products,  directly  or through  distributors,  to
wholesale  customers in  Australia,  Canada,  Hong Kong,  Japan,  Thailand,  the
Philippines  and  Singapore.  During  1997,  the  Company  intends to expand its
international  licensing  and  wholesale  distribution  programs  as a means  of
developing  global brand recognition and creating  additional  wholesale markets
for its products.

     At December 31, 1996, the Company operated one store in the Netherlands and
licensed the Kenneth Cole retail store format to its joint  venture in Hong Kong
and to a third party in  Singapore  The store  licensee  acquires  Kenneth  Cole
branded  products  through the Company and its licensees.  The licensed  store's
format and product mix are similar to that of the Company's  Kenneth Cole retail
stores.  In  connection  with the Company's  business  strategy of enhancing and
expanding  its  retailing   operations,   the  Company  is  considering  certain
licensing,  joint venture and  distribution  agreements  with respect to opening
additional retail stores internationally.

Design

     The  Company was founded by Kenneth D. Cole,  Chief  Executive  Officer and
President, and its success to date is largely attributable to his design talent,
creativity and marketing  abilities.  The Company selects designers on the basis
of their ability to understand  consumers'  preferences  and on their ability to
originate  and  define  fashion  trends  as well as to  anticipate  and react to
changing consumer demands in a timely manner.

     The  Company  maintains  design and  marketing  committees  for each of its
product lines that are responsible  for the creation,  development and marketing
of new product  styles.  The  Company's  design  committees  constantly  monitor
fashion  trends  and  search  for  new  inspirations.  Members  of  the  various
committees  travel  extensively to assess  fashion trends in Europe,  the United
States and Asia and work closely with retailers to monitor consumer preferences.
In addition,  the Company's design committees meet frequently to share ideas and
discuss  fashion trends  occurring  within each of the market segments served by
the Company.

                                       7
<PAGE>

     The process of designing and introducing a new product takes  approximately
three to four months.  Design committee members work together to create a design
which they believe fits the Company's  image,  reflects  current or  approaching
trends and can be  manufactured  cost-effectively.  Once the  initial  design is
complete,  a prototype is developed,  reviewed and refined prior to commencement
of production.

     In order to reduce the impact of changes in fashion trends on the Company's
product sales and increase the  profitability  of the Company's  products to its
wholesale  customers,  the Company  continuously seeks to develop new core basic
product  styles  which  remain   fashionable   from  season  to  season  without
significant  changes in design or styling.  Since these core basic  products are
seasonless,  retailers' inventories of core basic products tend to be maintained
throughout  the year and reordered as necessary,  primarily  through  electronic
data interchange.

Sourcing

     The  Company  does not own or  operate  any  manufacturing  facilities  and
sources its branded and private label  products  directly or indirectly  through
independently  owned  manufacturers in Italy,  Spain,  Brazil,  India, China and
Korea.  The  Company  maintains  offices  in  Florence,  Italy and Hong Kong and
generally has long-standing relationships with several independent buying agents
to monitor the  production,  quality and timely  distribution  of the  Company's
products from its  manufacturers.  The Company sources each of its product lines
separately based on the individual design, styling and quality specifications of
such products.

     The Company attempts to limit the  concentration of manufacturing  with any
one  manufacturer.  However,  approximately  14% and 28% of the dollar  value of
Kenneth Cole women's  footwear  purchases in 1996 and 1995,  respectively,  were
produced by a single  manufacturer in Spain and approximately 34% and 44% of the
dollar  value of total  leathergoods  purchased by the Company in 1996 and 1995,
respectively,  were produced by two manufacturers in India. These manufacturers,
however,  subcontract  a  significant  portion of such  purchases  to ensure the
consistent and timely delivery of quality  products.  The Company is the largest
customer of these manufacturers and has established long-standing  relationships
with them. While the Company believes it has alternative  manufacturing  sources
available to meet its current and future production  requirements,  there can be
no  assurance  that in the event the Company is required to change from  current
manufacturers,  alternative  suppliers will be available on terms  comparable to
the company's existing arrangements.

     In advance of the Fall and Spring selling  seasons,  the Company works with
its manufacturers to develop product prototypes for industry trade shows. During
this process,  the Company works with the manufacturers to determine  production
costs,  materials,  break-even  quantities  and component  requirements  for new
styles.  Based on  indications  from the  trade  shows  and  initial  purchasing
commitments  from  wholesalers,  the Company places  production  orders with the
manufacturers. As a result of the need to maintain in-stock inventory positions,
the  Company  places  manufacturing  orders for open stock and  certain  fashion
products prior to receiving firm commitments. Once an order has been placed, the
manufacturing and delivery time ranges from three weeks to four months depending
on whether it is  currently  in  production  or a new  product.  Throughout  the
production process,  the Company monitors product quality through inspections at
both the  factories  and upon receipt at its  warehouses.  To reduce the risk of
overstocking, the Company monitors sell-through data on a weekly basis and seeks
input on product  demand from  wholesale  customers  to adjust  production  when
needed.

Advertising and Marketing

     The Company  believes that  advertising  to promote and enhance the Kenneth
Cole and Kenneth  Cole  Reaction  brands is an  intricate  part of its long term
growth  strategy.  The  Company  believes  that  its  award-winning  advertising
campaigns, which have brought it national recognition for their focus on current
events  and  social  issues,  have  resulted  in  increased  sales and  consumer
awareness  of its  branded  products.  The  Company's  advertisements  appear in
magazines  such as Vogue,  Vanity Fair,  Details,  GQ, Glamour and Marie Claire,
newspapers and outdoor  advertising  media.  All of the Company's  licensees are
required to  contribute  a  percentage  of their net sales of licensed  product,
subject to  minimums,  to the  advertising  and  promotion  of the Kenneth  Cole
Trademark.  In  addition,  selected  personal  appearances  by Kenneth  Cole and
charitable  programs have been utilized to further enhance the Company's  image.
The Company employs an advertising and public relations staff to implement these
efforts.

     In order to continue to  strengthen  brand  awareness  of its  products and
increase sales, the Company is actively involved in the development of marketing
and  merchandising  programs.  As part  of this  effort,  the  Company  utilizes
cooperative  advertising  programs,   sales  promotions  and  produces  consumer
catalogs  which  feature a variety of Kenneth  Cole and  Kenneth  Cole  Reaction
branded  products  marketed by the Company and its licensees.  In addition,


                                       8
<PAGE>

the  Company  has,  on  a  limited  basis,  worked  with  customers  to  develop
distinctive catalogs which market the Company's products and to develop point of
sale displays.

     An important  developing  aspect of the Company's  marketing efforts is the
creation of  shop-in-shops,  where an entire collection of the Company's branded
products is featured,  along with focus areas, where specific product categories
are highlighted.  These shop-in-shops and focus areas create an environment that
is consistent  with the Company's  image and enables the retailer to display and
stock a greater  volume of the  Company's  products  per  square  foot of retail
space. In addition,  these  shop-in-shops  and focus areas encourage longer term
commitment by the retailer to the Company's  products and enhance consumer brand
awareness.

Distribution

     During 1996, the Company  relocated and entered into a six year lease for a
244,000 square foot  distribution  and  administrative  facility  located in New
Jersey.  The new facility  will be able to support the  continued  growth of the
Company's  business.  The Company also  utilizes a public  warehouse  located in
California.  Upon  completion  of  manufacturing,  the  Company's  products  are
inspected, bar coded (in the case of most footwear), packed and shipped by ocean
or air to the United States.  The Company utilizes fully integrated  information
systems to facilitate the receipt,  processing and distribution  through its New
Jersey  distribution  facility.  The products are then shipped to the  Company's
wholesale  customers  either  in bulk or  under  its  open  stock  program.  The
Company's  open stock  program  allows its  wholesale  customers to reorder core
basic styles in a range of colors and sizes for  immediate  shipment.  While the
open stock program requires an increased investment in inventories,  the Company
believes  this program is an important  service for its  wholesale  customers by
allowing them to manage inventory levels more effectively.

     The Company produces  consumer  catalogs which feature a variety of Kenneth
Cole and Kenneth  Cole  Reaction  branded  products.  Catalog  order  taking and
fulfillment is currently performed by a third party service located in Virginia.

Management Information Systems

         Sophisticated  information  systems  are  essential  to  the  Company's
ability to maintain its competitive  position and to support  continued  growth.
The Company's management information system was designed to provide, among other
things,  comprehensive order processing,  production,  accounting and management
information for the sourcing,  importing,  distribution and marketing aspects of
the  Company's  business.  The Company has also  installed  an  electronic  data
interchange  ("EDI")  system which  provides a computer link between the Company
and certain of its  wholesale  customers  that enables both the customer and the
Company to monitor purchases,  shipments and invoicing. The Company's EDI system
also improves the  efficiency of  responding to customer  needs.  The Company is
expanding  its use of bar codes to enhance the  efficiency  of the EDI system as
well as for the Company's own inventory  tracking  needs.  In its retail stores,
the  Company  uses  point-of-sales  registers  to  capture  sales data and track
inventories.  The Company  regularly  evaluates  the adequacy of its  management
information  systems and upgrades  such systems to support its growth.  However,
the Company's failure to continue to upgrade its management  information systems
necessary to support growth or expansion could have a material adverse effect on
the Company's financial condition and its results of operations.

Trademarks

     The Company,  through its  wholly-owned  subsidiary,  K.C.P.L.,  Inc., owns
federal  registrations for the trademarks  Kenneth Cole,  Kenneth Cole New York,
Kenneth Cole  Reaction,  and  Unlisted.  Each of the federal  registrations  are
currently  in full  force  and  effect  and are not  the  subject  of any  legal
proceedings.  In addition,  the Company has several pending federal applications
in the United  States  Patent and Trademark  office for  trademarks  and service
marks including Kenneth Cole Collection and Reaction.  Moreover,  the Company is
expanding its current international registrations in numerous countries in Asia,
South  America,  Europe and  elsewhere.  The Company  regards its trademarks and
other proprietary rights as valuable assets in the marketing and distribution of
its products,  and fully intends to maintain and renew the registrations as well
as vigorously defend against infringements.

Competition

     Competition  in the footwear and  leathergoods  industries is intense.  The
Company's  products  compete with other  branded  products  within their product
category as well as with private label  products  sold by  retailers,


                                       9
<PAGE>

including some of the Company's  customers.  In varying degrees depending on the
product category  involved,  the Company competes on the basis of style,  price,
quality, comfort and brand prestige and recognition, among other considerations.
The  Company  also   competes  with   numerous   manufacturers,   importers  and
distributors of footwear and accessories for the limited  shelf-space  available
for  the  display  of such  products  to the  consumer.  Moreover,  the  general
availability  of contract  manufacturing  capacity  allows  access by new market
entrants.  Some of the Company's  competitors are larger,  have achieved greater
recognition  for their brand names,  have captured  greater  market share and/or
have  substantially  greater  financial,   distribution,   marketing  and  other
resources than the Company.

Foreign Operations

     The Company's  business is subject to risks of doing business abroad,  such
as fluctuations in currency exchange rates, labor unrest,  political instability
and the  imposition of  additional  regulations  relating to imports,  including
quotas,  duties or taxes and other charges on imports.  While these factors have
not had a material adverse impact on the Company's operations to date, there can
be no  assurance  that  they  will not have a  material  adverse  affect  on the
Company's operations in the future.

