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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|                                                                                                | 
|----------------------------------------------------------------------------------------------- | 
|(Mark
 One)                                                                                    
|x     ANNUAL REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                                                                | 
|For the fiscal year ended December 31, 2007                                                    
|                                                                                               
|or                                                                                             
|                                                                                               
|o     TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                                | 
|For the transition period
 from___________to___________                                        

|                                                       
|-------------------------------------------------------
|Commission File 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)

603
West 50th Street, New York, NY 10019(Address of principal executive offices)

(212)
265-1500Registrants telephone number

Securities
registered pursuant to Section 12(b) of the Act:
Class A common stock,
par value $.01 per share

Securities
registered pursuant to Section 12 (g) of the Act:
None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o  No x

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o  No x

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o

Indicate
by check mark 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 III of this Form 10-K or any amendment to this Form 10-K. o

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

| |                           |                     |                         |                            
| | ------------------------- | ------------------- | ----------------------- | ---------------------------
| | Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o

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

The
aggregate market value of voting and non-voting stock held by non-affiliates of
the registrant as of the close of business on June 30, 2007: $294,535,817

Number
of shares of Class A Common Stock, $.01 par value, outstanding as of the close
of business on February 29, 2008: 11,377,189

Number
of shares of Class B Common Stock, $.01 par value, outstanding as of the close
of business on February 29, 2008: 8,010,497


|                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 shareholders of the Registrant by April 29, 2008.

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Kenneth
Cole Productions, Inc.TABLE OF CONTENTS

|        |  |                                                                                                               |  |      | 
|------- |  | ------------------------------------------------------------------------------------------------------------- |  | ---- | 
|        |  |                                                                                                               |  | Page
|        |  |                                                                                                               |  |     
|        |  | PART I                                                                                                        |  |      | 
|        |  |                                                                                                               |  |      | 
|Item 1  |  | Business                                                                                                      |  | 2    | 
|        |  |                                                                                                               |  |      | 
|Item 1A |  | Risk Factors                                                                                                  |  | 16   | 
|        |  |                                                                                                               |  |      | 
|Item 1B |  | Unresolved Staff Comments                                                                                     |  | 21   | 
|        |  |                                                                                                               |  |      | 
|Item 2  |  | Properties                                                                                                    |  | 21   | 
|        |  |                                                                                                               |  |      | 
|Item 3  |  | Legal Proceedings                                                                                             |  | 22   | 
|        |  |                                                                                                               |  |      | 
|Item 4  |  | Submission of Matters to a Vote of Security
 Holders                                                          |  | 22   | 
|        |  |                                                                                                               |  |      | 
|        |  | PART II                                                                                                       |  |      | 
|        |  |                                                                                                               |  |      | 
|Item 5  |  | Market for Registrants Common Equity,
Related Stockholder
 Matters and Issuer Purchases of Equity Securities |  | 23   | 
|        |  |                                                                                                               |  |      | 
|Item 6  |  | Selected Financial Data                                                                                       |  | 26   | 
|        |  |                                                                                                               |  |      | 
|Item 7  |  | Managements Discussion and Analysis of
Financial Condition and
 Results of Operations                        |  | 27   | 
|        |  |                                                                                                               |  |      | 
|Item 7A |  | Quantitative and Qualitative Disclosures
 About Market Risk                                                   |  | 35   | 
|        |  |                                                                                                               |  |      | 
|Item 8  |  | Financial Statements and Supplementary Data                                                                   |  | 35   | 
|        |  |                                                                                                               |  |      | 
|Item 9  |  | Changes in and Disagreements with Accountants on
Accounting and
 Financial Disclosure                         |  | 35   | 
|        |  |                                                                                                               |  |      | 
|Item 9A |  | Controls and Procedures                                                                                       |  | 35   | 
|        |  |                                                                                                               |  |      | 
|Item 9B |  | Other Information                                                                                             |  | 36   | 
|        |  |                                                                                                               |  |      | 
|        |  | PART III                                                                                                      |  |      | 
|        |  |                                                                                                               |  |      | 
|Item 10 |  | Directors, Executive Officers and Corporate
 Governance                                                       |  | 36   | 
|        |  |                                                                                                               |  |      | 
|Item 11 |  | Executive Compensation                                                                                        |  | 36   | 
|        |  |                                                                                                               |  |      | 
|Item 12 |  | Security Ownership of Certain Beneficial Owners
and Management
 and Related Stockholder Matters               |  | 36   | 
|        |  |                                                                                                               |  |      | 
|Item 13 |  | Certain Relationships and Related Transactions,
and Director
 Independence                                    |  | 36   | 
|        |  |                                                                                                               |  |      | 
|Item 14 |  | Principal Accounting Fees and Services                                                                        |  | 37   | 
|        |  |                                                                                                               |  |      | 
|        |  | PART IV                                                                                                       |  |      | 
|        |  |                                                                                                               |  |      | 
|Item 15 |  | Exhibits, Financial Statement Schedules                                                                       |  | 37   | 

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Item 1. Business

Important Factors
Relating to Forward- Looking Statements

The
Private Securities Litigation Reform Act of 1995 (the Reform Act) and Section
21E of the Securities Exchange Act of 1934 provides a safe harbor for
forward-looking statements made by or on behalf of Kenneth Cole Productions,
Inc. (the Company). The Company and its representatives may from time to time
make written or oral statements that are forward-looking, including
statements contained in this report and other filings with the Securities and
Exchange Commission and in reports to the Companys shareholders.
Forward-looking statements generally refer to future plans and performance and
are identified by the words believe, expect, anticipate, plan,
intend, will, estimate, project, or similar expressions. All statements
that express expectations and projections with respect to future matters,
including, but not limited to, the launching or prospective development of new
business initiatives, future licensee sales growth, gross margins, store
expansion and openings, changes in distribution centers, implementation of
management information systems, are forward-looking statements within the
meaning of the Reform Act. These statements are made on the basis of
managements views and assumptions, as of the time the statements are made,
regarding future events and business performance and are subject to certain risks
and uncertainties. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.

While
the Company does communicate from time to time with securities analysts, it is
against Company policy to disclose to them any material non-public information.
Shareholders should not assume that the Company agrees with any statement or
report issued by an analyst, regardless of the content of such statement or
report. To the extent that reports issued by securities analysts contain any
projections, forecasts or opinions, they are not the responsibility of the
Company.

There
can be no assurance that managements expectations will necessarily come to pass. A
number of factors affecting the Companys business and operations could cause
actual results to differ materially from those contemplated by the
forward-looking statements. Those factors include, but are not limited to,
changes in domestic economic conditions or in political, economic or other
conditions affecting foreign operations and sourcing, demand and competition
for the Companys products, risks associated with uncertainty relating to
the Companys ability to implement its growth strategies or its ability to
successfully integrate acquired business, risks arising out of litigation or
trademark conflicts, changes in customer or consumer preferences on fashion
trends, delays in anticipated store openings and changes in the Companys
relationship with its suppliers and other resources. This list of factors that
may affect future performance and the accuracy of forward-looking statements
are illustrative, but by no means exhaustive. Accordingly, readers of this annual
report should consider these facts in evaluating the information and are
cautioned not to place undue reliance on the forward-looking statements
contained herein. The Company undertakes no obligation to update or revise
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

General

Kenneth
Cole Productions, Inc., incorporated in September 1982, designs, sources and
markets a broad range of fashion footwear and handbags and through license agreements,
designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole
Reaction, Unlisted, Tribeca and Gentle Souls brand names. The Company also
has the rights to use the Bongo trademark for footwear through a
license agreement. In addition, the Company acquired the Le Tigre brand during
September 2007. The Companys products are targeted to appeal to fashion
conscious consumers, reflecting a casual urban perspective and a lifestyle
uniquely associated with Kenneth Cole. These products include core
basics that generally remain in demand from season to season and fashion
products that are designed to establish or capitalize on market trends. The
combination of basic products and fashion styles provides freshness in
assortments and maintains a fashion-forward image, while a multiple brand
strategy helps diversify business risk.

The
Company markets its products to approximately 6,000 department and specialty
store locations, as well as through its Consumer Direct business, which
includes full-priced retail and Company Stores and websites. The Company
believes the diversity of its product offerings distinguishes the Company from
its competitors in terms of product classifications (mens, womens and
childrens footwear, handbags, apparel and accessories), prices (from
better to moderate) and styling. The Company believes the diversity of
its product mix provides balance to its overall product sales and business
planning and increases sales opportunities to Wholesale customers who do not
carry the Companys full range of products.

2

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The
popularity of the Kenneth Cole brand names, including Kenneth Cole New York, Kenneth Cole
Reaction, and Unlisted, among consumers has enabled the
Company to expand its product offerings and channels of distribution through
licensing agreements. The Company offers, through these agreements, a lifestyle
collection of mens product categories, including tailored clothing, dress
shirts, dress pants, neckwear, briefcases, portfolios, jewelry, belts, leather
and fabric outerwear, cold-weather accessories, sunglasses, prescription
eyewear, watches, fragrance, swimwear, luggage, hosiery and small leather
goods. In addition, mens sportswear, which was formerly offered pursuant to a
license agreement, is being sold, marketed and distributed by the Company
directly commencing in 2008. Womens product categories currently being sold
pursuant to license agreements include sportswear, small leather goods, belts,
scarves and wraps, hosiery, leather and fabric outerwear, sunglasses,
prescription eyewear, watches, jewelry, fragrance, swimwear, and luggage. In
addition, the Company licenses its childrens apparel further broadening the branded lifestyle collection.

Business Growth
Strategies

The
Companys strategy is to continue to build upon the strength of its lifestyle
brand, Kenneth
Cole, through its well-differentiated and distinct labels including Kenneth Cole
New York,Kenneth Cole Reaction, Unlisted, and Tribeca. As such, the Company
continues to focus on designing and delivering high quality, fashionable
products, creating efficient and compelling retail environments, and continuing
to develop its partnerships with its licensees to ensure brand quality and
distribution integrity. The Company believes that further segmentation and
development of the brands afford growth potential within each of the Companys
business segments.

Wholesale.By strengthening and streamlining its distribution
channels, the Company continues to reinforce the segmentation of its brands in
wholesale, promoting even greater growth capability for each of its brands in
the future. This approach will facilitate the broadening of product offerings
and price points, attract new customers and further enable the Company to
address a wider variety of customers needs, both domestically and
internationally. Building on its distribution channels has given the Company
the ability to reach other distribution tiers and new customers. The Company
believes it is in the position to respond quickly to market changes, thereby
enabling each wholesale division to deliver appropriate fashions in a more
timely and effective manner. This approach has been effective in maintaining
the strength of the Kenneth Cole lifestyle brand franchise which will place
the Company in the best position to benefit from the consolidation in the
retail environment, and to enable the Companys brands to reach their
potential.

Consumer
Direct. The Companys Consumer Direct segment, which
operates full-priced retail and Company Stores, as well as e-commerce, affords
significant growth potential while simultaneously complementing the Companys
existing Wholesale and Licensing businesses. The Company believes that the sale
of footwear, handbags, mens apparel, and licensed products through its
consumer direct channels of distribution increases consumer awareness of the
Companys brands, reinforces the Companys image and builds brand equity. The
Company believes customers of its wholesale accounts in cities with a Kenneth Cole
retail presence have an enhanced brand awareness compared to those in cities
without a Kenneth Cole retail
presence. During 2006, the Company separated its merchandising and support
functions between Company Stores and full-priced retail stores. As a result,
the Company believes it can initiate more effective business and merchandising
practices for these stores. During 2007, the Company increased the amount of
specific made for Company Store product which improved margins and resulted
in positive Company Store comparative store sales and revised its real estate
and rent structure. The Company opened three Company Stores and closed five
full-priced retail stores and one Company Store in 2007. In its full-priced retail
stores, the Company limited its overstock position and reduced markdowns
through standardized assortments and modified price points to align the
price-value relationship of the Companys brands, which contributed to improved
operating performance. In addition, the Company closed seven stores in January
2008 and continues to evaluate its real estate portfolio.

As
of December 31, 2007, the Company operated 91 full-priced retail and Company
Stores as compared with 94 stores as of December 31, 2006.

The
Company continues to invest in the enhancement, visual presentation and
development of its websites to capitalize on the growth of its e-commerce and
emerging technologies. The Company believes that web-based transactions will
contribute to the Companys future, both as a source of consumer information
and as a generator of new revenue. Among other things, the websites are
designed to create additional revenues through an additional distribution
channel, build brand equity, fortify image, increase consumer awareness,
improve customer service,

3

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provide
entertainment and promote support for causes the Company believes are important
to its customers. During 2007, the Company signed an agreement to outsource the order-taking and fulfillment
responsibilities related to its Internet business to a third-party that
provides direct-to-customer e-commerce services. Shortly after the
agreement was signed, but before the scheduled launch date, the provider was
acquired, resulting in a launch delay. The new launch date is scheduled to
occur in 2008.

In
addition to seasonal image campaigns via traditional advertising media, the
Internet has enabled the Company and its customers to communicate directly with
each other. The Companys use of its websites to capture and process this
relevant market data on its consumer base provides a greater understanding of
its customers and market trends. The Company believes this dynamic relationship
is invaluable for building customer loyalty. Further, the Companys Internet
presence through two websites has enabled the creation of a substantial e-mail
database by which the Companys marketing department regularly interact with
its existing and new consumers online.

Licensing.
The strength of the Companys brands, Kenneth Cole New York, Kenneth Cole
Reaction, Unlisted, and Le Tigre provides
opportunities, through licensing agreements, to expand into new product
categories and broaden existing distribution channels. The Company believes its
strategic licensing relationships are essential to the growth of the Company
both domestically and abroad as a lifestyle branded franchise. Many of the
existing licensee businesses are still relatively small in their individual
product classifications and the Company believes they hold growth potential.