     In order to reduce the risk of  exchange  rate  fluctuations,  the  Company
regularly enters into forward  exchange  contracts to protect the purchase price
under its  agreements  with its  manufacturers  or purchases  products in United
States dollars.  See Item 7, "Management's  Discussion and Analysis of Financial
Condition and Results of Operations"  included  elsewhere in this report.  While
the Company  believes that its current  procedures with respect to the reduction
of risk associated with currency exchange rate  fluctuations is adequate,  there
can be no assurance that  fluctuations in currency  exchange rates in the future
will not have a material  adverse  effect on the  results of  operations  of the
Company.

Government Regulation

     Although  the  majority of the goods sold by the Company are not  currently
subject to quotas,  countries in which the Company's  products are  manufactured
may,  from  time to  time,  impose  new or  adjust  prevailing  quotas  or other
restrictions on exported products. In addition, the United States may impose new
duties,  tariffs and other restrictions on imported products, any of which could
have a material  adverse  affect on the Company's  operations and its ability to
import its products at the Company's  current or increased  quantity levels.  In
accordance with the Harmonized Tariff Schedule, a fixed duty structure in effect
for the United  States,  the Company pays import duties on its products  ranging
from  approximately  6% to 38%,  depending  on the  principal  component  of the
product.  Other  restrictions  on the  importation of footwear and the Company's
other products are periodically  considered by the United States  government and
no assurance can be given that tariffs or duties on the Company's  goods may not
be raised,  resulting  in higher  costs to the  Company,  or that import  quotas
respecting such goods may not be imposed or made more restrictive.

     A significant  portion of the Company's  products are  manufactured  in and
imported from China. The Company's operations and its ability to import products
from China at current tariff levels could be materially  and adversely  affected
if the "most  favored  nation"  status  granted  to China by the  United  States
government  for trade and tariff  purposes  is  terminated.  As a result of such
status,  products imported by the Company from China currently receive the lower
tariff  rates  made  available  to  most of the  United  States'  major  trading
partners.  While China has been granted  "most favored  nation"  status in every
year since 1979,  there can be no assurance that the United States will continue
to grant China "most  favored  nation"  status in the future.  In the event that
such status is not renewed in future  years,  tariff level on imports from China
could  rise  significantly  and  could  have a  material  adverse  effect on the
Company's results of operations.  However, the Company believes that it would be
able to shift production of certain goods to other countries on a cost effective
basis and to continue to produce in China  those goods  subject to lower  tariff
rates.

Customers Under Common Control

     The  Company's  department  store  customers  include  major United  States
retailers, certain of which are under common ownership. When considered together
as a group under common ownership, sales to the department store customers which
were owned by Federated Department Stores represented 14.2% and 15.8% of the net
sales of the  Company  for the  years  ended  1996 and 1995,  respectively.  The
Company's  ten largest  customers  represented  51% and 53% of the Company's net
sales for the years ended  December 31, 1996 and 1995,  respectively.  While the
Company   believes  that   purchasing   decisions   have   generally  been  made
independently by each division within a


                                       10
<PAGE>

department  store group,  there is a trend among  department store groups toward
centralized purchasing decisions of their divisions.

Backlog

     At December 31, 1996 and 1995, the Company had unfilled  wholesale customer
orders of $28.9 million and $23.4 million,  respectively.  The Company's backlog
at a particular time is affected by a number of factors,  including seasonality,
timing of market  weeks,  and  wholesale  customer  purchases  of its core basic
products through the Company's open stock program.  Accordingly, a comparison of
backlog  from  period  to  period  may  not be  indicative  of  eventual  actual
shipments.

Employees

     At December 31, 1996, the Company had approximately  600 employees,  140 of
whom are covered under a collective  bargaining agreement with a local affiliate
of the  International  Leather Goods,  Plastics,  Handbags and Novelty  Workers'
Union,  Local 1,  Division of Local 342-50  United Food and  Commercial  Workers
Union.  The  Company  considers  its  relationships  with  its  employees  to be
satisfactory.

Directors and Executive Officers

<TABLE>
<CAPTION>
Name                       Age      Present Position
----                       ---      ----------------
<S>                        <C>      <C>
Kenneth D. Cole........    43       President and Chief Executive Officer
Paul Blum..............    37       Executive Vice President
Stanley A. Mayer.......    49       Executive Vice President and Chief Financial Officer
Susan Hudson...........    37       Vice President Men's Division
Dick Prout.............    52       Vice President
Maria C. Cole..........    35       Director
Robert Grayson.........    51       Director
Denis F. Kelly.........    47       Director
Jeffrey G. Lynn........    47       Director
</TABLE>

     Kenneth D. Cole,  age 43, has served as the  Company's  President and Chief
Executive Officer since its inception in 1982. Mr. Cole was a founder,  and from
1976 through 1982, a senior  executive of El Greco,  Inc., a shoe  manufacturing
and design company which manufactured Candie's women's shoes.

     Paul Blum, age 37, has served as Executive Vice President since 1996 and as
Senior Vice  President of the Company from 1992  through  1996.  From 1982 until
1990, Mr. Blum served as Vice  President and was a principal  shareholder of The
Blum Co., a fashion  accessory  firm, the assets of which were purchased in 1990
by the Company.

     Stanley A. Mayer,  age 49, has served as Executive  Vice  President,  Chief
Financial  Officer,  Treasurer  and  Secretary of the Company since March 1988 .
From 1986  until  joining  the  Company,  Mr.  Mayer held the  position  of Vice
President-Finance and Administration of Swatch Watch USA, Inc. Mr. Mayer was the
controller  of the Ralph  Lauren  and Karl  Lagerfeld  womenswear  divisions  of
Bidermann Industries, USA, Inc. from 1979 until 1986.

     Richard Prout,  age 52, is, and for more than the past five years has been,
the sole shareholder and employee of Dick Prout Enterprises, Inc., a corporation
that has been  engaged by the  Company to direct  the  operations  of its landed
branded line of products.

     Susan Q.  Hudson,  age 37, has served as Vice  President in charge of men's
footwear  since 1990.  Prior to joining the Company,  Ms. Hudson was at LA Gear,
where she served as Regional Sales Manager.

     Maria Cuomo Cole, age 35, is the  Chairperson  of H.E.L.P.,  a position she
has held  since  January  1993.  From  time to  time,  Ms.  Cole has  acted as a
consultant to the Company with respect to public  relations.  From 1987 to 1992,
Ms. Cole was a partner in C.A. Associates,  a public-relations firm based in New
York City which provided public-relations services to the Company.

     Robert  C.  Grayson,  age  51,  is  the  Chairman,  President  and  CEO  of
Berglass-Grayson  Associates  (BGA),  a consulting  firm.  From  1992-1996,  Mr.
Grayson served  initially as an outside  consultant to Tommy  Hilfiger  Corp., a

                                       11
<PAGE>

wholesaler  and retailer of men's  sportswear  and boyswear,  and later accepted
titles of Chairman of Tommy  Hilfiger  Retail,  Inc. and Vice  Chairman of Tommy
Hilfiger Corp.  From 1970 to 1992, Mr. Grayson served in various  capacities for
Limited Inc.,  including President and CEO of Lerner New York from 1985 to 1992,
and President and CEO of Limited Stores from 1983 to 1985.

     Denis F. Kelly, age 47, is a Managing  Director and the head of the Mergers
and Acquisitions  Department at Prudential  Securities  Incorporated  since July
1993. From 1991 until 1993, Mr. Kelly was President of Denbrook Capital Corp., a
merchant  banking firm. Mr. Kelly was at Merrill Lynch from 1980 to 1991,  where
he served as Managing  Director,  Mergers & Acquisitions  from 1984 to 1986, and
then as a Managing Director, Merchant Banking, from 1986 to 1991.

     Jeffrey  G.  Lynn,  age 47,  has been the  Chairman,  President  and  Chief
Executive  Officer  of  Dunham's  Athleisure  Corp.,  a  specialty  retailer  of
sportswear,  since 1987. Mr. Lynn joined Dunham's  Athleisure  Corp. in 1985 and
served as  President  until 1987.  Prior to 1985,  he served as  Executive  Vice
President  of  the  Musicland   Group,  a  specialty   retailer  of  audio/video
entertainment software.

Item 2.  Properties

     The Company  leases its 26,000  square foot  executive  office and showroom
located in New York, New York under a lease which expires December 31, 2006.

     During 1996, the Company  relocated and entered into a lease for the use of
244,000 square feet of distribution and administrative office space in Secaucus,
New Jersey.  The new facility  replaces the 63,000 square foot  distribution and
office facility located in Secaucus,  New Jersey.  The term of the lease for the
new  distribution and office facility expires on June 29, 2002. The Company also
leases a 23,500 square foot facility in Secaucus used for outlet store space and
as a warehousing facility.  The Company has technical and administrative offices
in  Florence,  Italy and Hong Kong.  The  Company  does not own or  operate  any
manufacturing facilities.

     At December  31, 1996 the Company  operated 24 retail  stores and 11 outlet
stores, all of which were leased.  Generally,  the leases provide for an initial
term of five to ten years, with renewal options permitting the Company to extend
the term thereafter.

     As the  Company  continues  to expand it will  require  alternative  and/or
additional  office  space.  Accordingly,  the  Company is  currently  evaluating
alternative  and/or  additional  locations that will satisfy its projected space
requirements.

Item 3.  Legal Proceedings

     In 1992,  legal  action was  commenced  against  the Company in the Supreme
Court of the  State of New York  situated  in New  York  County.  The  complaint
alleged  that the Company had breached  its  obligations  under a lease with the
plaintiff  for the  rental of office  space in New York  City and,  as  amended,
sought damages of approximately  $851,000,  representing all rent then due under
the lease.

     In January 1994, a second  action was commenced  against the Company by the
plaintiff  in the  Supreme  Court of the State of New York  situated in New York
County for  additional  rent due under the lease.  The  complaint,  as  amended,
sought total damages of approximately $789,000.

     During 1996,  the Company  paid  $846,000 and  $608,000,  respectively,  in
satisfaction  of all  plaintiff's  claims in the two  actions  mentioned  above,
exclusive  of  the  plaintiff's  claim  for  attorneys  fees.  The  Company  has
established a reserve for the  anticipated  amount of attorney fees with respect
to this matter.

     The Company is, from time to time, a party to litigation that arises in the
normal course of its business  operations.  The Company is not presently a party
to any such litigation that would have a material adverse effect on its business
or operations.

Item 4.  Submission of Matters to a Vote of Security Holders

     None


                                       12
<PAGE>


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

     The  Company's  Class A Common Stock is listed and traded  (trading  symbol
KCP) on the New York Stock Exchange ("NYSE").  On October 17, 1995, the Board of
Directors  declared a two-for-one  stock split,  to be effected in the form of a
stock  dividend.  Shareholders  of record  on  October  27,  1995  received  one
additional  share of the Company's Class A Common Stock and Class B Common Stock
for each share of Class A Common Stock and Class B Common Stock held.