The
Company chooses its licensing partners with care, considering many factors,
including the strength of their sourcing and distribution abilities, thereby
attempting to maintain the same value and style that Kenneth Cole customers have come to expect. In 2006, the
Company terminated its license agreement with Paul Davril Inc. (PDI), which
resulted in the Company assuming control of its Kenneth Cole New York
sportswear categories and Kenneth Cole Reaction mens sportswear in
2007. Womens sportswear is currently distributed through an agreement with
Bernard Chaus, Inc., while mens sportswear began shipping in 2008 through
in-house operations. In September 2007, the Company acquired the Le Tigre
trademark. The Company is expected to launch the Le Tigre brand at JCPenney
in Spring 2008. The brand will debut in junior sportswear and is also expected
to expand into other categories, such as juniors footwear and accessories, as
well as young mens apparel. The Company believes the Le Tigre brand holds growth
potential both domestically and abroad.

The
Companys strategic partnership with its fragrance licensee, Coty, Inc.
(Coty), is designed to expand consumer awareness through Cotys global
marketing group and provide an extension of brand awareness to the Company
licensees and partnerships internationally and domestically. In the last two
years, the Company introduced Kenneth Cole Reaction fragrance for women,
Kenneth
Cole Signature for men, and added RSVP fragrance for men.
These fragrances replaced the original Kenneth Cole fragrances allowing for
fresh, new and exciting products for market penetration, growth and brand
awareness.

The
Company is committed to strategically expanding its product classifications
internationally and to building growth through brand awareness and diversity
    as
it continues to aggressively grow the watch and optical categories abroad,
focusing on certain specific international regions. In 2007, the Companys
licensees
opened thirteen freestanding stores and thirteen shop-in-shops in international
markets including Taiwan, the Gulf Region, Israel, Mexico, Latin America and
the Philippines.

The
Companys brands are currently licensed for a range of products consistent with
the Companys image (see Licensing below).

Products

The
Company markets its products principally under its Kenneth Cole New York, Kenneth Cole
Reaction, Unlisted, Tribeca, Gentle Souls and Le Tigre brand
names, along with its licensed brand for footwear, Bongo, each targeted to appeal to different consumers. The
Company believes that the products marketed under the Kenneth Cole New York brand
names have developed into true aspirational brands, and while it has similar
designer cache as other international designer brands, it has greater value
credibility.

4

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Kenneth Cole New York

Kenneth Cole New York products are designed for the fashion conscious consumer and
reflect the relaxed urban sophistication that is the hallmark of the Kenneth Cole New York image. The distinctive
styling of this line has established Kenneth Cole New York as a fashion
authority for sophisticated men and women who are seeking a value alternative
to other designer brands. As a result
of strong brand recognition and a reputation for style, quality and value, the
Company believes that Kenneth Cole New York is an important resource for better
department and specialty stores, and continues to provide significant growth
opportunities. The Kenneth Cole New York product offering has evolved from a very trendy line into one with broad
appeal, including both fashion-forward styling and core basics. The Company continues to leverage the
strength of its name through brand extensions, in-store shops and the licensing
of many product categories. As such,
the Company continues to focus on designing and delivering high quality,
fashionable products, creating efficient and compelling retail environments,
and continuing to develop its partnerships with its licensees to ensure brand
quality and distribution integrity.

Kenneth Cole New York men's footwear, manufactured through Italian and Chinese
factories, is designed as contemporary, comfortable leather fashion footwear
and is sold to the bridge-designer market at retail price points ranging from
approximately $155 to $400. As
versatile as it is sophisticated, Kenneth Cole New York mens footwear may be
worn to work, for special occasions or on weekends with casual clothes. In addition, the Company uses the label
silver technology in its line to denote enhanced comfort combined with its
fine leather shoe craftsmanship. The silver technology product features a
micro-tech midsole, a removable gel insole, and a fiberglass shank.

Kenneth Cole New York womens footwear, primarily manufactured through Chinese and
Brazilian factories, includes sophisticated and elegant dress, casual and
special occasion footwear that is sold to the bridge-designer market at retail
price points ranging from approximately $100 to $450. Womens footwear is
constructed by fine leather craftsmen to allow the customer high quality
designer styling with value for the fashion-conscious woman at work or in
social gatherings.

Kenneth Cole New York handbags are generally made of quality-crafted leathers and sold
to the bridge-designer market at retail price points ranging from approximately
$200 to $400. The seasonal line includes certain updated styles that offer the
customer high-fashion bags, which are accompanied by tailored career bags for
the sophisticated urban consumer.

Kenneth Cole New York mens sportswear is a contemporary sportswear collection which
includes knits, wovens, pants, sweaters and jackets and targets the
fashion-conscious male who enjoys neutral apparel with a splash of color. The
line was re-launched in-house in January 2008 after the Company terminated its
licensing agreement with its licensee. The collection is sold in top department
stores and select specialty stores with retail price points ranging from
approximately $40 to $425.

Kenneth Cole Reaction

Kenneth Cole Reaction consists of a variety of product classifications, which address
the growing trend toward flexible lifestyle dressing at affordable prices.
Kenneth Cole Reaction includes a comfort-oriented casual line, as well as more
dressy styles. Kenneth Cole Reaction womens footwear, primarily manufactured
in China, is designed for the workplace as well as for outside the office, with
an emphasis on comfort, versatility, contemporary styling and value. In
addition, the Company has added RXN comfort technology which uses a pod
system insole and gel heel pad to enhance comfort, support and flexibility. It
is targeted to compete in the largest single category of footwear sold in
department stores, womens better, and the majority of the line retails
primarily in the $70 to $120 price range. Kenneth Cole Reaction mens footwear,
primarily manufactured in China, combines fashionable and versatile styling
with affordable pricing and is positioned in the fastest growing classification
in the mens market as consumer preferences lean away from athletic constructed
footwear toward regular constructed footwear. This line retails approximately
in the $70 to $160 price range.

Kenneth Cole Reaction handbags, primarily manufactured in China, are designed to be
multifunctional with a contemporary look and are primarily made of leather and
non-leather technical fabrications, such as nylon, microfiber and canvas.
Kenneth Cole Reaction handbags have been styled to appeal to the same customer
as the Kenneth Cole Reaction footwear line to meet the varying needs of the
Companys customers. This line generally retails at price points ranging from
approximately $80 to $220.

5

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Kenneth Cole Reaction  childrens footwear, primarily
manufactured in China, includes dress and casual footwear sold at price points
ranging from $30 to $65 and is targeted to boys and girls ages 6 to 12, who the
Company believes are making more of their own fashion choices than ever before.
The toddler line for boys and girls ages 2 to 5 has price points ranging from
$30 to $50. The Company believes that childrens footwear is a natural
extension of its footwear business and that its use of styles based upon
successful performers in its existing mens and womens styles, greatly
enhances the likelihood of product performance.

Gentle
Souls

Gentle
Souls womens footwear is designed and targeted for
the sophisticated, active woman who expects a comfortable fit with a stylish
design. The footwear is sold in specialty retail and high end department stores
at price points ranging from $150 to $500. The line consists of approximately
30 styles that are manufactured with high quality leather around an exclusive
comfort technology. The product line was launched in 2007.

Unlisted

Unlistedproducts are designed and targeted to the younger,
trendier consumer market, the countrys largest consumer base of fashion
merchandise. The Unlisted brand was developed to expand the Companys sales into a younger, more moderately
priced business and includes mens and womens casual and dress shoes each
season.

Unlisted
footwear provides the young consumer with a wide selection of footwear with
contemporary styling and quality at affordable prices. Unlisted womens footwear includes not only fashion styles, but
also evening styles, basic pumps and loafers that generally retail at price points ranging
from $30 to $50 with approximately 60 styles per season. Unlisted mens footwear continues brand
penetration through additional door expansion, continuing its strong growth,
and capitalizing on the large youth consumer base. The line includes casual and
dress assortments with a variety of fashion styles to compliment the selection
of approximately 50 styles per season. Unlistedmens footwear appeals to a broader young mens market with shoes
that range at retail price points from $50 to $80.

Tribeca

The
Company introduced the Tribeca
womens footwear line in 2004. This brand was created for the young, trendier
shopper in the department store channel of distribution. The lines include
dress and casual styles leaning more toward the casual customers expectations.
The price points range from $50 to $70.

Bongo

Bongo
products are designed for the junior consumer market and are sold through
mid-tier department and specialty stores. The brand brings fashion and style at
reasonable price points to the junior market and includes childrens and womens
casual and dress shoes each season.

Currently,
Bongo footwear includes only
womens and childrens footwear lines. The womens footwear line has a wide
variety of styles for casual, weekend and special evening events including
pumps, boots and loafers, among others. The price points for the womens line
range from $30 to $50 with approximately 40 styles per season. Childrens price
points range from $20 to $30. The brand provides a market that the Company was
not previously penetrating with its branded products.

Business Segments

The
Company manages its business through three segments: Wholesale, Consumer Direct
and Licensing. During the periods presented below, the percentages of net
revenues contributed by the Companys business segments are as follows:

|                 |  |                                 |     |      |  |      |   |  |     |  
|---------------- |  | ------------------------------- | --- | ---- |  | ---- | - |  | --- | -
|                 |  | For the Year Ended December 31, |    
|                 |  | 2007                            |     | 2006 |  | 2005 |  
|                 |  |                                 |     |      |  |      |  
|Wholesale        |  |                                 | 57  | %    |  | 59   | % |  | 55  | %
|Consumer
 Direct |  |                                 | 34  |      |  | 33   |   |  | 37  |  
|Licensing        |  |                                 | 9   |      |  | 8    |   |  | 8   |  
|                 |  |                                 |     |      |  |      |   |  |     |  
|Total            |  |                                 | 100 | %    |  | 100  | % |  | 100 | %
|                 |  |                                 |     |      |  |      |   |  |     |  

See Note 9 to the Consolidated Financial Statements
    for a measure of segment income/loss and total assets.

6

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Wholesale Operations

The
Company strives to provide affordable fashion footwear, handbags and
accessories with consistent marketing and management support to its wholesale
customers. The Company provides this support by producing strong image-driven
advertising, offering creative quality products and maintaining adequate
inventory levels of new products as well as products included in the Companys
open stock program. The Company employs a sales force, as well as corporate
account specialists, to sell its products and to manage its relationships with
its wholesale customers, whose duties include analyzing and monitoring their
selling information.

The
Companys products are distributed to approximately 1,800 wholesale accounts
for sale in approximately 6,000 store locations in the United States. The
Company markets its branded products to major department stores and chains,
such as Dillard Department Stores, Inc., Federated Department Stores (including
Macys and Bloomingdales) and upscale specialty retailers, including Nieman
Marcus and Nordstrom, Inc. In addition, the Company sells out-of-season branded
products and overruns through its Company Stores and to off-price retailers.
The Company also sells its products, directly or through distributors or
licensees, to customers in various international markets including Canada,
Australia, Europe, parts of Asia, the Middle East, Latin America and parts of
South America and the Caribbean.

The
Company markets its product lines and introduces new styles at separate
industry-wide footwear and handbag tradeshows that occur several times
throughout the year in New York, Las Vegas and at various regional shows. These
trade shows also afford the Company the opportunity to assess preliminary
demand for its products. After each show, the Companys sales force 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 showrooms in New York.

Private
Label

The
Company also designs, develops and sources private label footwear and handbags
for selected retailers. These private label customers include major retailers
that do not purchase the Companys brands. The Companys private label business
requires minimal overhead and capital because the Company does not typically
incur any costs related to importing, shipping or warehousing of inventory, all
of which are usually borne by the private label customer.

Canada

The
Company assumed its Canadian footwear operations in 2003 and handbag operations
in 2004 after its respective license agreements ended. The operations are
managed from its New York City headquarters with a sales staff and third-party
distribution center in Canada.

The
Company markets its branded products in Canada to independent specialty
retailers and large department stores, including Sears Canada, Browns,
Townshoe, The Bay, Sterling and Friedmans. The branded products marketed in
Canada include Kenneth Cole New York,
Kenneth Cole Reaction, andUnlisted mens and womens footwear, as well as Kenneth Cole New York handbags and
Kenneth Cole Reaction childrens footwear and handbags. In 2005, the
Company began Canadian distribution of the TribecaandBongo footwear
brands.

Consumer Direct Operations

Retail Operations

The
Company continues to pursue opportunities to enhance and strengthen its retail
operations. At December 31, 2007, the Company operated 49 Kenneth Cole New York full-priced retail stores and 42 Company Stores
under
the Kenneth Cole New York name. In 2006, the Company
separated the merchandising and support functions between Company Stores and
its full-priced retail stores. As a result, the Company initiated more
effective business and merchandising practices for these stores. During 2007,
the Company increased the amount of specific made for Company Store product
and which resulted in improved margins and positive Company Store comparative
store sales. The Company opened three Company Stores in 2007 and plans on
opening five to eight locations in 2008. In its full-priced retail stores, the
Company limited its overstock position and reduced markdowns

7

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through
standardized assortments and modified price points to align the price-value
relationship of the Companys brands, which the Company believes will
contribute to improved operating performance. In addition, the Company
continued to evaluate its real-estate portfolio to identify unproductive
stores, and as a result closed five full-priced retail stores in 2007 and four
additional full-priced retail stores in January 2008.

The
Company believes its full-priced retail stores develop consumer recognition of
its brand names, provide a showcase for its branded products marketed by the
Company and its licensees, and enhance the Companys overall profitability. The
Company believes that these stores complement its wholesale business by
building brand awareness. The customer is presented with the Companys core
shoe and handbag business with selected key accessory styles. The Kenneth Cole retail stores enable the
Company to reach consumers who prefer the environment of a retail store. A
portion of the Companys store products are sourced exclusively for such stores
to differentiate the product mix of its stores from that of its wholesale
customers, while the Company sources made for Company Store product similar
to its exclusive sourcing for retail stores, and, thus, differentiates Company
Stores from both full-priced retail stores and wholesale customers.

The
success of the Companys new and existing stores will depend on various
factors, including the political instability in certain countries in which the
Company has a presence, the possibility of additional terrorist attacks,
general economic and business conditions affecting consumer spending, the
acceptance by consumers of the Companys retail concepts, the ability of the
Company to successfully manage expansion, the ability of the Company to 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,
including the implementation of SAP (see Management Information Systems). The
Company believes that its retail stores further enhance its image and represent
an opportunity for revenue and earnings growth.

Website

The
Company maintains websites to provide information regarding the Company and its
products, as well as to conduct online business. The Companys websites, www.kennethcole.com and
www.kennethcolereaction.com, are regularly
enhanced to enable consumers to purchase directly from the Company online. The
Company also maintains two toll-free telephone numbers (1-800-KEN-COLE and
1-800-UNLISTED), which provide customer service and answer product-related
questions.

As
part of its strategic plan, the Company signed an agreement to outsource its
Internet business to a third-party that provides direct-to-customer e-commerce
services, which the Company believes will increase the efficiency of the
Companys Internet business. Operations are expected to commence in 2008.

The
Company currently has a corporate gift program, whereby corporate customers are
sold Kenneth Cole items for award
and recognition programs. Orders are drop-shipped from the Companys licensees
or its warehouse. The Company believes this is another avenue to enhance
customer awareness and strengthen market position of its various brands.

Licensing

Domestic Licensing

The
Company views its licensing agreements as a vehicle to serve its customers
better by extending its product offerings thereby allowing more consumers to
meet their fashion accessory needs without compromising on price, value or
style. The Company considers entering into licensing and distribution
agreements with respect to certain products if such agreements 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 that it believes to be complementary to its existing product
lines.

Licensees
range from small to medium-sized manufacturers to companies that are among the
industry leaders in their respective product categories. The Company selects
licensees that it believes can produce and service quality fashion products
consistent with the Kenneth Cole New York,
Kenneth Cole Reaction and Unlisted
brand images. In 2007, the Company acquired the Le Tigre trademark and other intellectual property
associated with the Le Tigre
brand, which it expects to launch at JCPenney in Spring 2008 through a
licensing agreement.

8

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The
Company communicates its design ideas and coordinates all marketing efforts
with its licensees. The Company generally grants licenses for three to five
year terms with renewal options, limits licensees to certain territorial rights
and retains the right to terminate the licenses if certain specified sales
levels are not attained. Each license provides the Company with the right to
review, inspect and approve all product designs and quality and approve any use
of its trademarks in packaging, advertising and marketing. The Company plans to
continue to draw upon Kenneth Coles creative strength and the Companys marketing
resources to continue to build brand definition with its licensing partners.

The
following table summarizes the Companys product categories under its licensing
agreements at the end of 2007 for the Kenneth
Cole New York, Kenneth Cole Reaction, Unlisted and Le Tigre brands:

|                                    |  |                        |  |                        |  |          |  |         
|----------------------------------- |  | ---------------------- |  | ---------------------- |  | -------- |  | --------
|Product Category                    |  | Kenneth Cole
 New York |  | Kenneth Cole
 Reaction |  | Unlisted |  | Le Tigre
|                                    |  |                        |  |                        |  |          |  |         
|Mens
 Tailored Clothing            |  | X                      |  | X                      |  | X        |  |         
|Mens
 Sportswear                   |  | X                      |  | X                      |  |          |  | X       
|Mens
 Neckwear                     |  | X                      |  | X                      |  | X        |  |         
|Mens Dress
 Shirts                 |  | X                      |  | X                      |  | X        |  |         
|Mens Casual
 Pants                 |  | X                      |  | X                      |  | X        |  |         
|Mens
 Leather & Fabric Outerwear   |  | X                      |  | X                      |  |          |  | X       
|Mens Small
 Leather Goods          |  | X                      |  | X                      |  | X        |  | X       
|Mens Belts                         |  | X                      |  | X                      |  | X        |  | X       
|Mens
 Coldweather                  |  | X                      |  | X                      |  |          |  | X       
|Mens Socks                         |  | X                      |  | X                      |  | X        |  |         
|Womens
 Sportswear                 |  | X                      |  | X                      |  |          |  | X       
|Womens
 Small Leather Goods        |  | X                      |  | X                      |  | X        |  | X       
|Womens
 Leather & Fabric Outerwear |  | X                      |  | X                      |  |          |  | X       
|Mens/Womens
 Jewelry              |  | X                      |  | X                      |  | X        |  | X       
|Mens/Womens
 Swimwear             |  | X                      |  | X                      |  | X        |  |         
|Mens/Womens
 Watches              |  | X                      |  | X                      |  | X        |  | X       
|Mens/Womens
 Optical Frames       |  | X                      |  | X                      |  |          |  |         
|Mens/Womens
 Luggage/Briefcases   |  | X                      |  | X                      |  |          |  |         
|Mens/Womens
 Sunglasses           |  | X                      |  | X                      |  | X        |  | X       
|Mens/Womens
 Fragrances           |  | X                      |  | X                      |  | X        |  |         
|Mens/Womens
 Sleepwear            |  |                        |  |                        |  | X        |  |         
|Childrens
 Apparel                 |  |                        |  | X                      |  | X        |  | X       

All
of the Companys licensees of the Kenneth
Cole New York, Kenneth Cole Reaction, and Unlisted brands are required to contribute to the Company a
percentage of their net sales of licensed products, subject to minimum amounts,
for the ongoing marketing of the Kenneth
Cole brands.

International Licensing

The
Company sells its products through distributors and licensees to wholesale
customers and direct retailers in international markets including Canada,
Australia, parts of Europe, the Middle East, parts of Asia, Central America,
parts of South America and the Caribbean Islands. The Company also continues to
grow its international presence through broader wholesale distribution of
watches, fragrance and sunglasses and prescription eyewear and continues to
explore markets throughout the world.

Within
the Middle East, Kenneth Cole New York freestanding
stores in the United Arab Emirates grew to a total of nine while Israel ended
the year with three freestanding stores and thirteen shop-in-shops. The
Companys licensee in the Philippines grew its presence to a freestanding store
count of eight, while maintaining two shop-in-shops. The Company also maintains
agreements for the wholesale distribution of handbags, womens small leather
goods, and mens and womens footwear in Australia and has retail stores and
shop-in-shops in Taiwan.

In
North America, the Company, directly and through licensing arrangements,
continues to sell and market its products in Canada. The majority of product
classifications available domestically are also available in Canada. Currently,
the Company maintains direct distribution of its footwear and handbag
businesses in Canada and manages this business from its New York City
headquarters through its Wholesale segment. The Companys Latin

9

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American
licensee agreement covers Latin America, South America and the Caribbean, with
the exception of Brazil, Argentina and Uruguay. Currently, the Companys
licensee operates 37 stores in this region.

In
Europe, the Companys licensee sells footwear, luggage, small leather goods and
handbags to department stores within the United Kingdom. The Company has also
entered into an exclusive arrangement with House of Fraser to sell mens
tailored clothing, dress shirts and neckwear in the United Kingdom. In 2007 the
Company expanded into Germany and Spain through direct distribution of its
footwear and handbag businesses, while continuing to explore opportunities in
the European market. The Company furthered its international expansion into
South Africa as it introduced Unlisted
and Reaction branded footwear
into the South African market through a wholesale distribution agreement in
2007.

The
Company realizes the critical role that licensees have on the strategic plan to
reposition Kenneth Cole as an
accessible luxury brand, and on the growth and development of Kenneth Cole and its diffusion brands; and
therefore, the Company takes significant care to strategically align itself
with viable business partners around the world. The Company is optimistic about
the expansion of its international licensing programs as a means of developing
a truly global brand. The Company currently generates approximately 3% of its
total revenue internationally.

Design

Kenneth
D. Cole, the Companys Chairman and Chief Executive Officer, founded the
Company in 1982 and its success to date is largely attributable to his design
talent, creativity and marketing abilities. Mr. Cole selects designers to join
a design team to work with him in the creation and development of new product
styles. Members of each design team collaborate with Mr. Cole to create designs
that they believe fit the Companys image, reflect current or approaching
trends and can be manufactured cost-effectively.

The
Companys design teams constantly monitor fashion trends and search for new
inspirations. Members of the various teams travel extensively to assess fashion
trends in Europe, the United States and Asia and work closely with retailers to
monitor consumer preferences. The process of designing and introducing a new
product takes approximately two to four months. 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 to increase the Companys profitability, the Company
continuously seeks to develop new core basic product styles that 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. Instead, it
sources its branded and private label products directly or indirectly through
independently-owned manufacturers in Italy, Spain, Brazil, China and Korea,
among other locations. The Company maintains an office in Florence, Italy 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. In addition, as part of its global
sourcing strategy, the Company began operating from its Dongguan, China office
in 2005 as part of its plan to expand production in that region.

The
Company sources each of its product lines separately, based on the individual
design, styling and quality specifications of such products. The Company
primarily sources its products directly or indirectly through manufacturers in
Italy, Spain, Brazil and China. However, approximately 47% and 46% of total
handbag purchases came from two manufacturers in China during the years ended
December 31, 2007 and 2006, respectively. Approximately 42% and 39% of Kenneth Cole New York and Kenneth Cole Reaction
mens footwear purchases were from one manufacturer in China utilizing many different factories
during the years ended December 31, 2007 and December 31, 2006, respectively.
In addition, approximately 52% and 55% of Kenneth
Cole Reactionwomens footwear purchases were sourced through two
Chinese manufacturers during the years ended December 31, 2007 and December 31,
2006, 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 Companys production needs. Many of these

10

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manufacturers,
however, subcontract a portion of such purchases to ensure the consistent and
timely delivery of quality products. The Company is a significant customer of
several 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 its 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 will place production orders with the
manufacturers. In addition, the Company has a program, test and react,
whereby prototypes are rushed to its specialty retail stores immediately after
completion to determine initial consumer reaction. Successful styles, consumer
acceptance and demand are used to adjust factory production and line
development prior to initial season shipping. 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 from its
customers. Once an order has been placed, the manufacturing and delivery time
ranges from three weeks to four months depending on whether the product is new
or is currently in production. 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 as needed.

Advertising and Marketing

The
Company believes that advertising to promote and enhance its brands is an
integral part of its long-term growth strategy. The Company believes that its
advertising campaigns, which have brought it national recognition for their
timely focus on current events and social issues, have resulted in increased
sales and consumer awareness of its branded products. The Companys advertising
appears in magazines such as Vogue,
Elle, GQ, Details, Vanity Fair, and InStyle, newspapers, and outdoor and other media
advertising. The majority of the Companys licensees are required to contribute
to the Company a percentage of their net sales of licensed products, subject to
minimums, for the advertising and promotion of the image of the Companys
brands. In addition, the Company believes personal appearances by Kenneth D.
Cole further enhance the Companys brand awareness.

The
Company utilizes its in-house staff for marketing, advertising and public
relations efforts enabling the Company to maintain the integrity of its brands.
The Company occasionally will use advertising firms outside the United States
to assist with coordination of an international advertising effort; however,
all creative campaigns are designed by the Companys in-house staff.

In
order to continue to strengthen brand awareness of its products and increase
sales, the Company is actively involved in development, marketing and
merchandising programs for its customers. As part of this effort, the Company
utilizes cooperative advertising programs, sales promotions and produces trade
show sales tools and consumer catalogs which feature a variety of branded
products marketed by the Company and its licensees. As a result of these
internal productions, the Company believes that there is a singular focus,
strong synergy and consistency in all of the Companys communications.

An
additional aspect of the Companys marketing efforts is the creation and
placement of branded enhancements in key department and specialty store
locations. These 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. These enhancements
are achieved through the placement of fixtures, point of purchase displays and
graphics. The Company believes that these in-store enhancements encourage
longer-term commitment by retailers to the Companys products and heighten
consumer brand awareness.

In
2008, the Company, along with its licensees, will begin its silver anniversary
campaign celebrating its 25th anniversary through a year-long
calendar of events, print advertising and creative marketing. The Company
believes the campaign will heighten awareness of the Company, its brands,
products and social concerns.

11

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Distribution

To
facilitate distribution, the Companys products are inspected, bar coded,
packed and shipped from manufacturers by ocean or air to the Companys
distribution facilities located in the United States and Canada. The Company utilizes
fully-integrated information systems and bar code technology to facilitate the
receipt, processing and distribution of products through third-party warehouse
distribution centers. The products are then shipped to the Companys wholesale
and direct customers either in predetermined sizes, in case packs or under its
open stock program. The Companys open stock program allows its wholesale
customers to reorder, typically via electronic data interchange (EDI), core
basic styles in a range of colors and sizes as well as many fashion styles, 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 expects that affording customers improved
flexibility in ordering specific stock keeping units (SKUs) in smaller
quantities will ultimately reduce the incidence of markdowns and allowances.

The
Company has capitalized on its centralized distribution facilities to provide
additional support to its retail store operations on shipments of footwear and
handbag products as well as direct shipments to its catalog and Internet
customers. The Companys EDI program is also used to re-supply its retail store
on a variety of products, thereby enhancing its service to the Companys retail
operations through improved inventory management and customer response. To
facilitate distribution, the Company has third-party public warehouses located
on both the East and West Coasts of the United States, as well as in Canada, to
accommodate merchandise imported from Asia, Europe and South America.

Management Information Systems

The
Company believes that 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 systems were 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 continues to update and enhance
its distribution and financial systems with newer technology that offers
greater functionality and reporting capabilities. The Company also utilizes an
EDI system that provides a computer link between the Company and many of its
wholesale customers, as well as its retail operations that enable the Company
to receive online orders and to accumulate sales information on its products
shipped to its wholesale customers, retail stores, catalog and internet
customers. The Companys EDI system also improves the efficiency of responding
to customer needs and allows both the customer and the Company to monitor
purchases, shipments and invoicing. In its retail stores, the Company uses
point-of-sale registers to capture sales data, track inventories and generate
EDI replenishment orders.