On March 24,  1997 the  closing  sale  price  for the  Class A Common  Stock was
$19.75.  The  following  table sets  forth the high and low sale  prices for the
Class A Common Stock for each quarterly period for 1995 and 1996, as reported on
the NYSE Composite Tape (1):

         1995:                          High                 Low
                                        ----                 ---
First Quarter                           13 3/8               9 1/16
Second Quarter                          16 13/16             11 3/4
Third Quarter                           20                   16 1/16
Fourth Quarter                          22 1/2               17 3/8

         1996:
First Quarter                           19 1/4               11 3/4
Second Quarter                          20 1/2               17 1/8
Third Quarter                           20 3/8               15 1/8
Fourth Quarter                          20 1/4               14 1/2

     (1)  All per share amounts have been restated to reflect the stock split.

     The number of  shareholders  of record of the Class A Common Stock on March
     24, 1997 was 46.

     There is one holder of record of Class B Common Stock and 5,785,398  shares
of Class B Common  Stock are issued  and  outstanding.  There is no  established
public trading market for the Company's Class B Common Stock.

Dividend Policy

     The Company  intends to retain its  earnings  to finance  the  development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate  paying cash dividends on its Class A Common Stock in the foreseeable
future.  The payment of any future  dividends  will be at the  discretion of the
Company's  Board of Directors and will depend upon,  among other things,  future
earnings,  operations,  capital  requirements,  the  financial  condition of the
Company and general business conditions.


<PAGE>



Item 6.  Selected Financial Data


     The  following  selected  financial  data is  derived  from  the  financial
statements of the Company. The following data should be read in conjunction with
the  consolidated  financial  statements  and notes  thereto,  and  Management's
Discussion and Analysis of Financial Condition and Results of Operations.



<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                    -----------------------
                                                             1996             1995             1994           1993             1992
                                                             ----             ----             ----           ----             ----
                                                                           (dollars in thousands, except share data)
<S>                                                    <C>             <C>              <C>             <C>             <C>
Income Statement Data:
Net sales .........................................    $    148,258    $    113,828     $     84,893    $     60,831    $     46,049
Cost of goods sold ................................          86,919          67,382           50,166          36,132          28,741
Gross profit ......................................          61,339          46,446           34,727          24,699          17,308
Licensing and other income ........................           3,575           1,856              795             514             332
Selling and general administrative
    expense(1) ....................................          43,048          30,608           21,246          16,836          12,347
Executive officers' compensation (2)  .............           1,200           1,350            1,530           4,176           1,879
Loss on abandonment of leasehold
   improvements and equipment (3) .................             106                                              147           269 9
Operating income ..................................          20,560          16,344           12,746           4,054           3,145
Interest (income) expense, net ....................              22             (30)              25             180             298
Income before provision for income taxes ..........          20,538          16,374           12,721           3,874           2,847
Provision for income ..............................           8,251           6,550            2,894             351             252
Net income ........................................          12,287           9,824            9,827           3,523           2,595
Earnings per share ................................    $        .90    $        .72
Weighted average shares of common
stock outstanding .................................      13,578,326      13,575,572

Pro Forma Income Statement Data:(4)
Net sales .........................................                                     $     84,893    $     60,831
Cost of goods sold ................................                                           50,166          36,132
Gross profit ......................................                                           34,727          24,699
Licensing and other income ........................                                              795             514
Selling, general and administrative expenses (1) ..                                           21,246          16,836
Executive officers' compensation ..................                                            1,530           1,471
Loss on abandonment of leasehold improvements
 and equipment (3) ................................                                              147
Operating income ..................................                                           12,746           6,759
Interest, net .....................................                                               25             180
Income before provision for income taxes ..........                                           12,721           6,579
Provision for income taxes ........................                                            5,088           2,609
Net income ........................................                                            7,633           3,970
Supplementary pro forma net income per share ......                                      $       .60     $       .33
Supplementary pro forma shares outstanding (5) ....                                       12,689,640      11,909,148
</TABLE>


                                       14


<PAGE>

                                                 As At December 31,
                                                 ------------------
                                     1996     1995     1994     1993     1992
                                     ----     ----     ----     ----     ----
                                                       (dollars in thousands)
Balance Sheet Data:
Working capital..............       $37,023  $27,309  $18,701   $7,449   $5,021
Total assets.................        65,255   43,307   31,886   20,307   12,355
Total debt, including current
   maturities................           489      102      166    1,858      516
Total shareholders' equity...        46,599   33,489   22,356    8,454    5,978




(1)  Includes shipping and warehousing expenses.  Includes non-recurring charges
     of approximately $950,000 and $345,000 in 1993 and 1992, respectively,  for
     rent expense relating to vacated office space.
(2)  Includes  in  1993  (a)  amounts  paid  to  Kenneth   Cole  as   additional
     compensation to enable him to pay his taxes attributable to the Company's S
     Corporation  earnings and (b) a one-time  bonus to an executive  officer of
     $245,000 paid in the form of shares of Class A Common Stock.
(3)  Reflects losses on abandonment of leasehold  improvements and equipment (a)
     in 1996 and 1993 resulting from the decision to move its  distribution  and
     administrative offices and (b) in 1992 resulting from the relocation of the
     Company's principal offices.
(4)  Reflects the effect on the  historical  income  statement data for the year
     ended  December  31,  1994  and  1993 as if the  Company's  initial  public
     offering,  which was  consummated  in June 1994,  had been  completed as of
     January  1,  1993  and  the  Company  (a)  paid to its  executive  officers
     aggregate  annual  compensation of $1,471,000 in 1993, which represents the
     annual base salary payable to the Company's  executive officers under their
     respective  employment  agreements,   and  the  estimated  amortization  of
     compensatory  stock  options  granted to an  executive  officer and (b) was
     treated as a C Corporation filing on a consolidated return basis for income
     tax purposes, with an assumed effective income tax rate of 40%.
(5)  For 1993, supplementary pro forma shares includes 4,685,522 shares of Class
     A Common Stock (including  2,058,064  shares sold at the Company's  initial
     public  offering,  the  proceeds  of which  were  used to repay  short-term
     borrowings of  $11,484,000)  and 7,096,542  shares of Class B Common Stock,
     increased by 127,084 shares of Class A Common Stock representing the common
     stock  equivalents  derived from applying the treasury  stock method to the
     exercise  of  options  granted to an  officer  of the  Company to  purchase
     200,000  shares of Class A Common  Stock at $2.1875  per  share.

     For 1994,  supplementary pro forma shares includes (i) the weighted average
     shares  outstanding  during the period  (12,463,360)  and (ii) the  assumed
     exercise of options for the purchase of 222,950 and 373,900 shares of Class
     A Common Stock at $2.1875 and 6.00 per share respectively.

                                       15

<PAGE>


     Item 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations

     The following  discussion and analysis  should be read in conjunction  with
the consolidated  financial  statements and the notes thereto included elsewhere
in this document.

Results of Operations

     The Company's net sales and operating  income have  increased at compounded
annual  growth rates of  approximately  35% and 45%,  respectively,  since 1993,
principally as a result of increased  wholesales  sales of its branded  footwear
and handbags and increased  revenues  generated from the higher number of retail
and outlet  stores.  Net income  increased 25% to $12.3 million  compared to net
income of $9.8  million in 1995.  Net income for 1996 and 1995  reflects  income
taxes with an effective  tax rate of 40%. Pro forma net income  reflects  income
taxes as if the Company had been a "C"  Corporation for all periods in 1994 with
an effective tax rate of 40%.

     The  following  table  sets  forth  operating  data  of  the  Company  as a
percentage of net sales for the periods indicated below.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                         -----------------------

                                                                      1996    1995        1994
                                                                  -------------------------------
<S>                                                                  <C>      <C>        <C>
Net sales......................................................      100.0%   100.0%     100.0%
Cost of goods sold.............................................       58.6     59.2       59.1
                                                                  -------------------------------
Gross profit...................................................       41.4     40.8       40.9
Licensing and other income.....................................        2.4      1.6        0.9
Selling, general and administrative expenses(1)................       29.9     28.0       26.8
Operating income...............................................       13.9     14.4       15.0
Income before provision for income taxes.......................       13.9     14.4       15.0
Provision for income taxes.....................................        5.6      5.8        3.4
                                                                  -------------------------------
Net income.....................................................        8.3      8.6       11.6
                                                                  -------------------------------
Pro forma net income...........................................        N/A         N/A     9.0
*                                                                  ==============================
</TABLE>

(1)  Includes shipping and warehousing expenses.


1996 Compared to 1995

     Net sales were $148.3  million in 1996 compared to $113.8  million in 1995,
an  increase of $34.5  million or 30.3%.  Net sales of the  Company's  wholesale
operations,  excluding sales to its retail division,  increased $20.4 million or
21.3% to $116.1  million in 1996 from $95.7  million  in 1995.  Wholesale  sales
increased  due  to  increased  brand  awareness,   continued   growing  consumer
acceptance and the strengthening of the Company's three distinct brands, Kenneth
Cole, Unlisted and Kenneth Cole Reaction. The Company's retail and outlet stores
sales increased $14.1 million, or 78%, from $18.1 million to $32.2 million. This
increase  reflects a 5.4% comparable  store sales gains and the opening of seven
retail stores and four outlet stores in 1996.

     Gross  profit was $61.3  million in 1996,  an increase of $14.9  million or
32.1% from $46.4  million in 1995.  As a percentage  of net sales,  gross profit
increased to 41.4% in 1996 from 40.8% in 1995. The increase in gross profit as a
percentage of net sales was primarily  attributable to the relative  increase in
retail operations which produce higher margins than wholesale operations.

     Revenues  from  royalties  increased  93% from $1.9 million in 1995 to $3.6
million in 1996.  This increase  primarily  results from an increase in sales of
existing  licensed  products,  including men's and women's leather outerwear and
new license agreements which introduced several new product offerings.

     Selling,  general and  administrative  expenses  increased $12.4 million to
$44.4 million in 1996 from $32.0 million in 1995.  The increase is due to volume
related  expenses,  including the hiring of new personnel,  necessary to

                                       16

<PAGE>

support  the  increase  in  revenue  of  the  Company's   wholesale  and  retail
operations.  As a percentage of net sales,  selling,  general and administrative
expenses  increased  to 29.9% from 28.0% due to the  continued  expansion of the
Company's  retail  division  which  operates at a higher cost structure than its
wholesale operations.

     As a result of the  foregoing,  operating  income  increased 26% in 1996 to
$20.6 million (13.9% of sales) from $16.3 million (14.4% of sales) in 1995.

1995 Compared to 1994

     Net sales were $113.8 million in 1995 compared to $84.9 million in 1994, an
increase  of  $28.9  million  or  34%.  Net  sales  of the  Company's  wholesale
operations,  excluding sales to its retail division,  increased $19.2 million or
25.1% to $95.7  million in 1995 from $76.5  million in 1994.  This  increase was
primarily  due to a $13.6  million  or 28%  increase  in sales of  Kenneth  Cole
branded product  reflecting  increased brand awareness and consumer  acceptance.
The Company's  retail and outlet stores sales  increased $9.7 million,  or 115%,
from $8.4 million to $18.1 million.  This increase  reflects a 12.7%  comparable
store sales gains and the opening of eight retail  stores and five outlet stores
in 1995.

     Gross  profit was $46.4  million in 1995,  an increase of $11.7  million or
33.7% from $34.7  million in 1994.  As a percentage  of net sales,  gross profit
decreased to 40.8% in 1995 from 40.9% in 1994. The decrease in gross profit as a
percentage  of net sales  was  attributable  to  additional  markdowns  that the
Company  recorded  during the fourth  quarter  of 1995,  partially  offset by an
increase in higher gross margins from sales  generated by the  Company's  retail
stores.