The
Company regularly evaluates the adequacy of its management information systems
and upgrades such systems to support its growth. In 2006, the Company signed a
software license agreement with SAP America, Inc. (SAP) and implemented an
integrated business platform, using SAP software products, across the Companys
full-priced retail and Company Stores. Capital expenditures related to the SAP
retail implementation approximated $13.0 million. The Company believes that
failure to continue to upgrade its management information systems to support
growth and expansion, either in its internal systems or in systems of third
parties 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, Kenneth Cole Productions (LIC),
Inc., owns federal registrations for its principal trademarks Kenneth Cole, Kenneth Cole New York, Kenneth
Cole Reaction, Reaction, Kenneth Cole Collection, Tribeca and Unlisted as well as several other
ancillary and derivative trademarks. In 2007, the subsidiary acquired the Le Tigre trademark and other intellectual
property associated with the Le Tigre
brand. Each of the federal registrations is currently in full force and effect
and is not the subject of any legal proceedings. In addition, the Company has
several federal applications pending in the United States Patent and Trademark
office for trademarks and service marks. Moreover, the Company continues to
expand its current international registrations in numerous countries throughout
the world. The Company regards its trademarks and other proprietary rights as
valuable assets in the marketing and distribution of its products, and fully
intends to

12

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maintain,
renew and protect the registrations, as well as vigorously defend all of its
trademarks against infringements.

Competition

Competition
in the footwear and handbag industries is intense and these product
classifications are subject to rapidly changing consumer demands. The Company
competes with numerous designers, brands and manufacturers of footwear,
handbags, apparel and accessories, some of which may be 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. The Company also competes for the limited
shelf-space available for the display of its products to consumers, and the
Companys licensed apparel and accessories also compete with a substantial number
of designer and non-designer brands. Moreover, the general availability of
contract manufacturing capacity allows access by new market entrants. The
Company believes the success of its business depends on its ability to
stimulate and respond to changing consumer preferences by producing innovative
and attractive products, brands and marketing, while remaining competitive in
quality and price.

Foreign Operations

The
Companys business is subject to the risks of doing business abroad, such as
fluctuations in currency exchange rates, local market conditions, labor unrest,
political instability, actions of a public enemy, military or other government
intervention, priorities, restrictions or allocations and the imposition of
additional regulations relating to imports, including quotas, duties or taxes
and other charges on imports. There can be no assurance that these factors will
not have a material adverse effect on the Companys operations in the future.

In
order to reduce the risk of exchange rate fluctuations, the Company may enter
into forward exchange contracts to protect the future purchase price of
inventory denominated in Euro. These Euro forward exchange contracts are used
to reduce the Companys exposure to changes in foreign exchange rates and are
not held for the purpose of trading or speculation.

Import Restrictions

Although
most of the goods sourced 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 effect on the Companys operations and its ability to import its
products at 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. The majority of its
products have import duties that range from approximately 6% to 37.5%,
depending on the category and the principal component of the product. Other
restrictions on the importation of footwear, apparel, and 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 restricting
such goods may not be imposed or made more restrictive.

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 business follows the general seasonal trends
that are characteristic of the retail industry: sales and earnings are highest
in the fourth quarter and weakest in the first quarter. Because the timing of
wholesale shipments of products for any season may vary from year to year, the
results for any one quarter may not be indicative of the results for the full
year.

Customers

The
Companys department store customers include major United States retailers,
several of which are under common ownership. In 2007 and 2006, the Company had
no customer or group under common ownership account for more than 10% of
consolidated sales. The Companys ten largest customers represented 43.1% and
43.9% of the Companys net sales for the years ended December 31, 2007 and
2006, respectively. While the Company believes that purchasing decisions have
generally been made independently by each division within a

13

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

Backlog

The
Company had unfilled wholesale customer orders, excluding apparel, of $71.1
million and $77.3 million at February 26, 2008 and February 27, 2007,
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 shipments.

Sales Returns and Allowances

The
Companys ability to collect factor chargebacks for deductions taken by its
customers for returns, discounts and allowances as well as potential future
customer deductions is significant to its operations. The Company reserves
against known chargebacks as well as potential future customer deductions based
on a combination of historical activity and current market conditions. Actual
results may differ from these estimates under different assumptions or
conditions, which may have a significant impact on the Companys results.

Employees

At
December 31, 2007, the Company had approximately 1,800 employees (which include
approximately 900 part-time employees), none of whom are covered under a collective
bargaining agreement. The Company considers its relationship with its employees
to be satisfactory.

Directors and Executive Officers

|                    |  |     |  |                                                                   
|------------------- |  | --- |  | ------------------------------------------------------------------
|Name                |  | Age |  | Present Position                                                  
|                    |  |     |  |                                                                   
|                    |  |     |  |                                                                   
|Kenneth D.
 Cole    |  | 53  |  | Chief
 Executive Officer, Chairman of the Board of Directors      
|David P.
 Edelman   |  | 46  |  | Chief
 Financial Officer                                          
|Michael F.
 Colosi  |  | 42  |  | Senior Vice
 President and General Counsel and Corporate Secretary
|Doug
 Jakubowski    |  | 44  |  | President,
 Kenneth Cole  Apparel and Corporate Relations        
|Jeff Cohen          |  | 54  |  | Divisional
 President, Consumer Direct                            
|Michael
 DeVirgilio |  | 39  |  | Executive
 Vice President, Business Development                   
|Richard S.
 Olicker |  | 50  |  | Executive
 Vice President, Wholesale                              
|Kyle Andrew         |  | 41  |  | Senior Vice
 President, Marketing                                 
|Linda Nash
 Merker  |  | 51  |  | Senior Vice
 President, Human Resources                           
|Martin E.
 Franklin |  | 43  |  | Director                                                          
|Robert C.
 Grayson  |  | 63  |  | Director                                                          
|Denis F.
 Kelly     |  | 58  |  | Director                                                          
|Philip R.
 Peller   |  | 68  |  | Director                                                          

Kenneth
D. Cole has served as the Companys Chief Executive
Officer and Chairman of the Board since its inception in 1982 and was also
President until February 2002. 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 Candies
womens shoes. Mr. Cole is the Chairman of the Board of Directors of the
American Foundation for AIDS Research (AmFAR). In addition, he is on the
Board of Trustees of the Sundance Institute and the Council of Fashion
Designers of America. Mr. Cole is also a Director and President of nearly all
of the wholly-owned subsidiaries of the Company.

David
P. Edelman was appointed as the Chief Financial
Officer in July 2004. He joined the Company in January 1995 and served as the
Companys Senior Vice President of Finance since April 2000. Before joining the
Company, Mr. Edelman was Chief Financial Officer of a womens suit wholesaler,
and he was employed 10 years as a CPA with Ernst & Young in various
specialty groups including E&Ys National Consulting Office and its Retail
and Apparel Audit Group. Mr. Edelman serves on the Board of Directors of the
American Apparel and Footwear Association. Mr. Edelman is also a Director of
many of the Companys wholly-owned subsidiaries.

14

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Michael
F. Colosi has served as the Companys Senior Vice
President, General Counsel and Corporate Secretary since March 2007. Mr. Colosi
previously served as Corporate Vice President and General Counsel for the
Company from July 2000 to February 2007 and as Corporate Secretary since July
2004. Previously, Mr. Colosi was the Associate General Counsel and Assistant
Secretary for The Warnaco Group, Inc. from 1996 to 2000. After clerking for
Judge J. Edward Lumbard of the U.S. Court of Appeals for the Second Circuit, he
was engaged in the private practice of law from 1992 to 1996.

Doug
Jakubowski has served as President of Kenneth Cole 
Apparel and Corporate Relations since October 2007. Mr. Jakubowski previously
served as President of the Kenneth Cole
Reaction brand and Senior Vice President of Reaction from July 2005. Prior to joining
the Company, Mr. Jakubowski served as President of Perry Ellis Menswear from
2003 to 2005. From 1997 to 2003, he served as Executive Vice President of
Merchandising and Design for Perry Ellis Sportswear. Prior to joining Perry
Ellis, Mr. Jakubowski held various positions of Vice President of Sales and
Marketing at International News, and Director of Marketing and Sales at Koral
Industries.

Michael
DeVirgilio has served as Executive Vice President of Business
Development since January 2006. Mr. DeVirgilio previously served as Senior Vice
President of Licensing from May 2005. Prior to that, he served as Corporate
Vice President of Licensing and Design Services from March 2002 to May 2005.
From 1999 to 2001, Mr. DeVirgilio served as Divisional Vice President of
Licensing. Mr. DeVirgilio joined the Company as Director of Licensing in 1997.
Prior to joining the Company, Mr. DeVirgilio was Director of Merchandising for
the Joseph & Feiss Company (a Division of Hugo Boss, USA).

Richard
S. Olicker joined the Company as President of the
Wholesale Division and Executive Vice President of the Corporation in January
2006. Mr. Olicker was previously employed by Steven Madden, Ltd. Where he held
the position of President since 2001 and was responsible for seven
independently operating wholesale footwear divisions, including Steve Madden,
Stevies, l.e.i., and Candies. Mr. Olicker also had visibility of the operation
of the retail, licensing, Internet and international divisions. Prior to this,
Mr. Olicker co-founded Aerogroup International, Inc. (Aerosoles), the footwear
import and marketing firm, and previously also served as General Counsel and
Licensing Business Director at El Greco Inc.  Candies.

Kyle
Andrew joined the Company in February 2007 as Senior
Vice President of Marketing. Ms. Andrew previously served as the Vice President of Marketing at Gap Brand, and
was responsible for all Brand Communications and Creative. In this capacity,
Ms. Andrew oversaw all advertising, media, public relations, promotions, buzz
marketing, events, packaging and in-store creative for Gap, Baby Gap, Gap Kids
and Gap Body. Prior to working at Gap Inc., Ms. Andrew worked on the agency
side at various companies, including Arnell Group, Toth and Select
Communications.

Linda
Nash Merker joined the Company as Senior Vice
President of Human Resources in May 2004. Previously, she served as Senior Vice
President of Human Resources at Perry Ellis from January 2002 to November 2003,
and Senior Vice President of Human Resources at Loehmanns from 1994 until
2000. While at Macys East from 1987 until 1994, Ms. Merker also held various
positions, the last two of which were Vice President of Human Resources  Merchandise
Recruitment and Development and Vice President of Human Resources for the
Herald Square store.

Jeff
Cohen was named Divisional President of Consumer
Direct in March 2008. He joined the Company as Divisional President of Company
Stores in October 2006. Previously, he served as President of Retail at Calvin
Klein, Inc., Guess? and Ecko Unlimited. Mr. Cohen served as President of Retail
at Tommy Hilfiger, Inc. from 1993 to 2000. From 1983 to 1993, Mr. Cohen served
as President of Retail with Polo Ralph Lauren.

Martin
E. Franklin has served as the Chairman and Chief
Executive Officer of Jarden Corporation since September 2001. He has served as
Director of GLG Partners, Inc., formerly known as Freedom Acquisition Holdings,
Inc., since December 2006. Mr. Franklin also serves as the Chairman of Liberty
Acquisitions Holdings, Corp since November 2007. Prior to this, Mr. Franklin
served as Executive Chairman of Bolle Inc. from July 1997 to February 2000. He
also held the position of Chairman and CEO of Lumen Technologies, Inc. from May
1996 to December 1998, and its predecessor, Benson Eyecare Corporation, from
October 1992 to May 1996. Mr. Franklin is currently a member of the Board of
Directors of the Jewish Theological Seminary of America and One Family Fund,
and various other charitable organizations.

Robert
C. Grayson is the founder of Robert C. Grayson &
Associates (d.b.a. The Grayson Company), a broad-based consulting practice for
the consumer goods sector. From 1992 to 1996, Mr. Grayson served initially as

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an outside
consultant to Tommy Hilfiger Corp., a 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 1982 to 1985. He also serves as a director of St. John
Knits, Lillian August Inc., U-Food, and Stax Incorporated.

Denis
F. Kelly is a Managing Partner of Scura, Rise &
Partners, LLC as well as Chairman of Ashburn Hill Corp, a manufacturer of fire
resistant (FR) garments. From July 1993 to December 2000, Mr. Kelly was the
head of the Mergers and Acquisitions Department at Prudential Securities
Incorporated. From 1991 to 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. Mr. Kelly is a director of MSC Industrial Direct, Inc.

Philip
R. Peller was employed by Arthur Andersen LLP for 39
years. Prior to his retirement from Arthur Andersen in 1999, he served as
Managing Partner of Practice Protection and Partner Matters for Andersen
Worldwide SC, the coordinating entity for the activities of Arthur Andersen and
Andersen Consulting, from 1996 to 1999. Prior to that appointment, Mr. Peller
served as the Managing Director - Quality, Risk Management and Professional
Competence for the worldwide audit practice. Mr. Peller joined Arthur Andersen
in 1960 and was promoted to Audit Partner in 1970. Mr. Peller is a Certified
Public Accountant. Mr. Peller is currently a member of the Board of Directors
and Chair of the Audit Committee of MSC Industrial Direct Co., Inc. and of a
privately-owned insurance company and serves as a consultant to other
companies.

Available Information

The
Company files its annual, quarterly and current reports and other information
with the Securities and Exchange Commission (SEC). The Certifications
required under Section 302 of the Sarbanes-Oxley Act of 2002 are filed as
exhibits to the annual and quarterly reports on Form 10-K and Form 10-Q,
respectively. In addition, the Company has provided the annual certification to
the New York Stock Exchange. The Companys annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are available free of charge in
the Investor section under the subheading of About Us on the Companys
website www.kennethcole.com.
These reports, and any amendments to these reports, are made available on our
website as soon as reasonably practicable after such reports are filed with or
furnished to the SEC. The public may read and copy any materials filed by the
Company with the SEC at the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may also obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding the Company, which is available at http://www.sec.gov.

In
addition, the Companys website, www.kennethcole.com,will include, free of charge, items related to corporate governance
matters, including the Companys Corporate Governance Guidelines, charters of
various committees of the Companys Board of Directors and the Companys Code
of Business Conduct and Ethics applicable to employees, officers and directors.
A printed copy of the Companys Form 10-K, Corporate Governance Guidelines and
Code of Business Conduct and Ethics is available without charge by sending a
written request to: Investor Relations, Kenneth Cole Productions, Inc., 400
Plaza Drive, Secaucus, NJ 07094.

Item 1A. Risk Factors

The Company
operates in a changing environment that involves numerous known risks and
uncertainties that could materially adversely affect its operations. The risks
described below highlight some of the factors that have affected and in the
future could affect the Companys operations. Additional risks that the Company
does not yet know of or that it currently thinks are immaterial may also affect
business operations. If any of the events or circumstances described below
actually occurs, the Companys business, financial condition or results of
operations could be materially adversely impacted.

The Company may not be able to respond to
changing fashion and consumer demands in a timely manner.

The footwear,
apparel and accessory industries are subject to changing consumer demands and
fashion trends. The Company believes that its success depends in large part
upon its ability to identify and interpret fashion trends and to anticipate and
respond to such trends in a timely manner. The Company has generally been
successful in this regard

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but there can
be no assurance that the Company will be able to continue to meet changing
consumer demands or to develop successful styles in the future. If the Company
misjudges the market for a particular product or product line, it may result in
an increased inventory of unsold and outdated finished goods, which may have an
adverse effect on the Companys financial condition and results of operations.
In addition, any failure by the Company to identify or respond to changing
demands and trends could, in the long term, adversely affect consumer
acceptance of the Companys brand names, which may have an adverse effect on
the Companys business and prospects.

The Company
intends to market additional lines of footwear, apparel and fashion accessories
in the future. As is typical with new products, demand and market acceptance
for any new products introduced by the Company will be subject to uncertainty.
Achieving market acceptance for each of these products may require substantial
marketing efforts and the expenditure of significant funds to create customer
demand. There can be no assurance that the Companys marketing effort will successfully
generate sales or that the Company will have the funds necessary to undertake
such an effort.

The Companys sales are influenced by general
economic cycles.

Footwear,
apparel and accessories are cyclical industries dependent upon the overall level
of consumer spending. Our customers anticipate and respond to adverse changes
in economic conditions and uncertainty by reducing inventories and canceling
orders. As a result, any substantial deterioration in general economic
conditions, increases in energy costs or interest rates, acts of nature or
political events that diminish consumer spending and confidence in any of the
regions in which we compete, could reduce our sales and adversely affect our
business and financial condition.

The footwear, apparel and accessory
industries are highly competitive. Any increased competition could result in
reduced sales or margins.

Competition in
the footwear, apparel and accessory industries is intense. The Companys
products compete with other branded products within their product categories as
well as with private label products sold by retailers, 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, apparel and accessories for the limited shelf-space available for the
display of such product to the consumer. Moreover, the general availability of
contract manufacturing capacity allows ease of 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.

The loss of any of the Companys largest
customers could have a material adverse effect on its financial results.

Although currently
no customer comprises more than ten percent of the Companys customer base,
should one of its larger customers be negatively impacted, it could adversely
affect the Companys business. In recent years the retail industry has
experienced consolidation and other ownership changes.

In the future,
retailers may have financial problems or consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could further
increase the concentration of the Companys customers. The loss of any of the
Companys largest customers, or the bankruptcy or material financial difficulty
of any customer, could have a material adverse effect on its business. The
Company does not have long-term contracts with any of its customers, and sales to
customers generally occur on an order-by-order basis. As a result, customers
can terminate their relationships with the Company at any time or under certain
circumstances cancel or delay orders which could reduce our sales and adversely
affect its business condition.

The success of the Companys business depends
on its ability to attract and retain key employees.

The Company is
heavily dependent on its current executive officers and management. The loss of
any of its executive officers or management, including but not limited to,
Kenneth D. Cole, or the inability to attract and retain qualified personnel
could delay the development and introduction of new products, harm our ability
to sell products, damage the image of its brands and/or prevent the Company
from executing its business strategy.

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Imposition of quotas and fluctuations in
exchange rates could increase the Companys costs and impact its ability to
source goods.

The Companys
business is subject to risks of doing business abroad, including, but not
limited to, fluctuations in exchange rates and the imposition of additional
regulations relating to imports, including quotas, duties, taxes and other
charges on imports.

In order to
reduce the risk of exchange rate fluctuations, the Company often enters into
forward exchange contracts to protect the purchase price under its agreements
with its manufacturers or purchases products in United States dollars. The
Company cannot fully anticipate all of its currency needs and, therefore,
cannot fully protect against the effect of such fluctuations.

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 and the United States may impose new duties, tariffs and other
restrictions on imported products, any of which could adversely affect the
Companys operations and its ability to import its products at the Companys
current or increase quantity levels. Other restrictions on the importation of
footwear and the Companys other products are periodically considered by the
United States Congress and no assurances can be given that tariffs or duties on
the Companys goods may not be raised. If tariffs are raised in the future,
they will result in higher costs to the Company, and if import quotas are
imposed or made more restrictive, the Company may not be able to source its
goods at historical factories or at similar prices.

The voting shares of the Companys stock are
concentrated in one majority shareholder.

Currently,
Kenneth D. Cole owns approximately 88% of the voting power and approximately
43% of the outstanding common stock of the Company. As a result, Mr. Cole has
the ability to control (i) the election of all of the Companys directors other
than the directors who will be elected by the holders of Class A Common Stock,
voting separately as a class, and (ii) the results of all other shareholder
votes. Mr. Coles interests may differ from the interests of the other
stockholders.

War and acts of terrorism could affect the
Companys ability to procure, sell and deliver product.

In the event
of war or acts of terrorism or the escalation of existing hostilities, or if
any are threatened, the Companys ability to procure its products from its
manufacturers for sale to its customers may be negatively affected. The Company
imports a substantial portion of its products from other countries. If it
becomes difficult or impossible to import the Companys products into the
countries in which it sell its products, the Companys sales and profit margins
may be adversely affected. Additionally, war, military responses to future
international conflicts, and possible future terrorist attacks may lead to a
downturn in the U.S. and/or international economies, which could have a
material adverse effect on the Companys results of operations.

The Companys business is subject to risks
associated with sourcing outside the United States.

Substantially
all of the Companys apparel products are produced by independent
manufacturers. The Company faces the risk that these third-party manufacturers
with whom it contracts to produce its products may not produce and deliver its
products on a timely basis, or at all. The Company cannot be certain that it
will not experience operational difficulties with its manufacturers, such as
reductions in the availability of production capacity, errors in complying with
product specifications, insufficient quality control, and failures to meet
production deadlines or increases in manufacturing costs. The failure of any
manufacturer to perform to the Companys expectations could result in supply
shortages for certain products and harm its business.

In addition,
the Companys foreign manufacturers may be adversely effected by additional
factors such as political instability in countries where contractors and
suppliers are located, imposition of regulations and quotas relating to
imports, imposition of duties, taxes and other charges on imports, significant
fluctuation of the value of the dollar against foreign currencies and
restrictions on the transfer of funds to or from foreign countries.

The capacity
of the Companys manufacturers to manufacture its products also is dependent,
in part, upon the availability of raw materials. The Companys manufacturers
may experience shortages of raw materials, which

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could result
in delays in deliveries of its products by its manufacturers or in increased
costs to the Company. Any shortage of raw materials or inability of a
manufacturer to manufacture or ship its products in a timely manner, or at all,
could impair the Companys ability to ship orders of its products in a
cost-efficient, timely manner and could cause the Company to miss the delivery
requirements of its customers. As a result, the Company could experience
cancellations of orders, refusals to accept deliveries or reductions in its
prices and margins, any of which could harm the Companys financial performance
and results of operations.

The Company relies on licensees for revenues,
supply of products and compliance with Company standards.

The Company
licenses its trademarks to third parties for manufacturing, marketing,
distribution and sale of various products and intends to expand its licensing
programs. While the Company enters into comprehensive licensing agreements with
its licensees covering product design, product quality, sourcing,
manufacturing, marketing and other requirements, its licensees may not comply
fully with those agreements. Non-compliance could include marketing products
under the Companys brand names that do not meet its quality and other
requirements or engaging in manufacturing practices that do not meet the
Companys supplier code of conduct. These activities could harm the Companys
brand equity, its reputation and its business.

In addition,
the Companys results could be affected by the results of its licensees
or
distributors, or the transition of any of its licensing categories in-house.
The financial difficulties of any of its partners or their failure to produce
and deliver acceptable product could have an adverse impact on the Companys
business in the future. In the event of a business failure of any such partner
or of the breakdown of the Companys relationship with any domestic or foreign
partner, there is no guarantee that the Company could replace such business.

The Company has assumed greater control over
its mens sportswear collection.

The Company
terminated its license agreement with Paul Davril, Inc. for mens sportswear
in 2007 and created a wholesale apparel division to design, source and market
these products commencing in Spring 2008. In addition to all of the risk
factors listed in this section, the wholesale apparel division is subject to
all the associated risks of a new business, including but not limited to,
startup development costs incurred in advance of sales commencing, inability
to
attract and retain employees with sufficient expertise to manage these new
classifications and inexperience of existing management with direct control of
the business. New product classifications may require different methods of
operations than those used in the past and may involve different customers or
competitors, possible difficulties, delays or costs in integrating these lines
into the business, operations, personnel or systems of the Company in ways not
currently anticipated by Company management, and projected sales, margins and
profits may not be realized.

Failure to anticipate and maintain proper
inventory levels could have an adverse financial effect on the Companys
business.

The Company
maintains an inventory of selected products that it anticipates will be in high
demand. The Company may be unable to sell the products it ordered in advance
from manufacturers or that it has in its inventory. Inventory levels in excess
of customer demand may result in inventory write-downs or the sale of excess
inventory at discounted or closeout prices. These events could significantly
harm the Companys operating results and impair the image of the Companys
brands. Conversely, if the Company underestimates consumer demand for its
products or if manufacturers fail to supply quality products in a timely
manner, the Company may experience inventory shortages, which may result in
unfilled orders, negatively impact customer relationships, diminish brand
loyalty and result in lost revenues.

The Company relies on third parties for
distribution and warehousing.

The Company
relies on warehousing and distribution facilities operated by third parties in
California and New Jersey. Any damage at either of these facilities due to
fire, earthquake, flood, terrorist attack or any other natural or manmade
cause, including operational or financial hardship of the provider or its
capacity, could impair a portion of the Companys inventory or its ability to
use its warehousing and distribution facilities.

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Outcomes
of litigation or changes in regulatory control could impact the Companys
financial condition.

From time to time, the Company may be a party to
lawsuits and regulatory actions relating to its business. Due to the inherent
uncertainties of litigation and regulatory proceedings, the Company cannot
accurately predict the ultimate outcome of any such proceedings. An unfavorable
outcome could have a material adverse impact on the Companys business,
financial condition and results of operations. In addition, regardless of the
outcome of any litigation or regulatory proceedings, such proceedings could
result in substantial costs and may require that the Company devote substantial
resources to defend itself. Further, changes in government regulations both in
the United States and in the countries in which the Company operates could have
adverse affects on its business and subject it to additional regulatory
actions.

The
loss or infringement of the Companys trademarks and other proprietary rights
could have a material adverse effect on its operations.

The Company believes that its trademarks and other
proprietary rights are important to its success and competitive position.
Accordingly, the Company devotes substantial resources to the establishment and
protection of its trademarks on a worldwide basis. There can be no assurances
that such actions taken to establish and protect the Companys trademarks and
other proprietary rights will be adequate to prevent imitation of its products
by others or to prevent others from seeking to block sales of the Companys
products as violative of their trademarks and proprietary rights. Moreover,
there can be no assurances that others will not assert rights in, or ownership
of, the Companys trademarks and other proprietary rights or that the Company
will be able to successfully resolve such conflicts. In addition, the laws of
certain foreign countries may not protect proprietary rights to the same extent
as do the laws of the United States. Any litigation regarding our trademarks
could be time consuming and costly, and the loss of such trademarks and other
proprietary rights, or the loss of the exclusive use of such trademarks and
other proprietary rights could have a material adverse effect on the Companys
operations.

Implementation
of management information systems may impact the Companys financial results.

During 2007, the Company implemented SAP information
management software in its retail operations and considered further expansion
of SAP as an entity-wide integrated system solution. The implementation of such
software could be delayed and the Company may encounter computer and
operational complications in connection with such implementation that could
have a material adverse effect on its business, financial condition or results
of operations. Difficulties migrating existing systems to the new software
could impact its ability to design, produce and ship its products on a timely
basis.

Seasonality
of the Companys business and the timing of store openings and closings could
result in fluctuations in its financial performance.

The Companys business is subject to seasonal
fluctuations. Historically, fourth quarters sales are typically higher due to
holiday business. Therefore, results of operations for any single quarter are
not necessarily indicative of the results that may be achieved for a full
fiscal year. Quarterly results have been, and in the future will continue to
be, significantly impacted by the timing of new store openings and their
respective pre-opening costs, as well as store closings and related costs.

Adverse
publicity could negatively affect public perception of the brand.

The Companys results could be substantially affected
by adverse publicity resulting from its products or its advertising.

Expiration
of leases could result in fluctuations in the Companys financial performance.

As retail store leases expire, the Company may not be
able to renew them on acceptable terms or secure suitable replacement
locations. While the Company continues to explore new markets and is always
evaluating new potential, some stores may close, and this may have an adverse
impact on the financial operations of the Companys Consumer Direct division.