     Selling,  general and administrative  expenses were $32.0 million (28.0% of
sales) in 1995 and $22.8 million  (26.8% of sales) in 1994.  The increase is due
to the hiring of additional  personnel to support  wholesale and retail  growth,
the increase in the number of retail stores and higher  marketing and production
costs  attributable to the Company's  expanding  catalog  business and increased
marketing efforts. The increase as a percentage of sales is primarily due to the
increase in the number of retail stores, which carry a higher expense level than
the wholesale division.

     As a result of the foregoing,  operating  income increased 28.3% in 1995 to
$16.3 million (14.4% of sales) from $12.7 million (15.0% of sales) in 1994.


Liquidity and Capital Resources

     The Company  relies  primarily on cash flow from  operations and borrowings
under its line of credit to finance  operations and growth. Net cash provided by
operating  activities  in 1996 was $3.6  million.  Cash  (used in)  provided  by
operations in 1995 and 1994 was $(.2)  million and $4.9  million,  respectively.
The Company's  primary funding  requirements  are to finance working capital and
the continued growth of the business. This includes the purchase of inventory in
anticipation of increased sales as well as the capital  expenditures  related to
the expansion of the retail operations.

     During the first  quarter of each year,  the Company  normally  experiences
negative  cash flows from  operations  due to the build-up of inventory  and the
timing of collection  of  receivables  (due from  factors)  relating to the peak
spring  sales  period.  Cash  flows  may vary  from  time to time as a result of
seasonal  requirements,  the timing of the receipt of merchandise from suppliers
and the  delivery  by the  Company  of the  merchandise  to its  customers,  the
Company's open stock inventory program and the level of accounts  receivable and
due from factors  balances.  At December 31, 1996 and 1995,  working capital was
$36.9 million and $27.3 million, respectively.

     The Company  sells  substantially  all of its  accounts  receivable  to two
factors without recourse.  In circumstances where a customer's account cannot be
factored  without  recourse,  the Company may take other  measures to reduce its
credit exposure which could include  requiring the customer to pay in advance or
to  provide a letter  of credit  covering  the  sales  price of the  merchandise
ordered.

     The Company currently has a line of credit, as amended on November 8, 1996,
under  which up to  $20.0  million  is  available  to  finance  working  capital
requirements  and  letters  of  credit  to  finance  the  Company's   purchases.
Borrowings  available  under the line of credit are  determined  by a  specified
percentage of eligible accounts  receivable and inventories and bear interest at
(i) the higher of The Bank of New York's prime lending rate

                                       17
<PAGE>

or the  Federal  Funds  rate  plus  0.5%  at the  date  of  borrowing  or (ii) a
negotiated  rate. In connection with the line of credit,  the Company has agreed
to eliminate  all the  outstanding  balances  under the facility for at least 30
consecutive  days during each calendar year. In addition,  borrowings  under the
line of credit are secured by certain assets of the Company.

     Capital expenditures,  which were primarily for leasehold  improvements and
furniture and fixtures  associated with new store openings,  were  approximately
$4.9  million,   $3.4  million  and  $2.3  million  for  1996,  1995  and  1994,
respectively.  The Company anticipates opening, in total, approximately 10 to 12
retail and outlet stores in 1997 requiring  aggregate  capital  expenditures  of
approximately  $3.0  million.   In  addition,   the  Company  expects  to  spend
approximately  $2.0 million for the initial  inventory  requirements  of the new
stores.

     The Company anticipates that it will require increased capital expenditures
to  support  its  continued  growth  including  an  increase  in its  office and
warehouse space and improvements to its management information systems.

     The  Company  believes  that it will be able to satisfy  its  ongoing  cash
requirements  for  the  foreseeable  future,   including  requirements  for  its
expansion, primarily with cash flow from operations,  supplemented by borrowings
under its line of credit.

     The retail industry has experienced  significant  changes and  difficulties
over the past several years,  including  consolidation  of ownership,  increased
centralization   of   buying   decisions,   restructurings,   bankruptcies   and
liquidations.  Although  to date  these  circumstances  have not had a  material
adverse effect on the Company,  the Company cannot predict what effect,  if any,
continued  changes  within the retail  industry will have on the Company's  cash
flow from operations.

     The  Company  regularly  purchases  inventory  in foreign  currencies  from
manufacturers  in Spain and Italy. In order to reduce the risks  associated with
currency  exchange rates,  the Company  regularly  enters into forward  exchange
contracts  for the  purchase of inventory  at future  dates,  payable in foreign
currencies.  At December 31, 1996,  forward  exchange  contracts  totaling  $2.1
million were outstanding with settlement dates ranging from January 1997 through
March 1997. The Company  expects to continue  routinely to enter into additional
foreign exchange contracts  throughout the year. While the Company believes that
its current  procedures  with respect to the reduction of risk  associated  with
currency exchange rate fluctuations is adequate,  there can be no assurance that
such  fluctuations  will not have a material  adverse  effect on the  results of
operations of the Company in the future.

         The Company intends to retain its earnings to finance the  development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate  paying cash dividends on its Class A Common Stock in the foreseeable
future.  The payment of any future  dividends  will be at the  discretion of the
Company's  Board of Directors and will depend upon,  among other things,  future
earnings,  operations,  capital  requirements,  the  financial  condition of the
Company and general business conditions.

Seasonality

     The Company's  products are marketed primarily for Fall and Spring seasons,
with  slightly  higher  volume of wholesale  products  sold during the first and
third quarters.  The Company's  retail  operations  generally  experience  their
strongest results in the fourth quarter and their weakest in the first quarter.

Effects of Inflation

     The  Company  does  not  believe  that  the  relatively  moderate  rates of
inflation  experienced  over the last few years in the United  States,  where it
primarily competes, have had a significant effect on revenues or profitability.

Item 8. Financial Statements and Supplementary Data

     See  page  F-1  for a  listing  of the  consolidated  financial  statements
submitted as part of this report.

Item  9.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

     None.


                                       18
<PAGE>




                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

     Except for the information  regarding  directors and executive  officers of
the registrant,  which is included in Part I, the  information  required by this
item  will  be  contained  in the  Company's  Proxy  Statement  for  its  Annual
Shareholders Meeting to be held May 29, 1997 to be filed with the Securities and
Exchange  Commission within 120 days after December 31, 1996 and is incorporated
herein by reference in response to this item.

Item 11. Executive Compensation

     The  information  required by this item will be contained in the  Company's
Proxy Statement for its Annual  Shareholders  Meeting to be held May 29, 1997 to
be filed  with the  Securities  and  Exchange  Commission  within 120 days after
December  31, 1996 and is  incorporated  herein by reference in response to this
item.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The  information  required by this item will be contained in the  Company's
Proxy Statement for its Annual  Shareholders  Meeting to be held May 29, 1997 to
be filed  with the  Securities  and  Exchange  Commission  within 120 days after
December  31, 1996 and is  incorporated  herein by reference in response to this
item.

Item 13. Certain Relationships and Related Transactions

     The  information  required by this item will be contained in the  Company's
Proxy Statement for its Annual  Shareholders  Meeting to be held May 29, 1997 to
be filed  with the  Securities  and  Exchange  Commission  within 120 days after
December  31, 1996 and is  incorporated  herein by reference in response to this
item.

                                       19

<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  (1) See  page  F-1  for a  listing  of  consolidated  financial  statements
submitted as part of this report.

(a) (2) All schedules,  for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions,  are shown in the financial statements or are inapplicable
and therefore have been omitted.

(a) (3).  The following exhibits are included in this report.

Exhibit
  No.
  ---
                                         Description
                                         -----------

3.01 --   Restated  Certificate of  Incorporation  of Kenneth Cole  Productions,
          Inc.;  Certificate  of Merger of Cole Fifth Avenue,  Inc. into Kenneth
          Cole  Productions,  Inc.;  Certificate of Merger of Cole  Productions,
          Inc. into Kenneth Cole  Productions,  Inc.;  Certificate  of Merger of
          Cole Sunset, Inc., into Kenneth Cole Productions, Inc.; Certificate of
          Merger of Cole Union Street, Inc. into Kenneth Cole Productions, Inc.;
          Certificate   of  Merger  of  Cole  West,   Inc.   into  Kenneth  Cole
          Productions,  Inc.,  Certificate  of Merger of Kenneth Cole  Woodbury,
          Inc. into Kenneth Cole  Productions,  Inc.;  Certificate  of Merger of
          Kenneth Cole Leather Goods, Inc. into Kenneth Cole Productions,  Inc.;
          Certificate of Merger of Unlisted into Kenneth Cole Productions,  Inc.
          (Incorporated   by  reference   to  Exhibit  3.01  to  the   Company's
          Registration Statement on Form S-1, Registration No. 33-77636).

3.02 --   By-laws.  (Incorporated  by reference to Exhibit 3.02 to the Company's
          Registration Statement on Form S-1, Registration No. 33-77636).

4.01 --   Specimen  of  Class  A  Common  Stock  Certificate.  (Incorporated  by
          reference to Exhibit 4.01 to the Company's  Registration  Statement on
          Form S-1, Registration No. 33-77636).

10.01 --  Tax Matters  Agreement,  dated as of June 1, 1994,  among Kenneth Cole
          Productions,  Inc.,  Kenneth D. Cole,  Paul Blum and Stanley A. Mayer.
          (Incorporated   by  reference  to  Exhibit   10.01  to  the  Company's
          Registration Statement on Form S-1, Registration No. 33-77636).

10.02 --  Term Loan  Agreement,  dated as of May 26, 1994,  by and among Kenneth
          Cole Productions,  Inc., Kenneth Cole Leather Goods,  Inc.,  Unlisted,
          Inc., Cole West, Inc., Kenneth Cole Financial Services,  Inc., Kenneth
          Cole Woodbury,  Inc., Cole Fifth Avenue, Inc., Cole Union Street, Inc.
          and The Bank of New York; Promissory Notes, dated May 26, 1994, issued
          by each of Kenneth Cole Leather Goods, Inc., Unlisted Inc., Cole West,
          Inc.,  Kenneth Cole Financial  Services,  Inc., Kenneth Cole Woodbury,
          Inc., Cole Fifth Avenue,  Inc., Cole Union Street, Inc. to The Bank of
          New York;  Shareholder Guaranty by and between Kenneth D. Cole and The
          Bank of New York, dated as of May 26, 1994; Subordination Agreement by
          and among Kenneth D. Cole,  Kenneth Cole  Productions,  Inc.,  Kenneth
          Cole Leather Goods,  Inc.,  Unlisted,  Inc., Cole West, Inc.,  Kenneth
          Cole Financial Services, Inc., Kenneth Cole Woodbury, Inc., Cole Fifth
          Avenue,  Inc., Cole Union Street, Inc. and The Bank of New York, dated
          as of April 13, 1994;  Reinvestment  Agreement by and among Kenneth D.
          Cole, Kenneth Cole Productions, Inc., Unlisted, Inc., Cole West, Inc.,
          Kenneth Cole Financial  Services,  Inc., Kenneth Cole Woodbury,  Inc.,
          Cole Fifth Avenue,  Inc., Cole Union Street,  Inc. and The Bank of New
          York,  dated as of May 26,  1994;  Amendment  No.  1 to the Term  Loan
          Agreement and the Reinvestment Agreement by and among Kenneth D. Cole,
          Kenneth  Cole  Productions,   Inc.,  Cole  West,  Inc.,  Kenneth  Cole
          Woodbury,  Inc.,  Cole Fifth Avenue,  Inc.,  Cole Union Street,  Inc.,
          Kenneth Cole Financial Services,  Inc. and The Bank of New York, dated
          as of May 31, 1994. (Incorporated by reference to Exhibit 10.02 to the
          Company's   Registration  Statement  on  Form  S-1,  Registration  No.
          33-77636).

10.03 --  Line of Credit  Letter,  dated January 13, 1994,  from The Bank of New
          York to Kenneth Cole  Productions,  Inc.,  Kenneth Cole Leather Goods,
          Inc. and Unlisted, Inc.; $7,500,000 Promissory Note, dated February 1,
          1994 by Kenneth Cole  Productions,  Inc.,  Kenneth Cole Leather Goods,
          Inc.  and  Unlisted,  Inc.  issued  to The  Bank of New  York;  Letter
          Agreement,  dated December 16, 1993,  between The Bank of New York and
          Kenneth Cole Productions,  Inc., Unlisted,  Inc., Kenneth Cole Leather
          Goods,  Inc., Cole  Productions,  Inc., Cole West, Inc.,  Kenneth Cole
          Financial Services,  Inc., Cole Woodbury,  Inc., Cole Sunset, Inc. and
          Cole Fifth Avenue, Inc.; General Guarantees,  dated December 16, 1993,
          in favor of The Bank of New

                                       20
<PAGE>

          York by Kenneth  Cole  Leather  Goods,  Inc. for  Unlisted,  Inc.,  by
          Kenneth Cole Leather Goods, Inc. for Kenneth Cole  Productions,  Inc.,
          by Unlisted,  Inc. for Kenneth Cole  Productions,  Inc.,  by Unlisted,
          Inc.  for  Kenneth  Cole  Leather   Goods,   Inc.,   by  Kenneth  Cole
          Productions, Inc. for Kenneth Cole Leather Goods, Inc., and by Kenneth
          Cole Productions,  Inc. for Unlisted,  Inc.; General Loan and Security
          Agreements,  dated December 16, 1993, between The Bank of New York and
          each of Kenneth Cole  Productions,  Inc.,  Kenneth Cole Leather Goods,
          Inc. and Unlisted,  Inc.;  and Personal  Guarantees of Mr.  Kenneth D.
          Cole,  dated  December 16, 1993,  in favor of The Bank of New York for
          Kenneth  Cole  Productions,  Inc.,  Unlisted,  Inc.  and Kenneth  Cole
          Leather Goods, Inc. (Incorporated by reference to Exhibit 10.03 to the
          Company's   Registration  Statement  on  Form  S-1,  Registration  No.
          33-77636).

          Line of Credit  Letter,  dated  December  9, 1994 from The Bank of New
          York to Kenneth Cole Productions,  Inc.; $7,500 Promissory Note, dated
          December 15, 1994 by Kenneth Cole Productions, Inc. issued to The Bank
          of New York;  Letter of  Termination  of  Personal  Guarantees  of Mr.
          Kenneth D. Cole,  dated  December 8, 1994, in favor of The Bank of New
          York for Kenneth Cole Productions,  Inc.,  Unlisted,  Inc. and Kenneth
          Cole Leather Goods,  Inc.  (Incorporated by reference to Exhibit 10.03
          to the Company's 1994 Form 10-K).

10.03A    $10,000   Promissory  Note,  dated  July  31,  1995  by  Kenneth  Cole
          Productions, Inc. issued to The Bank of New York. (Previously filed as
          Exhibit 10.03A to the Registrant's  Annual Report on Form 10-K for the
          year ended December 31, 1996 and incorporated herein by reference).

*10.04 -- Kenneth Cole Productions,  Inc. 1994 Stock Option Plan.  (Incorporated
          by reference to Exhibit 10.04 to the Company's  Registration Statement
          on Form S-1, Registration No. 33-77636).

*10.05 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
          Productions,  Inc. and Kenneth D. Cole.  (Incorporated by reference to
          Exhibit  10.05 to the  Company's  Registration  Statement on Form S-1,
          Registration No. 33-77636).

*10.06 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
          Productions, Inc. and Paul Blum. (Incorporated by reference to Exhibit
          10.06  to  the   Company's   Registration   Statement   on  Form  S-1,
          Registration No. 33-77636).

*10.07 -- Employment Agreement, dated as of April 30, 1994, between Kenneth Cole
          Productions,  Inc. and Stanley A. Mayer;  Stock Option Agreement dated
          as of March 31,  1994  between  Kenneth  Cole  Productions,  Inc.  and
          Stanley A. Mayer.  (Incorporated  by reference to Exhibit 10.07 to the
          Company's   Registration  Statement  on  Form  S-1,  Registration  No.
          33-77636).

          Stock Option Agreement dated as of June 1, 1994,  between Kenneth Cole
          Productions,  Inc. and Stanley A. Mayer;  Stock Option Agreement dated
          as of July 7, 1994, between Kenneth Cole Productions, Inc. and Stanley
          A. Mayer  (Incorporated by reference to Exhibit 10.07 to the Company's
          1994 Form 10-K).

10.08 --  Collective Bargaining Agreement by and between the New York Industrial
          Council of the  National  Fashion  Accessories  Association,  Inc. and
          Leather Goods, Plastics, Handbags and Novelty Workers' Union, Local 1,
          dated as of April 25, 1987; Memorandum of Agreement by and between the
          New  York  Industrial  Council  of the  National  Fashion  Accessories
          Association,  Inc. and Leather Goods,  Plastics,  Handbags and Novelty
          Workers'  Union,  Local 1,  Division of Local  342-50  United Food and
          Commercial Workers Union, dated as of June 16, 1993.  (Incorporated by
          reference to Exhibit 10.08 to the Company's  Registration Statement on
          Form S-1, Registration No. 33-77636).

10.09     Memorandum of Agreement between the New York Industrial Council of the
          National  Fashion  Accessories  Association  Inc.  and Local 1 Leather
          Goods,  Plastics,  Handbags,  and Novelty  Workers Union,  Division of
          Local 342-50  United Food and  Commercial  Workers  Union  (Previously
          filed as Exhibit  10.1 to the  Registrant's  Quarterly  Report on Form
          10-Q for the  quarterly  period  ended June 30, 1996 and  incorporated
          herein by reference).

10.10     Employment Agreement between Kenneth Cole Productions,  Inc., and Paul
          Blum.  Previously filed as Exhibit 10.2 to the Registrant's  Quarterly
          Report on Form 10-Q for the  quarterly  period ended June 30, 1996 and
          incorprated herein by reference).

+10.11    Sublease  Agreement,   dated  June  17,  1996,  between  Kenneth  Cole
          Productions, Inc. and Liz Claiborne Accessories, Inc.


                                       21
<PAGE>

+21.01 -- List of Subsidiaries.

+23.01    Consent of Ernst & Young LLP

+27       Financial Data Schedule

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

*         Management contract or compensatory plan or arrangement required to be
          identified pursuant to Item 14(a) of this report.

+         Filed herewith.



(b) Reports on Form 8-K

         None.

(c) See (a) (3) above for a listing of the  exhibits  included as a part of this
report.



                                       22
<PAGE>
                 Kenneth Cole Productions, Inc. and Subsidiaries

                   Index to Consolidated Financial Statements

                                                                         Page
                                                                         ----

Report of Independent Auditors........................................    F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995..........    F-3

Consolidated Statements of Income for the years ended
   December 31, 1996, 1995 and 1994...................................    F-5

Consolidated Statements of Changes in Shareholders' Equity
   for the years ended December 31, 1996, 1995 and 1994...............    F-6

Consolidated Statements of Cash Flows for the years ended
   December 31, 1996, 1995 and 1994...................................    F-7

Notes to Consolidated Financial Statements............................    F-8



                                      F-1
<PAGE>


                         Report of Independent Auditors

Board of Directors and Shareholders
Kenneth Cole Productions, Inc. and Subsidiaries

     We have audited the  accompanying  consolidated  balance  sheets of Kenneth
Cole  Productions,  Inc. and  subsidiaries as of December 31, 1996 and 1995, and
the related consolidated  statements of income, changes in shareholders' equity,
and cash flows for each of the three  years in the  period  ended  December  31,
1996.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial position of Kenneth Cole
Productions,  Inc.  and  subsidiaries  at December  31,  1996 and 1995,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted accounting principles.

                                                      ERNST & YOUNG LLP
New York, New York
February 25, 1997


                                      F-2
<PAGE>

                 Kenneth Cole Productions, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                 1996               1995
                                                                           -----------------------------------
<S>                                                                        <C>                <C>
Assets
Current assets:
     Cash                                                                  $     1,626,000    $    2,204,000
     Due from factors                                                           17,976,000        13,898,000
     Accounts receivable, less allowance for doubtful accounts
       of $65,000 in 1996, and $30,000 in 1995                                   3,339,000         2,316,000
     Inventories                                                                29,265,000        16,361,000
     Prepaid expenses and other current assets                                   1,001,000           909,000
     Deferred income taxes                                                         755,000           514,000
                                                                           -----------------------------------

Total current assets                                                            53,962,000        36,202,000
                                                                           -----------------------------------

Property and equipment - at cost:
     Furniture and fixtures                                                      3,234,000         1,716,000
     Machinery and equipment                                                     2,916,000         1,788,000
     Leasehold improvements                                                      6,610,000         4,523,000
                                                                           -----------------------------------

                                                                                12,760,000         8,027,000
     Less accumulated depreciation and amortization                              3,428,000         2,374,000
                                                                           -----------------------------------

Net property and equipment                                                       9,332,000         5,653,000
                                                                           -----------------------------------

Other assets:
     Deferred income taxes                                                         145,000           422,000
     Deposits and sundry                                                         1,816,000         1,030,000
                                                                           -----------------------------------

Total other assets                                                               1,961,000         1,452,000
                                                                           -----------------------------------
Total assets                                                               $    65,255,000    $   43,307,000
                                                                           ===================================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>


                 Kenneth Cole Productions, Inc. and Subsidiaries

                     Consolidated Balance Sheets (continued)

<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                              1996               1995
                                                                      ------------------------------------
<S>                                                                   <C>               <C>
Liabilities and shareholders' equity
Current liabilities:
     Accounts payable                                                 $    12,738,000   $     6,765,000
     Accrued expenses and other current liabilities                         2,376,000         1,859,000
     Advances due under revolving credit facility and
       current portion of long-term debt                                      489,000            54,000
     Income taxes payable                                                   1,247,000
     Deferred license income                                                   89,000           121,000
                                                                      ------------------------------------
Total current liabilities                                                  16,939,000         8,799,000

Rent payable                                                                  521,000           367,000
Other non-current liabilities                                               1,196,000           652,000