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The
Companys expectations of growth anticipate new store openings which are
subject to many factors beyond its control.

Future growth in sales and profits in the Companys
Consumer Direct division will depend to some extent on its ability to increase
the number of stores. The lease negotiation and development timeframes vary
from location to location and can be subject to unforeseen delays. The number
and timing of new stores actually opened during any given period, and their
associated contribution to net income for the period, will depend on a number
of factors including, but not limited, to: the identification and availability
of suitable locations and leases; the availability of suitable financing to the
Company and its landlords; the timing of the delivery of the leased premises to
the Company from its landlords in order to commence build-out construction
activities; the Companys ability and its landlords ability to obtain all
necessary governmental licenses and permits to construct and operate its stores
on a timely basis; the Companys ability to manage the construction and
development costs of new stores, and the availability and/or cost of raw
materials; the rectification of any unforeseen engineering or environmental
problems with the leased premises; adverse weather during the construction
period; and the hiring and training of qualified operating personnel in the
local market. Any of the above factors could have a material adverse impact on
the Companys financial condition.

The
effects of recent hurricanes and other natural disasters have increased insurance
costs for which the Company expects to take on higher deductibles if losses
occur.

The Company has operations in flood, hurricane and
earthquake zones. As such, the Company has insured itself against losses from
natural disasters. The cost of such insurance has risen significantly as a
result of the effects of recent disasters throughout the United States. To
offset such costs, the Company has taken on larger deductibles which, if
aggregated through multiple disaster locations, could have a material effect on
our results of operations.

The
Company intends to outsource its Internet business to a third-party
direct-to-customer e-commerce service provider.

The Company signed an agreement in 2007 to outsource
its Internet business to a third-party that provides direct-to-customer
e-commerce services, which the Company believes will increase the efficiency of
the Companys Internet business. Shortly after the agreement was signed, but
before the scheduled launch date, the provider was acquired, resulting in a
launch delay. The new launch date is scheduled to occur in 2008. Although the
Company will be working closely with the third-party fulfillment center in
transitioning the business from its current in-house process, the Company may
incur delays in order-taking and fulfillment, as a result of the transition.
This could impair the Companys ability to adequately meet the needs of its
customers and negatively impact the Companys operating results.

Negative
conditions in global credit markets may impair the Companys marketable
securities portfolio.

The Company has investments in auction-rate securities
which reset every 28 days, that, are triple A rated debt obligations,
and
substantially all have insurers. The recent conditions in the global credit
markets have prevented some investors from liquidating their holdings of
auction-rate securities because the amount of securities submitted for sale has
exceeded the amount of purchase orders for such securities. If there is
insufficient demand for the securities at the time of auction, the auction may
not be completed and the interest rates may not be reset to predetermined
interest rates. When auctions for these securities fail, the investments may
not be readily convertible to cash until a future auctions of these investments
is successful or they are redeemed or mature. If a decline in market value
continues that is deemed other-than-temporary resulting in a writedown, the
result could have a material effect on our results of operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

In
June 2006, the Company purchased its corporate headquarters building, for
approximately $24 million. The Company currently occupies 119,500 square feet
in the building, which is located at 603 West 50th Street, New York,
New York.

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The
Company leases 51,000 square feet of office space in Secaucus, New Jersey for
its administrative offices. In addition, the Company also leases a 23,500
square foot facility in Secaucus used for Company Store space as well as an
additional distribution warehousing facility. The Company also has a technical
and administrative office in Florence, Italy, and the Company opened a similar
office in Dongguan, China in 2005. The Company does not own or operate any
manufacturing facilities.

As
of December 31, 2007, the Company leased space for all of its 49 full-priced
retail stores (aggregating approximately 237,000 square feet) and 42 Company
Stores (aggregating approximately 208,000 square feet). Generally, the leases
provide for an initial term of five to ten years and certain leases provide for
renewal options permitting the Company to extend the term thereafter.

Item 3. Legal Proceedings

On
April 17, 2007, a class action was filed in Superior Court for the State of
California, County of San Diego. The class action alleged that the Companys
policies and practices regarding the request of personal information during
credit card purchases violated California Civil Code Section 1747.08 (the Song-Beverly
Credit Card Act). On October 29, 2007, the parties participated in mediation
and reached an agreement in principle to settle the dispute. The amounts
reserved at December 31, 2007 were sufficient to cover the proposed settlement
preliminarily approved by the court on January 25, 2008. A hearing on final
approval is scheduled for March 21, 2008.

A
former store manager brought suit against the Company seeking back overtime pay
for time worked in the store in excess of forty hours per week. On appeal the
California Supreme Court ruled that amounts owed to employees for meal breaks
should be treated as wage claims subject to a three-year statute of
limitations. The Company has fully satisfied the judgment including attorneys
fees for the original trial. The plaintiff petitioned the court of appeals for
attorneys fees for the appellate proceedings, and the court of appeals
subsequently referred the petition back to the trial court. On October 3, 2007,
the trial court heard oral argument on the parties positions and made
preliminary rulings. Based on those rulings, the Company established a reserve
in September 2007. The amounts reserved at December 31, 2007 were sufficient
to
cover the judgment that was settled and paid in January 2008.

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

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

None.

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PART II

Item 5. Market for Registrants Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity Securities

The
Companys Class A Common Stock is listed and traded (trading symbol: KCP) on
the New York Stock Exchange (NYSE). On February 29, 2008 the closing sale
price for the Class A Common Stock was $14.87. The following table sets forth
the high and low closing sale prices for the Class A Common Stock for each
quarterly period for 2007 and 2006, as reported on the NYSE Composite Tape:

|               |       |       | 
|-------------- | ----- | ----- | 
|2007:          | High  | Low   | 
|               |       |       | 
|               |       |       | 
|First Quarter  | 27.67 | 22.85 | 
|Second Quarter | 27.94 | 23.07 | 
|Third Quarter  | 25.02 | 19.37 | 
|Fourth Quarter | 20.34 | 17.27 | 
|               |       |       | 
|2006:          | High  | Low   | 
|               |       |       | 
|               |       |       | 
|First Quarter  | 28.52 | 25.47 | 
|Second Quarter | 28.56 | 22.33 | 
|Third Quarter  | 25.52 | 22.07 | 
|Fourth Quarter | 26.60 | 22.97 | 

The
number of shareholders of record of the Companys Class A Common Stock on
February 29, 2008 was 75.

There
were 7 holders of record of the Companys Class B Common Stock on February 29,
2008. There is no established public trading market for the Companys Class B
Common Stock.

During
the fourth quarter of 2007, the Company repurchased 725,700 shares of its own
stock, as presented in the following table:

|              |  |                                                   |  |                                              |  |                                                                                                     |  |                                                                                                                                        | 
|------------- |  | ------------------------------------------------- |  | -------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- | 
|Period        |  | (a) Total Number of
 Shares (or Units)
 Purchased |  | (b) Average Price
 Paid per Share
 (or Unit) |  | (c) Total Number of
 Shares (or Units)
 Purchased as Part of
 Publicly Announced
 Plans or Programs |  | (d) Maximum
 Number (or
 Approximate Dollar
 Value) of Shares (or
 Units) that May Yet
 Be Purchased Under
 the Plans or
 Programs (1) | 
|              |  |                                                   |  |                                              |  |                                                                                                     |  |                                                                                                                                        | 
|November 2007 |  | 580,200                                           |  | $18.81                                       |  | 580,200                                                                                             |  | 837,500                                                                                                                                | 
|              |  |                                                   |  |                                              |  |                                                                                                     |  |                                                                                                                                        | 
|December 2007 |  | 145,500                                           |  | $18.40                                       |  | 145,500                                                                                             |  | 692,000                                                                                                                                | 

| |     |                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | As of December 31, 2007, the remaining amount of
 shares that could be repurchased was approximately 692,000 shares. On March
 3, 2008, the Companys Board of Directors increased the authorization for the
 Companys stock buyback plan by 4,000,000 shares to 4,692,000 shares
 available for repurchase.

Dividend Policy

The
payment of any future dividends will be at the discretion of the Companys
Board of Directors and will depend, among other things, upon, future earnings,
operations, capital requirements, proposed tax legislation, the financial
condition of the Company and general business conditions.

The
Company established a quarterly dividend policy in 2003 and made $0.l8 per
share dividend payments to shareholders of record as of the close of business
on March 8, May 24, August 23 and November 21 during the fiscal year ended
December 31, 2007 and March 9, May 23, August 25, and November 22 during the
fiscal year ended December 31, 2006.

23

---



On
March 3, 2008, the Board of Directors declared a quarterly cash dividend of
$0.09 per share, payable on March 28, 2008, to shareholders of record at the
close of business on March 14, 2008.

The
Company had the following securities authorized for issuance under equity
compensation plans as of December 31, 2007:

|                                                             |  |                                                                                                 |  |                                                                                 |  |                                                                                                                                                 | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                             |  | Number of securities to be
 issued upon exercise of
 outstanding options,
 warrants, and rights |  | Weighted-average exercise
 price of outstanding
 options, warrants, and
 rights |  | Number of securities
 remaining available for
 future issuance under
 equity compensation plans
 (excluding securities
 reflected in column (a) | 
|Plan Category                                                |  | (a)                                                                                             |  | (b)                                                                             |  | (c)                                                                                                                                             | 
|                                                             |  |                                                                                                 |  |                                                                                 |  |                                                                                                                                                 | 
|Equity compensation plans
 approved by security
 holders     |  | 1,754,779                                                                                       |  | $25.08                                                                          |  | 1,214,668                                                                                                                                       | 
|                                                             |  |                                                                                                 |  |                                                                                 |  |                                                                                                                                                 | 
|Equity compensation plans
 not approved by security
 holders |  | N/A                                                                                             |  | N/A                                                                             |  | N/A                                                                                                                                             | 

Stock Performance Graph

The
following graph compares the yearly percentage change in the cumulative total
shareholder return on the Class A Common Stock during the period beginning on
December 31, 2002 and ending on December 31, 2007 with the cumulative total
return on the Standard & Poors 500 Composite Index and the Standard &
Poors Footwear Index. The comparison assumes that $100 was invested on
December 31, 2002 in the Class A Common Stock in the foregoing indices and
assumes the reinvestment of dividends.

24

---



|                                                                                    
|------------------------------------------------------------------------------------
|COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*                                       
|Among Kenneth
 Cole Productions, Inc., The S&P 500 Index
 and The S&P Footwear Index

(LINE GRAPH)

* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year
ending December 31.

25

---



Item 6. Selected Financial Data

The
following selected financial data has been derived from the consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and notes thereto that appear elsewhere in
this Annual Report and in Managements Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 of this Annual Report.

(Amounts are in thousands
except for per share and dividend amounts.)

|                                                 |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                 |  | 2007 |         | 2006 |   | 2005    |  | 2004 |         | 2003 |  
|                                                 |  |      |         |      |   |         |  |      |         |      |  
|                                                
|Income Statement Data:                           |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Net sales                                        |  | $    | 466,405 |      | $ | 492,282 |  | $    | 474,060 |      | $ | 473,438 |  | $ | 430,101 | 
|Royalty
 revenue                                 |  |      | 44,315  |      |   | 44,217  |  |      | 43,983  |      |   | 42,763  |  |   | 38,252  | 
|Net revenue                                      |  |      | 510,720 |      |   | 536,499 |  |      | 518,043 |      |   | 516,201 |  |   | 468,353 | 
|Cost of
 goods sold                              |  |      | 287,408 |      |   | 304,672 |  |      | 283,727 |      |   | 284,817 |  |   | 258,457 | 
|Gross profit
 (2)                                |  |      | 223,312 |      |   | 231,827 |  |      | 234,316 |      |   | 231,384 |  |   | 209,896 | 
|Selling and
 general administrative expenses (1) |  |      | 207,863 |      |   | 194,718 |  |      | 188,953 |      |   | 174,519 |  |   | 157,824 | 
|Impairment
 of long-lived assets                 |  |      | 10,564  |      |   | 121     |  |      |        |      |   | 448     |  |   | 1,153   | 
|Operating
 income                                |  |      | 4,885   |      |   | 36,988  |  |      | 45,363  |      |   | 56,417  |  |   | 50,919  | 
|Interest and
 other income, net                  |  |      | 5,366   |      |   | 4,875   |  |      | 4,151   |      |   | 1,411   |  |   | 825     | 
|Income
 before provision for income taxes        |  |      | 10,251  |      |   | 41,863  |  |      | 49,514  |      |   | 57,828  |  |   | 51,744  | 
|Provision
 for income taxes                      |  |      | 3,168   |      |   | 15,098  |  |      | 15,988  |      |   | 21,976  |  |   | 19,145  | 
|Net income                                       |  | $    | 7,083   |      | $ | 26,765  |  | $    | 33,526  |      | $ | 35,852  |  | $ | 32,599  | 
|Earnings per
 share:                             |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Basic                                            |  | $    | 0.35    |      | $ | 1.34    |  | $    | 1.69    |      | $ | 1.79    |  | $ | 1.66    | 
|Diluted                                          |  | $    | 0.35    |      | $ | 1.31    |  | $    | 1.65    |      | $ | 1.74    |  | $ | 1.59    | 
|Weighted-average
 shares outstanding:            |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Basic                                            |  |      | 20,057  |      |   | 20,046  |  |      | 19,888  |      |   | 20,050  |  |   | 19,609  | 
|Diluted                                          |  |      | 20,325  |      |   | 20,396  |  |      | 20,318  |      |   | 20,652  |  |   | 20,486  | 
|Cash
 dividends per share                        |  | $    | 0.72    |      | $ | 0.72    |  | $    | 0.66    |      | $ | 0.52    |  | $ | 0.17    | 
|                                                 |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 

|                                          |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|----------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                          |  | 2007 |         | 2006 |   | 2005    |  | 2004 |         | 2003 |  
|                                          |  |      |         |      |   |         |  |      |         |      |  
|                                         
|Balance Sheet Data:                       |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Working
 capital                          |  | $    | 139,401 |      | $ | 169,862 |  | $    | 187,106 |      | $ | 173,007 |  | $ | 154,161 | 
|Cash                                      |  |      | 90,653  |      |   | 105,441 |  |      | 63,747  |      |   | 80,014  |  |   | 111,102 | 
|Marketable
 Securities                    |  |      | 8,305   |      |   | 12,250  |  |      | 66,400  |      |   | 40,000  |  |   |        | 
|Inventory                                 |  |      | 48,033  |      |   | 46,274  |  |      | 45,465  |      |   | 47,166  |  |   | 44,851  | 
|Total assets                              |  |      | 354,537 |      |   | 361,113 |  |      | 340,671 |      |   | 304,587 |  |   | 273,841 | 
|Total debt,
 including current maturities |  |      |        |      |   |        |  |      | 3,000   |      |   |        |  |   |        | 
|Total
 shareholders equity               |  | $    | 241,990 |      | $ | 257,676 |  | $    | 244,660 |      | $ | 216,528 |  | $ | 196,334 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | Includes
 warehousing and receiving expenses.                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                        
| | (2) | Gross profit
 may not be comparable to other entities, since some entities include the
 costs related to their distribution network (receiving and warehousing) in
 cost of goods sold and other entities, similar to the Company, exclude these
 costs from gross profit, including them instead in a line item such as
 selling, general and administrative expenses.