Commitments and contingencies

Shareholders' equity :
 Preferred stock, par value $1.00, 1,000,000
   shares authorized, none outstanding
 Class A  Common  Stock,  par  value  $.01,  20,000,000
   shares  authorized, 7,353,179 and 7,299,382
   outstanding in 1996 and 1995                                                74,000            73,000
 Class B Convertible Common Stock, par value $.01,
   6,000,000 shares authorized, 5,785,398
   outstanding in 1996 and 1995                                                58,000            58,000
 Additional paid-in capital                                                19,104,000        18,510,000
 Retained earnings                                                         27,432,000        15,145,000
 Deferred compensation--stock options                                         (69,000)         (297,000)
                                                                      ------------------------------------
Total shareholders' equity                                                 46,599,000        33,489,000
                                                                      ------------------------------------

Total liabilities and shareholders' equity                            $    65,255,000   $    43,307,000
                                                                      ------------------------------------
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


                 Kenneth Cole Productions, Inc. and Subsidiaries

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                             1996                1995               1994
                                                      -----------------------------------------------------------

<S>                                                      <C>                 <C>                <C>
Net sales                                                $   148,258,000     $   113,828,000    $    84,893,000
Cost of goods sold                                            86,919,000          67,382,000         50,166,000
                                                      -----------------------------------------------------------
Gross profit                                                  61,339,000          46,446,000         34,727,000
Licensing and other income                                     3,575,000           1,855,000            795,000
Operating costs and expenses:
   Selling, general and administrative and shipping
     and warehousing                                          44,354,000          31,957,000         22,776,000
                                                      -----------------------------------------------------------
                                                              44,354,000          31,957,000         22,776,000
                                                      -----------------------------------------------------------
Operating income                                              20,560,000          16,344,000         12,746,000
Interest (income) expense, net                                    22,000             (30,000)            25,000
                                                      -----------------------------------------------------------
Income before provision for income taxes                      20,538,000          16,374,000         12,721,000
Provision for income taxes                                     8,251,000           6,550,000          2,894,000

Net income                                               $    12,287,000     $     9,824,000    $     9,827,000

Earnings per share                                       $           .90     $           .72
Shares used to compute earnings per share                     13,578,000          13,576,000

Unaudited pro forma information:
   Historical income before taxes                                                                $   12,721,000
   Pro forma adjustment for taxes                                                                    (5,088,000)
                                                                                             --------------------
   Pro forma net income                                                                          $   7,633,000
                                                                                             --------------------
   Supplementary pro forma net income
     per share
                                                                                                          $.60
                                                                                             --------------------
   Shares used to compute supplementary pro forma
     net income per share                                                                            12,690,000
                                                                                             --------------------
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>


<TABLE>
<CAPTION>
                                           Kenneth Cole Productions, Inc. and Subsidiaries

                                     Consolidated Statements of Changes in Shareholders' Equity


                                      Class A Common Stock         Class B Common Stock
                                  ----------------------------- ----------------------------   Total
                                      Number                       Number                      Common
                                    of Shares       Amount       of Shares       Amount        Stock
                                  ------------------------------------------------------------------------

<S>                                   <C>          <C>            <C>             <C>          <C>
Shareholders' equity,
   December 31, 1993                  1,155,714   $  11,000       3,548,271     $  36,000     $  47,000
Deferred compensation under
   stock option plan
Stock grants
Exercise of stock option                158,015       2,000                                       2,000
S corporation dividends
Distribution to shareholders
Net proceeds from initial public
   offering, net                      1,613,000      16,000                                      16,000
Net income
Amortization of deferred
   compensation                   ------------------------------------------------------------------------
Shareholders' equity,
   December 31, 1994                  2,926,729      29,000       3,548,271        36,000        65,000
Conversion of Class B to Class A        655,572       7,000        (655,572)       (7,000)
Exercise of stock option,
   including tax benefit from            67,390       1,000                                       1,000
   exercise of stock options
Net income
Amortization of deferred
   compensation
Two-for-one stock split               3,649,691      36,000       2,892,699        29,000        65,000
                                  ------------------------------------------------------------------------
Shareholders' equity,
   December 31, 1995                  7,299,382      73,000       5,785,398        58,000
                                                                                                131,000
Exercise of stock option,
   including tax benefit from            53,797       1,000                                       1,000
   exercise of stock options
Net income
Amortization of deferred
   compensation                   ------------------------------------------------------------------------
Shareholders' equity,
   December 31, 1996                  7,353,179    $ 74,000       5,785,398       $58,000      $ 132,000
                                  ========================================================================

<CAPTION>
                                         Additional
                                           Paid-In       Retained      Deferred
                                           Capital       Earnings    Compensation       Total
                                        ------------------------------------------------------------

                                        <C>            <C>            <C>          <C>
Shareholders' equity,
   December 31, 1993                    $  2,944,000    $  5,463,000                $  8,454,000
Deferred compensation under
   stock option plan                         674,000                  $ (674,000)
Stock grants                                 154,000                                     154,000
Exercise of stock option                       4,000                                       6,000
S corporation dividends                   (3,320,000)     (9,180,000)                (12,500,000)
Distribution to shareholders                                (789,000)                   (789,000)
Net proceeds from initial public
   offering, net                          17,036,000                                  17,052,000
Net income                                                 9,827,000                   9,827,000
Amortization of deferred                                                 152,000         152,000
   compensation                         ------------------------------------------------------------
Shareholders' equity,
   December 31, 1994                      17,492,000       5,321,000    (522,000)     22,356,000
Conversion of Class B to Class A
Exercise of stock option,
   including tax benefit from              1,083,000                                   1,084,000
   exercise of stock options
Net income                                                 9,824,000                   9,824,000
Amortization of deferred                                                 225,000         225,000
   compensation
Two-for-one stock split                      (65,000)
                                        ------------------------------------------------------------
Shareholders' equity,
   December 31, 1995                      18,510,000      15,145,000    (297,000)     33,489,000

Exercise of stock option,
   including tax benefit from                594,000                                     595,000
   exercise of stock options
Net income                                                12,287,000                  12,287,000
Amortization of deferred                                                 228,000         228,000
   compensation                         ------------------------------------------------------------
Shareholders' equity,
   December 31, 1996                    $ 19,104,000    $ 27,432,000   $ (69,000)  $  46,599,000
                                        ============================================================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>

<TABLE>
<CAPTION>
                                           Kenneth Cole Productions, Inc. and Subsidiaries
                                                Consolidated Statements of Cash Flows

                                                                                      1996               1995              1994
                                                                               ----------------------------------------------------
<S>                                                                            <C>                 <C>                 <C>
Cash flows from operating activities
Net income .............................................................       $ 12,287,000        $  9,824,000        $  9,827,000
Adjustments to reconcile net income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization .....................................          1,109,000             794,000             477,000
     Provision for doubtful accounts ...................................             35,000              35,000              91,000
     Amortization of deferred compensation .............................            228,000             225,000             152,000
     Abandonment of leasehold improvements and equipment ...............            106,000
     Provision (benefit) for deferred taxes ............................             36,000             186,000            (971,000)
     Changes in operating assets and liabilities:
         Increase in due from factors ..................................         (4,078,000)         (6,105,000)         (1,999,000)
         Increase in accounts receivable ...............................         (1,058,000)           (424,000)         (1,237,000)
         Increase in inventories .......................................        (12,904,000)         (4,585,000)           (328,000)
         Increase in prepaid expenses and
           other current assets ........................................            (92,000)           (514,000)           (283,000)
         Increase in deposits and sundry ...............................           (786,000)           (600,000)           (364,000)
         Increase (decrease) in income taxes payable ...................          1,497,000            (220,000)            559,000
         Increase in accounts payable ..................................          5,973,000           1,129,000           1,746,000
         Increase (decrease) in accrued expenses and
           other current liabilities ...................................            485,000            (566,000)         (2,891,000)
         Increase in other non-current liabilities .....................            747,000             551,000             108,000
                                                                               ----------------------------------------------------
Net cash provided by (used in) operating activities ....................          3,585,000            (270,000)          4,887,000

Cash flows from investing activities
Acquisition of property and equipment, net .............................         (4,894,000)         (3,320,000)         (2,263,000)
                                                                               ----------------------------------------------------
Net cash used in investing activities ..................................         (4,894,000)         (3,320,000)         (2,263,000)

Cash flows from financing activities
Proceeds (repayment) of revolving line of credit, net ..................            440,000          (1,432,000)
Net proceeds from initial public offering ..............................         17,052,000
Proceeds from exercise of stock options ................................            345,000             542,000               6,000
S corporation dividends paid ...........................................        (12,500,000)
Distribution to shareholders ...........................................           (789,000)
Repayment of notes payable to shareholders .............................           (209,000)
Repayment of long-term debt ............................................            (54,000)            (63,000)            (52,000)
                                                                               ----------------------------------------------------
Net cash provided by financing activities ..............................            731,000             479,000           2,076,000
Net (decrease) increase in cash ........................................           (578,000)         (3,111,000)          4,700,000
Cash, beginning of year ................................................          2,204,000           5,315,000             615,000
                                                                               ----------------------------------------------------
Cash, end of year ......................................................       $  1,626,000        $  2,204,000        $  5,315,000
                                                                               ====================================================
Supplemental  disclosures of cash flow  information
Cash paid during the period for:
   Interest ............................................................       $    119,000        $     82,000        $    143,000
   Income taxes ........................................................       $  5,804,000        $  6,357,000        $  3,378,000
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-7
<PAGE>


                 Kenneth Cole Productions, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                               December 31, 1996


1. Description of Business

     Kenneth Cole Productions, Inc. and its subsidiaries (the "Company") designs
and  sources  a broad  range  of  quality  footwear,  handbags  and  accessories
primarily under its Kenneth Cole, Unlisted and Kenneth Cole Reaction brand names
and  markets  its  products  for sale to more than 2,500  department  stores and
specialty store locations in the United States, in several foreign countries and
through its retail and outlet store base.  In addition,  the Company has granted
licenses to certain third parties for a variety of accessory and apparel product
categories, including men's neckwear, briefcases,  portfolios, fabric outerwear,
tailored clothing,  jewelry,  women's hosiery and small leather goods, and men's
and women's belts, scarves and wraps, leather outerwear, sunglasses and eyewear,
watches,  and luggage.  The Company produces consumer catalogues which feature a
variety of Kenneth Cole and Kenneth Cole Reaction branded products.

   Organization and Initial Public Offering

     The Company was  incorporated in September  1982. The Company  completed an
initial public offering (the  "Offering") of 1,860,000  shares of Class A Common
Stock,  in which the Company sold  1,613,000  shares,  par value $.01 on June 9,
1994 at $12 per share.  Net  proceeds to the Company  were  approximately  $17.1
million, which is net of $2.5 million of fees to underwriters and other expenses
related to the Offering.

   Stock Split

     On October 17,  1995, a  two-for-one  stock split of the  Company's  Common
Stock was effected in the form of a stock  dividend of one share of Common Stock
for each share of Common Stock  outstanding  at the close of business on October
27, 1995 (the "Stock Split").  Accordingly,  all applicable  share and per share
data have been adjusted for the Stock Split.




                                      F-8
<PAGE>

               Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. Significant Accounting Policies

   Management's Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from these estimates.

   Principles of Consolidation

     The consolidated  financial statements include the accounts of Kenneth Cole
Productions,   Inc.  and  its  wholly  owned   subsidiaries.   All  intercompany
transactions and balances have been eliminated.

   Cash and Cash Equivalents

      The Company  considers  all highly liquid  investments  with a maturity of
three months or less at the time of purchase to be cash equivalents.  Restricted
cash in the amount of $1,196,000 and $603,000  related to deferred  compensation
is included in other non current assets in 1996 and 1995, respectively.

   Inventories

     Inventories  are stated at the lower of cost or market.  Cost is determined
on the first-in, first-out method. All inventory is comprised of finished goods.

     The Company  sources  each of its product  lines  separately,  based on the
individual  design,  styling and quality  specifications  of such products.  The
Company sources all of its products directly or indirectly through manufacturers
in Italy, Spain,  Brazil,  India, China and Korea. The Company attempts to limit
the concentration with any one manufacturer.  However, approximately 14% and 28%
of the dollar value of Kenneth Cole women's footwear  purchases were produced by
a single manufacturer in Spain and approximately 34% and 44% of the dollar value
of  total   leathergoods   purchases  by  the  Company  were   produced  by  two
manufacturers in India in 1996 and 1995,  respectively.  The Company believes it
has alternative  manufacturing  sources available to meet its current and future
production  requirements  in the event the Company is required to change current
manufacturers or current  manufacturers are unavailable to fulfill the Comapny's
production needs.



                                      F-9
<PAGE>

               Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. Significant Accounting Policies (continued)

   Property and Equipment

     Property and equipment are stated at cost.  Depreciation  and  amortization
are computed using the straight-line  method over estimated useful lives ranging
from  five  to  seven  years.   Leasehold  improvements  are  amortized  by  the
straight-line  method over the term of the related lease or the estimated useful
life, whichever is less.

   Licensing and Other Income

     The Company has entered into various  trade name license  agreements  which
provide  revenues  based on minimum  royalties and  additional  amounts based on
percentage  of  defined  sales.  Minimum  royalty  revenue  is  recognized  on a
straight-line  basis over each period,  as defined,  in each license  agreement.
Royalties  exceeding the defined minimum amounts are recognized as income during
the period corresponding to the licensee sales.

   Revenue Recognition

     Wholesale  sales are recognized upon shipment of products to the customers.
Retail sales are recognized when the payment is received from the customers.

   Advertising Costs

     The Company incurred advertising expense of $5.0 million,  $3.5 million and
$2.7 million, before advertising contributions made by licensees, for 1996, 1995
and 1994, respectively.  The Company records advertising expense concurrent with
the first time the advertising takes place.

   Stock Based Compensation

     The Company  adopted  Statement of Financial  Accounting  Standards No. 123
"Accounting  for  Stock-Based  Compensation"  (SFAS  123),  in 1996.  Under  the
provisions of SFAS, companies can elect to account for stock-based  compensation
plans using a fair value based method or continue measuring compensation expense
for those  plans using the  intrinsic  value  method  prescribed  in  Accounting
Principles  Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25) and related  Interpretations.  The Company has elected to continue using the
intrinsic value method to account for stock-based  compensation  plans. SFAS 123
requires companies electing to continue using the intrinsic value method to make
certain pro forma disclosures (see Note 9).


                                      F-10
<PAGE>


               Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. Significant Accounting Policies (continued)

     Income Taxes

     The Company  accounts for income taxes using the  liability  method.  Under
this  method,  deferred  income  taxes  reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

      Earnings Per Share

     Earnings per share is based upon the weighted  average  number of shares of
common  stock  outstanding  during the period and the  dilutive  effect of stock
options.

     Reclassifications

     Certain  amounts  included in the 1995 and 1994 financial  statements  have
been reclassified to conform with the 1996 presentation.

3. Pro Forma Information--Unaudited

      The pro forma financial information presents the effects on the historical
consolidated  financial  information  as if the Company has been  treated as a C
Corporation rather than an S Corporation throughout 1994. Prior to the Offering,
the Company had elected to be treated as an S Corporation for Federal and, where
permitted,  state income tax  purposes.  Upon the closing of the  Offering,  the
Company  terminated  its status as an S  Corporation.  The pro forma  adjustment
reflects  increased  provisions  for  Federal  and  state  taxes to  reflect  an
effective rate of 40%.

   Supplementary Pro Forma Net Income Per Share

     Supplementary pro forma net income per share is based upon (i) the weighted
average  shares  outstanding  during  1994  (12,463,360)  and (ii)  the  assumed
exercise  of options for the  purchase of 222,950 and 373,900  shares of Class A
Common Stock at $2.1875 and $6.00 per share, respectively.

4. Due from Factors and Line of Credit Facility

     The Company sells substantially all of its accounts receivables to factors,
without recourse,  subject to credit limitations  established by the factors for
each individual  account.  Certain accounts  receivable in excess of established
limits are  factored  with  recourse.  Included in amounts  due from  factors at
December  31,  1996 and  1995 are  accounts  receivable  totaling  approximately
$811,000 and $606,000,  respectively,  subject to recourse.  The agreements with
the factors provide for payment of a service fee on receivables sold.



                                      F-11
<PAGE>


               Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. Due from Factors and Line of Credit Facility (continued)

     At December 31, 1996 and 1995, the balance due from factors, which includes
chargebacks  due from  customers  is net of sales  allowances  of  approximately
$2,200,000 and $1,800,000, respectively.

     On December 16, 1993,  the Company  entered into a Line of Credit  Facility
(the "Facility").  The Facility, as amended,  allows for uncommitted borrowings,
letter of credits and banker's acceptances subject to individual maximums and in
the aggregate, an amount not to exceed the lesser of $20,000,000 or a "Borrowing
Base." The Borrowing  Base is  calculated on a specified  percentage of eligible
amounts  due  under  factoring  arrangements,   eligible  non-factored  accounts
receivable, and eligible inventory.  Borrowings under the revolving loan portion
of the  Facility  ("Advances")  are due on demand.  The Company may pay down and
re-borrow at will under the  Facility.  Advances  bear interest at the Alternate
Base Rate  (defined  as the  higher of the Prime  Rate or the  Federal  Funds in
effect at borrowing  date plus 1/2 of 1%) or the Note Rate (which will be agreed
upon  between  the  lender and the  Company).  Outstanding  advances  under this
agreement were $440,000 at December 31, 1996. There were no outstanding advances
at December 31, 1995.

     In connection with the line of credit,  the Company has agreed to eliminate
all the outstanding balances under the facility for at least 30 consecutive days
during each calendar year. In addition,  borrowings under the line of credit are
secured by certain assets of the Company.

5. Accrued Expenses and Other Current Liabilities

     Accrued expenses and other current liabilities consist of the following:

                      December 31,
                   1996          1995
               -----------------------
Rent expense   $  707,000   $  750,000
Compensation      977,000      837,000
Other             692,000      272,000
               -----------------------
               $2,376,000   $1,859,000
               =======================

6. Other Noncurrent Liabilities

     Included  in other  noncurrent  liabilities  is  deferred  compensation  of
approximately  $1,196,000  and  $603,000  in 1996  and  1995,  respectively  and
long-term debt of $49,000 in 1995.



                                      F-12
<PAGE>


               Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. Foreign Currency Transactions

     The Company  routinely  enters into firm  commitments  for the  purchase of
imported  merchandise  at future dates,  payable in foreign  currencies.  Due to
fluctuations in foreign currency exchange rates, the Company enters into forward
exchange  contracts  ($2,065,000,  and $3,463,000 at December 31, 1996 and 1995,
respectively)  to protect the purchase price under such  commitments.  Gains and
losses on forward  exchange  contracts are deferred and accounted for as part of
the  purchase  price of imported  merchandise.  At December  31,  1996,  forward
exchange  contracts have maturity dates through March 1997. The unrealized  loss
on these forward exchange contracts is approximately $2,000.

8. Income Taxes

     Prior  to  the  Offering,  the  Company  had  elected  to be  treated  as a
Subchapter S  Corporation  for federal and,  where  permitted,  state income tax
purposes.  As an S Corporation,  the Company was not responsible for the payment
of federal and certain state income taxes.  On June 2, 1994, in connection  with
the Offering,  the Company terminated its S Corporation status and, accordingly,
has been subject to federal and state income taxes as a C Corporation since that
date. As a result of the termination of the Company's S Corporation  status, net
deferred income tax assets totaling  approximately $787,000 have been reinstated
as of June 2, 1994 and have been included as an income tax benefit in 1994.

     Significant  items  comprising  the Company's net deferred tax assets as of
December 31, 1996 and 1995 are:


                                                   December 31,
                                                1996          1995
                                             -----------------------
Current:
     Inventory capitalization and reserves   $ 399,000    $ 422,000
     Allowance for bad debts                    26,000       12,000
     Rent                                      170,000
     Other                                     160,000       80,000
                                            -----------------------
                                             $ 755,000    $ 514,000
                                            =======================
Non-current:
     Depreciation                             (260,000)    (140,000)
     Deferred compensation                     633,000      311,000
     Undistributed foreign earnings           (358,000)
     Other                                     130,000      251,000
                                            -----------------------
                                             $ 145,000    $ 422,000
                                            =======================



                                      F-13
<PAGE>


                 Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


8. Income Taxes (continued)

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                   1996         1995          1994
                                              -----------------------------------------
<S>                                           <C>            <C>            <C>
     Federal                                  $ 6,543,000    $ 5,031,000    $ 2,936,000
     State and local                            1,650,000      1,300,000        889,000
     Foreign                                       22,000         32,000         40,000
                                             ------------------------------------------
                                                8,215,000      6,363,000      3,865,000
Deferred:
     Federal                                       32,000        163,000       (205,000)
     State and local                                4,000         23,000         21,000
     Reinstatement of deferred income taxes      (787,000)
                                             ------------------------------------------
                                                   36,000        186,000       (971,000)
                                             ------------------------------------------
                                              $ 8,251,000    $ 6,549,000    $ 2,894,000
                                             ==========================================
</TABLE>


     The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate for 1996, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
                                                             1996              1995             1994
                                                            -----------------------------------------
<S>                                                          <C>                <C>               <C>
Federal income tax at statutory rate                         35%                35%               35%
S Corporation income                                                                             (11)
State and local taxes, net of federal tax benefit             5                  6                 5
Deferred income taxes resulting from change in tax status                                         (6)
Other                                                                                             (1)

                                                            -----------------------------------------
                                                             40%                40%               23%
                                                            =========================================
</TABLE>


                                      F-14
<PAGE>

                 Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. Stock Option Plans and Grants

   1994 Stock Option Plan

      The Company has elected to continue to follow Accounting  Principles Board
Opinion No. 25, in accounting for its employee stock options. Under APB 25, when
the exercise  price of the Company's  employee  stock options  equals the market
price of the underlying  stock on the date of grant, no compensation  expense is
recognized. Had compensation cost for the stock options been determined based on
the fair value at the grant dates for awards under the plan, consistent with the
alternative method set forth under SFAS 123, net income and net income per share
would have been reduced.

The pro forma amounts are indicated below:

                                     1996                       1995
                                -----------------------------------------
     Net income:
          As reported              $12,287,000                $9,824,000
          Pro forma                $11,916,000                $9,633,000
     Net income per share
          As reported                     $.90                      $.72
          Pro forma                       $.88                      $.71

      The effects of applying SFAS 123 on this pro forma  disclosure  may not be
indicative  of future  results.  SFAS 123 does not apply to grants prior to 1995
and additional awards in future years are anticipated.