26

---



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 that appear elsewhere
in this Annual Report.

Overview

Kenneth
Cole Productions, Inc. designs, sources and markets a broad range of fashion
footwear and handbags and, through license agreements, designs and markets
apparel and accessories under its Kenneth
Cole New York, Kenneth Cole
Reaction, Unlisted, Bongo, Tribeca and Le Tigre brand names. It also designs, sources and markets
mens sportswear under the Kenneth Cole New
York brand. The Companys products are targeted to appeal to fashion
conscious consumers, reflecting a casual urban perspective and a contemporary
lifestyle uniquely associated with Kenneth
Cole.

The
Company markets its products to approximately 6,000 department and specialty
store locations, as well as through its Consumer Direct business, which
includes a base of full-priced retail and Company Stores and interactive
websites, including online e-commerce.

The
popularity of the Kenneth Cole
brand names among consumers has enabled the Company to expand its product
offerings and channels of distribution through licensing agreements and offers
through these agreements a lifestyle collection of mens product categories
including tailored clothing, dress shirts, dress pants, neckwear, briefcases,
portfolios, jewelry, fragrance, belts, leather and fabric outerwear,
cold-weather accessories, swimwear, sunglasses, prescription eyewear, watches,
fragrance, swimwear, luggage, hosiery and small leather goods. Womens product
categories currently being sold pursuant to license agreements include
sportswear, small leather goods, belts, scarves and wraps, hosiery, leather and
fabric outerwear, sunglasses, prescription eyewear, watches, jewelry,
fragrance, swimwear, and luggage. In addition, the Company licenses boys and
girls apparel, under the Kenneth Cole
Reaction brand, as well as the Unlisted
and Le Tigre brands in certain
categories.

The
Company recorded revenues of $510.7 million for the year ended December 31,
2007. Diluted earnings per share decreased to $0.35 from $1.31, year-over-year,
inclusive of an annual after-tax impairment charge of $0.32. As of December 31,
2007, the Company had $90.7 million in cash and cash equivalents with no debt.
In addition, the Company has a five-year $100 million committed Revolving
Credit Facility and will pay a quarterly cash dividend of $0.09 on March 28,
2008 to shareholders of record at the close of business on March 14, 2008.

Critical Accounting Policies and Estimates

General

The
Companys managements discussion and analysis of its financial condition and
results of operations are based upon the Companys consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to product returns,
bad debts, inventories, income taxes, financing operations, contingencies and
litigation. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

Inventory

The
Company writes down its inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

27

---



Sales Returns and Allowances

The
Companys ability to collect factor chargebacks for deductions taken by its customers
for returns, discounts and allowances as well as potential future customer
deductions is significant to its operations. The Company reserves against known
chargebacks as well as potential future customer deductions based on a
combination of historical activity and current market conditions. Actual
results may differ from these estimates under different assumptions or
conditions, which may have a significant impact on the Companys results.

Allowance for Doubtful Accounts

The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, as
well as royalties and advertising revenues from its licensing partners. These
customers include non-factored accounts and credit card receivables from
third-party service providers. If the financial conditions of these customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

Impairment of Indefinite-lived Intangible
Assets and Long-Lived Assets

The
Company performs a review of its indefinite-lived intangible assets and
long-lived assets for impairment on a quarterly basis or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and carrying value of the asset.

Income Taxes

The
Companys income taxes are routinely under audit by federal, state or local
authorities. These audits include questioning of the timing and amount of
deductions and the allocation of income among various tax jurisdictions. Based
on its annual evaluations of tax positions, the Company believes it has
appropriately accrued for probable exposures. To the extent the Company is
required to pay amounts in excess of recorded income tax liabilities, the
Companys effective tax rate in a given financial statement period could
be
materially impacted. The Company adopted Financial Accounting Standards Board
Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (FIN 48) on January 1, 2007
which requires financial statement recognition and measurement of a tax position
taken
or expected to be taken in a return. The adoption of FIN 48 did not have a
material impact on the financial statements.

Litigation

The
Company is periodically involved in various legal actions arising in the normal
course of business. Management is required to assess the probability of any
adverse judgments as well as the potential range of any losses. Management
determines the required accruals after a careful review of the facts of each
significant legal action. The Companys accruals may change in the future
due
to new developments in these matters.

Contingencies

In
the ordinary course of business, the Company is involved in and subject to
compliance and regulatory reviews and audits by numerous authorities, agencies
and other governmental agents and entities from various jurisdictions. The
Company is required to assess the likelihood of any adverse outcomes of these
matters. A determination of the amount of reserves required, if any, for these
reviews is made after careful analysis of each individual issue. The reserves
may change in the future due to new developments or final resolution in each
matter, which may have a significant impact on the Companys results.

Stock-based Compensation

Effective
January 1, 2006, the Company adopted SFAS No. 123R Share-based Payment (SFAS
123R) which requires all share-based payments, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The Company elected to use the modified prospective transition method
to record stock-based compensation expense; therefore, prior period results
were not restated. Under SFAS 123R, the
Company measures the cost of services received in exchange for stock options
and similar awards based on the grant-date fair value of the award and
recognizes this cost in the income statement over the period during which an
award recipient is

28

---



required to provide services in exchange for the award. The Company uses the
Black-Scholes model to assess the fair value of share-based payments and
amortizes this cost over the service period. In addition, stock compensation
expense is reduced for estimated forfeitures prior to vesting primarily based
on historical annual forfeiture rates and by employee classification. Estimated
forfeitures are reassessed on a quarterly basis and may change based on new
facts and circumstances.

New Accounting Pronouncements

In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements (SFAS 157), which addresses how companies should measure fair
value when they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting principles. The FASB believes
that the new standard will make the measurement of fair value more consistent
and comparable and improve disclosures about those measures. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. In February 2008,
the FASB deferred the effective date of SFAS 157 for one year for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. The Company adopted
the provisions on January 1, 2008, and has determined that it will not have a
material impact on the Companys consolidated financial statements.

In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an amendment of FASB
Statement No.115 (SFAS 159). SFAS 159 allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities
at fair value in situations in which they are not otherwise required to be
measured at fair value. If a company elects the fair value option for an
eligible item, changes in that items fair value in subsequent reporting
periods must be recognized in current period earnings. SFAS 159 also
establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. The Company adopted the provisions on January
1, 2008, and has determined that it will not have a material impact on the
Companys consolidated financial statements.

In
December 2007, the FASB issued FASB Statement No. 141 (R), Business
Combinations (SFAS 141R). SFAS 141R requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
141R is effective for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to December
15, 2008. The Company is currently evaluating the requirements and impact of
FAS 141R on the Companys consolidated financial statements.

In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51
(SFAS 160). SFAS 160 clarifies that a noncontrolling interest in a subsidiary
should be reported as equity in the consolidated financial statements. The
calculation of earnings per share will continue to be based on income amounts
attributable to the parent. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the requirements and impact of SFAS 160 on the Companys
consolidated financial statements.

Results of Operations

The
following table sets forth certain operating data of the Company as a
percentage of net revenues for the periods indicated below:

|                                              |  |      |       |      |  |       |   |  |       |  
|--------------------------------------------- |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|                                              |  | 2007 |       | 2006 |  | 2005  |  
|                                              |  |      |       |      |  |       |  
|Net sales                                     |  |      | 91.3  | %    |  | 91.8  | % |  | 91.5  | %
|Royalty
 revenue                              |  |      | 8.7   |      |  | 8.2   |   |  | 8.5   |  
|                                              |  |      |       |      |  |       |   |  |       |  
|Net revenues                                  |  |      | 100.0 |      |  | 100.0 |   |  | 100.0 |  
|Cost of
 goods sold                           |  |      | 56.3  |      |  | 56.8  |   |  | 54.8  |  
|                                              |  |      |       |      |  |       |   |  |       |  
|Gross profit
 (1)                             |  |      | 43.7  |      |  | 43.2  |   |  | 45.2  |  
|Selling,
 general and administrative expenses |  |      | 40.7  |      |  | 36.2  |   |  | 36.5  |  
|Impairment
 of long-lived assets              |  |      | 2.1   |      |  | 0.1   |   |  | 0.0   |  
|Operating
 income                             |  |      | 1.0   |      |  | 6.9   |   |  | 8.7   |  
|Income
 before provision for income taxes     |  |      | 2.0   |      |  | 7.8   |   |  | 9.6   |  
|Provision
 for income taxes                   |  |      | 0.6   |      |  | 2.8   |   |  | 3.1   |  
|                                              |  |      |       |      |  |       |   |  |       |  
|Net income                                    |  |      | 1.4   | %    |  | 5.0   | % |  | 6.5   | %
|                                              |  |      |       |      |  |       |   |  |       |  

29

---



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Gross
  profit may not be comparable to other entities, since some entities include
  the costs related to their distribution network (receiving and warehousing)
  in cost of goods sold and other entities, similar to the Company, exclude
  these costs from gross profit, including them instead in a line item such as
  selling, general and administrative expenses.

Year Ended December 31, 2007 Compared to Year
Ended December 31, 2006

Net
revenues decreased $25.8 million, or 4.8%, to $510.7 million in 2007 from
$536.5 million in 2006. The decrease was due to decreases in the Companys
Wholesale and Consumer Direct business segments, partially offset by slight
increases in the Companys Licensing business.

Wholesale
net sales (excluding sales to the Companys Consumer Direct business segment)
decreased $24.2 million, or 7.7% to $290.8 million in 2007 from $315.0 million
in 2006. The decrease is primarily due to a decline in sales across the
Companys branded businesses. The challenging retail environment, from a lack
of strong direction in footwear fashion trends, as well as generally softer
sell-thrus compared to the prior year, resulted in the decline in most of the
Companys Wholesale businesses.

Net
sales in the Companys Consumer Direct segment decreased $1.7 million, or 0.9%,
to $175.6 million for the year ended December 31, 2007 from $177.3 million for
the year ended December 31, 2006. The decrease primarily related to a decrease
in full-priced retail and Company Store sales of $2.1 million, or 1.2%, offset
by increased Internet sales of $0.4 million, or 7%, for the year ended December
31, 2007 as compared to December 31, 2006. Comparable store sales decreased
$1.2 million, or 0.7%, while new store sales in 2007 plus that portion of 2007
sales for stores not open for all of 2006 decreased $0.9 million. Comparable
stores sales are defined as new stores that are open for longer than thirteen
months. A store that stops operations is included in the comparable sales
calculation through the date of closing. As the Company has increased the
amount of specific made for Company Store product, sales have improved at its
Company store locations. In its full-priced retail stores, the Company limited
overstock positions and reduced markdowns through standardized assortments and
modified price points to align the price-value relationship of the Companys
brands, which the Company believes will result in improved operating
performance over time. In addition, the Company closed five full-priced retail
stores and one Company Store during 2007 and seven stores in January 2008 and
continues to evaluate its real-estate portfolio. As part of its strategic plan
for the Consumer Direct segment, the Company signed an agreement to outsource the order-taking and fulfillment
responsibilities related to its Internet business to a third-party that
provides direct-to-customer e-commerce services, which the Company believes
will increase the efficiency of this business.

Royalty
revenue increased $0.1 million or 0.2% to $44.3 million in 2007 from $44.2
million in 2006. The increase in licensing revenues was primarily attributable
to incremental revenues from its existing licensees offset by a reduction in
sportswear royalties from an amendment to the Companys licensing agreement
relating to its Kenneth Cole Reaction mens and Kenneth Cole New
York
sportswear businesses. The Company has transitioned its Kenneth Cole New York and Kenneth
Cole
Reaction mens sportswear businesses from a licensing model to an in-house
operation, and has commenced shipments for the Spring 2008 season.

Consolidated
gross profit, as a percentage of net revenues, increased to 43.7% for the year
ended December 31, 2007 from 43.2% for the year ended December 31, 2006. This increase
was primarily due to an increase in Consumer Direct margins, as well as a
change in mix of the Companys net revenues from its Wholesale, Consumer Direct
and Licensing segments. The Consumer Direct segment, which operates at a higher
gross profit level than the Wholesale segment, had increased revenues as a
percentage of net revenues of 34.4% for the year ended December 31, 2007
compared to 33.1% for the year ended December 31, 2006, while the Wholesale
segment revenues as a percentage of net revenues decreased to 56.9% for the
year ended December 31, 2007 from 58.7% for the year ended December 31, 2006.
The revenues in the Licensing segment, which carries no cost of goods sold,
increased as a percentage of net revenues to 8.7% for the year ended December
31, 2007 as compared to 8.2% for the year ended December 31, 2006. In addition,
wholesale margins decreased from softer sell-thrus in a challenging retail
environment, while retail margins improved from reduced markdowns from modified
price points to align the price-value relationship of the Companys brands.