      The Company's 1994 Incentive Stock Option Plan has authorized the grant of
options to employees for up to 1,000,000  shares of the Company's  common stock.
Certain options  granted under the Plan vest in one-third  increments in each of
the  first,  second  and third  years  following  the date of grant and  certain
options vest up to 10%, 30%, 60% and 100% in the second, third, fourth and fifth
years,  respectively.  Options granted have 10 year terms. Non employee Director
options granted have 10 year terms and vest 50% on the first  anniversary of the
date of grant and become fully exercisable at the end of two years.

      Pro forma  information  regarding  net  income and  earnings  per share is
required  by  Statement  123 and  has  been  determined  as if the  Company  had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions for 1996 and 1995 respectively: risk-free interest rate of 6.25%; 0%
dividend yields; expected volatility factors of .359 and .346 and expected lives
of 6.3 and 4.5 years.  The weighted average of fair value of options granted was
$7.21 and $5.15 for the years ended December 31, 1996 and 1995, respectively.


                                      F-15
<PAGE>

                Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


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

     The  following  table  summarizes  all stock option  transactions  from the
inception of the plan through December 31, 1996.

<TABLE>
<CAPTION>
                                                   Shares             Weighted-Average
                                                                       Exercise Price
                                           ----------------------- ------------------------
<S>                                                 <C>                    <C>
   Outstanding at December 31, 1993                       0
   Granted                                          403,950                $6.00
   Exercised                                              0
   Forfeited                                        (30,050)               $6.00
                                           -----------------------
   Outstanding at December 31, 1994                 373,900                $6.00

   Granted                                          420,372               $10.59
   Exercised                                        (64,780)               $6.00
   Forfeited                                        (27,034)               $7.52
                                           -----------------------
   Outstanding at December 31, 1995                 702,458

   Granted                                          156,583               $15.89
   Exercised                                        (53,797)               $6.35
   Forfeited                                        (43,919)               $9.04
                                           -----------------------
   Outstanding at December 31, 1996                 761,325
                                           =======================
</TABLE>


   The following table  summarizes  information  about stock options at December
31, 1996:

<TABLE>
<CAPTION>
            Outstanding Stock Options                                          Exercisable Stock Options
            -------------------------                                          -------------------------
                                                    Weighted
                                                    Average             Weighted                           Weighted
                                                   Remaining            Average                            Average
       Range of Exercise                          Contractual           Exercise                           Exercise
             Prices               Shares              Life               Price             Shares           Price
             ------               ------              ----               -----             ------           -----
<S>                               <C>                <C>                  <C>              <C>              <C>
    $  6.00   to  $ 9.00          230,368            7.5 years            $ 6.00           123,584          $ 6.00
    $  9.01   to  $14.00          342,000            8.0 years            $ 9.88               666          $ 9.50
    $14.01    to  $21.00          188,957            6.6 years            $16.37            14,098          $18.10
</TABLE>

         Exercise  Prices for options  outstanding as of December 31, 1996 range
from $6.00 to $20.44.




                                      F-16
<PAGE>

                Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. Stock Option Plans and Grants (continued)

   Stock Option Grants

     In 1994, the Board of Directors granted  non-transferable  stock options to
an officer of the Company,  for the purchase of 222,950 shares of Class A Common
Stock at an exercise  price of $2.1875 per share.  The option vests in one-third
increments  on each of the first,  second and third  anniversaries  after grant.
During 1995,  70,000 options were  exercised.  At December 31, 1996,  options to
purchase 152,950 shares are outstanding, of which 78,632 are exercisable.

10. 401(k) Plan

     The Company's  401(k)  profit-sharing  plan covers all  non-union  eligible
employees, subject to certain minimum age and length of service requirements who
are  permitted to  contribute  specified  percentages  of their salary up to the
maximum  permitted by the Internal Revenue Service.  The Company is obligated to
make  a  matching   contribution  and  may  make  an  additional   discretionary
contribution, as defined. Contributions to the plan for the years ended December
31,  1996,  1995,  and 1994 were  approximately  $54,000,  $38,000 and  $29,000,
respectively.


11. Commitments and Contingencies

   Leases

     The  Company  leases  office,   retail,  and  warehouse   facilities  under
non-cancelable   operating   leases.   Future   minimum   lease   payments   for
non-cancelable  leases with initial  terms of one year or more  consisted of the
following at December 31, 1996:

                    1997                           $4,603,000
                    1998                            4,702,000
                    1999                            4,454,000
                    2000                            4,245,000
                    2001                            4,158,000
                    Thereafter                     13,228,000
                                                   ----------
                                                  $35,390,000
                                                  ===========

                                      F-17
<PAGE>

                Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. Commitments and Contingencies (continued)

     In addition, certain of these leases contain rent escalation and percentage
rent clauses that require additional payments to be made.

     Rent  expense  for the years ended  December  31,  1996,  1995 and 1994 was
$4,646,000 $2,782,000, and $1,331,000, respectively.

     The Company is, from time to time, a party to litigation that arises in the
normal course of its business  operations.  The Company is not presently a party
to any such litigation that would have a material adverse effect on its business
or operations.

   Letters of Credit

      At December  31, 1996 and 1995,  the Company was  contingently  liable for
approximately $4,855,000 and $4,035,000 of open letters of credit, respectively.
In addition,  at December 31, 1996 and 1995, the Company was contingently liable
for approximately $278,000 of standby letters of credit.

12. Shareholders' Equity

   Consolidation

      Prior to the Offering, Kenneth Cole Productions,  Inc. ("KCP") revised its
capital structure.  As part of that revision, (i) the 1,000 authorized shares of
KCP common stock were  exchanged  for  20,000,000  authorized  shares of Class A
Common Stock and 6,000,000 authorized shares of Class B Common Stock, (ii) a new
class of 1,000,000  shares of preferred stock was authorized,  with the Board of
Directors of the Company  having  authority to  designate  the relative  voting,
dividend,  liquidation  and other rights,  preferences  and  limitations  of the
preferred stock and (iii) the 1,000 shares of KCP common stock  outstanding were
exchanged  for 459,790  shares of Class A Common Stock and  3,042,692  shares of
Class B Common  Stock.  On May 26,  1994,  an  executive  officer of the Company
exercised an incentive  stock option issued to him in 1990 to acquire 10% of the
outstanding  shares of common stock of Kenneth Cole  Leathergoods  ("KCLG").  In
order to  consolidate  the Company's  wholesale  operations,  KCLG and Unlisted,
Inc., another affiliated  corporation,  were merged into KCP on May 27, 1994 and
the shareholders of KCLG and Unlisted,  Inc.  received an aggregate of 2,086,240
shares of Class A Common Stock and  3,594,060  shares of Class B Common Stock in
connection  therewith.  On May 31, 1994,  certain other affiliated  corporations
were merged into KCP and the sole shareholder received 400,000 shares of Class B
Common Stock in  connection  therewith.  On June 2, 1994,  KCP and the principal
shareholder   of  certain   other   affiliated   corporations   entered  into  a
Consolidation Agreement pursuant to which the shareholder contributed to KCP all
of his  shares  of  such  affiliated  corporations.  As  consideration  for  his
contribution  of such shares,  the  shareholder  received an aggregate of 59,790
shares  of  Class  B  Common  Stock.   The  foregoing  events  are  referred  to
collectively as the "Consolidation."



                                      F-18
<PAGE>

                Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


12. Shareholders' Equity (continued)

     The  Consolidation,  as described above, has been accounted for in a manner
similar  to  pooling of  interests  and the  financial  statements  reflect  the
consummation  of the  Consolidation  on a  retroactive  basis  for  all  periods
presented.

   Common Stock

      Holders of Class A Common  Stock are  entitled  to one vote for each share
held of record,  and holders of Class B Common  Stock are  entitled to ten votes
for each share held of record. Each share of Class B Common Stock is convertible
into one share of Class A Common Stock at the option of the Class B shareholder.
The holders of Class A Common  Stock vote  together  with the holders of Class B
Common  Stock on all matters  subject to  shareholder  approval,  except Class A
Common Stock  shareholders  vote separately as a class to elect 25% of the Board
of  Directors  of the  Company.  Shares of  neither  class of common  stock have
preemptive or cumulative voting rights.

   Preferred Stock

     The  Company's  Certificate  of  Incorporation  authorizes  the issuance of
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to  time as  determined  by the  Board  of  Directors  of the  Company,  without
shareholder approval. Such preferred stock may be issued in such series and with
such  preferences,  conversion or other  rights,  voting  powers,  restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of  Directors.  There are no shares of  preferred  stock  currently
outstanding.

13. Principal Customer

The Company has a significant customer,  which accounted for approximately 14.2%
and 15.6% of net sales in 1996 and 1995, respectively.


                                      F-19
<PAGE>

                Kenneth Cole Productions, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



14. Quarterly Financial Data (Unaudited)

Summarized  quarterly  financial  data  for  1996  and  1995  appear  below  (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                              First           Second            Third           Fourth
                                             Quarter          Quarter          Quarter          Quarter
                                         ---------------- ---------------- ---------------- ----------------
<S>                                        <C>              <C>              <C>              <C>
1996
Net sales                                  $   35,110       $   35,019       $   39,841       $   38,288
Gross profit                                   14,785           14,312           16,500           15,742
Operating income                                5,051            4,552            6,814            4,143
Net income                                      2,956            2,701            4,077            2,553
Earnings per share                             $  .22           $  .20           $  .30           $  .19

1995
Net sales                                  $   26,131       $   25,259       $   32,574       $   29,863
Gross profit                                   10,925           10,546           13,729           11,246
Operating income                                4,205            3,703            5,786            2,650
Net income                                      2,541            2,228            3,445            1,610
Earnings per share                             $  .19           $  .16           $  .25           $  .12
</TABLE>





                                      F-20
<PAGE>

                                   Signatures


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                          KENNETH COLE PRODUCTIONS, INC.

                                          By  /s/ KENNETH D. COLE
                                              --------------------------------
                                                  Kenneth D. Cole
                                          President and Chief Executive Officer

                                          Date:


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

             Signature                                     Title                                        Date
---------------------------------------------------------------------------------------------------------------------------

<S>                                          <C>                                         <C>
/S/     KENNETH D. COLE                      President, Chief Executive                  March 28, 1997
------------------------------------
          Kenneth D. Cole                        Officer and Director

/S/    STANLEY A. MAYER                      Executive Vice President,                   March 28, 1997
------------------------------------
         Stanley A. Mayer                        Chief Financial Officer,
                                                 Treasurer and Director

/S/            PAUL BLUM                     Executive Vice President                    March 28, 1997
------------------------------------
             Paul Blum                           and Director

/S/     DAVID P. EDELMAN                     Vice President Finance (Principal           March 28, 1997
------------------------------------
         David P. Edelman                        Accounting Officer)

/S/   MARIA CUOMO COLE                       Director                                    March 28, 1997
------------------------------------
         Maria Cuomo Cole

/S/      ROBERT C. GRAYSON                   Director                                    March 28, 1997
------------------------------------
              Robert  C. Grayson

/S/        DENIS F. KELLY                    Director                                    March 28, 1997
------------------------------------
          Denis F. Kelly

/S/       JEFFREY G. LYNN                    Director                                    March 268, 1997
------------------------------------
          Jeffrey G. Lynn

</TABLE>



                                      F-21