Selling, general and administrative
(SG&A) expenses, including warehousing and receiving expenses, increased
$13.1 million to $207.9 million for the year ended December 31, 2007 from
$194.8 million for the year ended December 31, 2006. The increase in SG&A
expenses was primarily attributable to increases in stock-based compensation
expense, costs incurred with transitioning the mens sportswear business to an
in-house operation, costs associated with the implementation of the Companys
SAP retail and point-of-sale systems and legal reserves.

30

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As a percentage of net revenues, SG&A expenses increased to 40.7%
for the year ended December 31, 2007, from 36.3% for the year ended December
31, 2006 from the additional costs mentioned above and loss of leverage on the
decrease in Wholesale sales.

The
Company incurred an impairment on long-lived assets of $10.6 million during the
year ended December 31, 2007 compared to $0.1 million in 2006. The increase in
charges in 2007 primarily related to the impairment in 2007 of certain
leasehold improvements and furniture and fixtures in twenty-three of the
Companys stores.

Interest
and other income increased $0.5 million, or 10.1%, to approximately $5.4
million for the year ended December 31, 2007 as compared to the year ended
December 31, 2006, primarily due to an average higher rate of return on
investments.

The
Companys effective tax rate decreased to 30.9% for the year ended December
31, 2007 from 36.1% for the year ended December 31, 2006. This was primarily
due to
a $0.8 million tax benefit and a decrease in the related level of earnings in
the various state and local taxing jurisdictions to which the Companys
earnings are subject during the year ended December 31, 2007 as compared to December
31,
2006. In 2006, the Company recorded $0.6 million of net tax benefits for
agreements reached with certain tax jurisdictions that closed outstanding
audit periods for which the Company had previously established reserves.

As a result of the
foregoing, net income decreased by $19.7 million or 73.5% to $7.1 million (1.4%
of net revenues) for the year ended December 31, 2007 from $26.8 million (5.0%
of net revenues) for the year ended December 31, 2006

Year Ended December 31, 2006 Compared to Year
Ended December 31, 2005

Net
revenues increased $18.5 million, or 3.6%,to $536.5 million in 2006 from $518.0
million in 2005. This increase was due to revenue increases in the Companys
Wholesale and Licensing business segments, partially offset by decreases in the
Companys Consumer Direct business.

Wholesale
net sales (excluding sales to the Consumer Direct business segment) increased
$27.9 million, or 9.7%, to $315.0 million in 2006 from $287.1
million in 2005. The increase was primarily due to a growth in sales of Kenneth Cole
Reaction footwear and handbags of approximately 20%, as well as
single digit growth in Bongo, Tribeca, andUnlisted footwear, offset
by declines in Kenneth Cole New York handbags. The Company will continue to
focus on product offerings, design, pricing and distribution, which it believes
are the significant factors defining its brands and increasing consumer demand.

Net
sales in the Companys Consumer Direct segment decreased $9.6 million, or 5.1%,to $177.3 million in 2006 from $186.9
million in 2005. The decrease was primarily due to a decrease in retail store
sales of $10.0 million, or 5.5%, as compared to year ended December 31, 2005.
Comparable store sales decreased by $16.5 million, or 9.7%, offset by an
increase of $6.6 million of new store sales in 2006 plus the portion of 2006
sales for stores not open for all of 2005. Comparable stores are defined as new
stores that are open for longer than thirteen months. A store that stops
operations is included in the comparable sales calculation through the date of
closing. The Company believes that the lack of an effective execution of its
brand elevation strategy for the Companys retail stores contributed
significantly to the decline in Consumer Direct results. The Company believes
it may have elevated its prices too abruptly to create an appropriate
transition for its customers. The Company is taking measures to address these
issues, including certain organizational and management changes, as well as
merchandising improvements. The Company has separated the merchandising and
support functions between the Companys Company Stores and its full-priced
retail stores. As a result, the Company believes it can initiate more effective
business and merchandising practices for these stores. The initial stage of the
Companys plan has been to eliminate the use of its Company Stores as clearance
centers and increase the amount of specific made for Company Store product.
This has improved the Companys presentation, margins, and resulted in positive
Company Store comparative store sales in the fourth quarter of 2006 of 1.8%. In
addition, the Company is controlling inventory levels to reduce clearance
product, is adjusting product mix to incorporate a wider range of price points,
and is evaluating its real estate portfolio with plans to close several stores,
while reviewing opportunities for new store locations for the latter half of 2007.

Royalty
revenue increased $0.2 million, or 0.5%, to $44.2 million in 2006 from $44.0
million in 2005. The increase was primarily attributable to the incremental
minimum royalties from the Companys existing licensees, as well as additional
royalties from two Reaction licensees related to womens
sportswear and the home collection,

31

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offset by
declines in domestic royalty revenue from mens and womens Kenneth Cole
New York sportswear. The Company believes sportswear is a critical
component in the visibility of its brands in both its Consumer Direct and
Wholesale business segments. In November 2006, the Company amended its license
agreement with Paul Davril Inc. (PDI), which covers the manufacture and
distribution of mens and womens sportswear under the Kenneth Cole New York
trademark and mens sportswear under the Kenneth Cole Reaction trademark. The
amended agreement results in the Company assuming control of its Kenneth Cole
New York and Kenneth Cole Reaction sportswear
categories at the end of 2007. The Company is transitioning the Kenneth Cole
New York womens sportswear business, some of which the Company has
already been sourcing over the past two seasons and plans to assume control of
the Kenneth
Cole New York mens sportswear business during 2007. As the Company
absorbs the infrastructure and makes this transition, it will make a
determination as to the strategic alternatives of Kenneth Cole Reaction mens
sportswear, which include entering into a strategic licensing arrangement or similar
venture with a new partner or partners or assuming internal control of the
business. The Company believes that taking control of the Kenneth Cole New York mens
and womens sportswear business by the end of 2007 will result in the reduction
of licensing revenue along with reduced advertising contributions and some
additional infrastructure costs in the short term, but will have meaningful
long-term benefits. The Company believes that controlling the Kenneth Cole
New York sportswear classification will allow it to better reinforce
each of its brands and all of the associated businesses, most particularly the
Consumer Direct business. The amendment of the PDI license is expected to cause
a reduction in licensing royalties of approximately $5 million to $6 million
before considering any 2007 growth in other licenses. In addition, incremental
advertising and infrastructure costs of approximately $3 million to $5 million
are expected before implementing any mitigating actions.

Consolidated
gross profit decreased to 43.2% in 2006, as a percentage of net revenues,
compared to 45.2% in 2005. This decrease was primarily a result of decreases in
the Consumer Direct margins, offset by an increase in Wholesale margins, and
the change in mix of the Companys net revenues from its three segments. The
Consumer Direct segment, which typically operates at a higher gross profit
level than the Wholesale segment, had decreased revenues as a percentage of net
revenues of 33.1% for the year ended December 31, 2006 compared to 36.1% for
the year ended December 31, 2005, while the Wholesale segment revenues as a
percentage of net revenues increased to 58.7% for the year ended December 31,
2006 from 55.4% for the year ended December 31, 2005. The revenues in the Licensing
segment, which carries no cost of goods sold, also decreased as a percentage of
revenue to 8.2% for the year ended December 31, 2006 compared to 8.5% for the
year ended December 31, 2005. The increase in Wholesale margins is primarily
due to strong sell-thrus at retail of Kenneth Cole Reaction branded product,
while the margins in Consumer Direct decreased due to additional clearance
activity, during the first three quarters of 2006.

SG&A
expenses, including warehousing and receiving expenses, decreased as a
percentage of net revenues to 36.3% ($194.8 million) in 2006, which included
impairment charges of approximately $0.1 million, from 36.5% of net revenues
($189.0 million) in 2005, which included severance costs of approximately $0.8
million in 2005. Stock-based compensation expense amounted to $3.2 million and
is included in SG&A expenses. Excluding the impact of stock-based
compensation expense, SG&A expenses, as a percentage of net revenues, would
have been 35.7% for the year ended December 31, 2006, as compared to 36.2% in
2005. Expenses, as a percentage of net revenues, decreased primarily due to
leverage from the Companys improvement in sales from its Wholesale segment,
including efficiencies gained by moving to a new West Coast distribution center
in March 2006, offset by fixed costs de-leveraging on its Consumer Direct
segments negative comparative stores sales base results.

Interest
and other income increased to $4.9 million for the year ended December 31, 2006
from $4.2 million in 2005. The increase
was primarily due to higher average cash balances and a higher rate of return
on investments.

The
Companys effective tax rate increased to 36.1% for the year ended December 31,
2006 from 32.3% for the year ended December 31, 2005. The increase was primarily the result of a temporary provision that
allowed U.S. companies to repatriate earnings from their foreign subsidiaries
at a reduced tax rate in 2005, which resulted in approximately $3.0 million in
tax savings for the year ended December 31, 2005. This was offset by a tax
benefit during 2006 of approximately $600,000, net of certain tax liabilities
that were established, resulting from agreements reached with various taxing
authorities that closed certain outstanding audit periods, for which the
Company had previously established reserves.

As
a result of the foregoing, net income decreased by $6.7 million, or 20.2%, to
$26.8 million (5.0% of net revenue), for the year ended December 31, 2006, from
$33.5 million (6.5% of net revenue) for the year ended December 31, 2005.

32

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Related Party
Transactions

The
Company has an exclusive license agreement with Iconix Brand Group, Inc., and
its trademark holding company, IP Holdings, LLC (Iconix), to use the Bongo
trademark in connection with worldwide manufacture, sale and distribution of
womens, mens and childrens footwear. The Chief Executive Officer and
Chairman of Iconix is the brother of the Companys Chief Executive Officer and
Chairman. The term of the agreement is through December 31, 2010. Management
believes that the license agreement with Iconix was entered into at
arms-length. During these periods, the Company is obligated to pay Iconix a
percentage of net sales based upon the terms of the agreement. The Company
recorded approximately $1,083,000 and $1,400,000 in aggregate royalty and
advertising expense under the agreement for the years ended December 31, 2007
and December 31, 2006, respectively.

During
2007, the Company recorded expenses of approximately $510,000 and $515,000 for
the years ended December 31, 2007 and 2006 to a third-party aviation company
which hires and uses an aircraft partially owned by Emack LLC, a company which
is wholly-owned by the Companys Chief Executive Officer and Chairman.
Management believes that all transactions were made on terms and conditions
similar to or more favorable than those available in the marketplace from
unrelated parties.

Liquidity and Capital
Resources

The
Companys cash requirements are generated primarily from working capital needs,
retail expansion, new technology, and other corporate activities. The Company
primarily relies upon internally generated cash flows from operations to
finance its operations and growth; however, it also has the ability to borrow
up to $100.0 million under its revolving credit facility. Cash flows may vary
from time to time as a result of seasonal requirements of inventory, the timing
of the delivery of merchandise to customers and the level of accounts
receivable and payable balances. At December 31, 2007, working capital was
$139.4 million compared to $169.9 million at December 31, 2006.

Net
cash provided by operating activities was $34.4 million for the year ended
December 31, 2007 compared to $48.7 million for the year ended December 31,
2006. The decrease in cash flows provided by operations is primarily
attributable to a decrease in net income and the timing of accounts receivable
and accounts payable.

Net
cash used in investing activities totaled $20.3 million for the year ended
December 31, 2007 compared to $13.6 million provided by investing activities
for the year ended December 31, 2006. The decrease was primarily attributable
to $54.3 million in proceeds received from the sale of marketable securities in
connection with the shift in the Companys portfolio holdings of auction-rate
securities to overnight money market funds, compared to proceeds of $8.4
million of marketable securities in 2007. In addition, approximately $13.0
million was used to purchase the Le Tigre trademark and other intellectual
property associated with the Le Tigre brand during 2007. This was
partially offset by a reduction in capital expenditures for the year ended
December 31, 2007 of $10.6 million, compared to $39.9 million for the year
ended December 31, 2006, which includes the purchase of the Companys corporate
headquarters building for approximately $24 million in 2006. Also included in
capital expenditures for the years ended December 31, 2007 and 2006, were
approximately $9.3 million and $15.9, respectively, for amounts associated with
the implementation of the SAP retail and point of sales systems and furniture,
fixtures, and leasehold improvements for the buildout of new Company Stores.

Net
cash used in financing activities was $28.9 million for the year ended December
31, 2007 compared to $20.6 million for the year ended December 31, 2006. The
increase is primarily due to the Companys repurchase of 1,080,000 treasury
shares at an aggregate price of $19.2 million during 2007 as compared to
300,000 treasury shares repurchased at an aggregate price of $7.2 million
during 2006. This was partially offset by proceeds from stock option exercises
of $4.3 million for the year ended December 31, 2007, compared to $3.3 million
for the year-ended December 31, 2006, and the repayment of the Companys
short-term borrowing of $3.0 million in 2006.

The
Company currently 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.

33

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The
Companys material obligations under contractual agreements, primarily
commitments for future payments under operating lease agreements, as of
December 31, 2007 are summarized as follows:

|                                       |  |                       |             |                |   |            |  |           |            |               |   |            |  |   |            | 
|-------------------------------------- |  | --------------------- | ----------- | -------------- | - | ---------- |  | --------- | ---------- | ------------- | - | ---------- |  | - | ---------- | 
|                                       |  | Payment Due by Period |            
|                                       |  |                       |            
|                                       |  | Total                 |             | 1 year or less |   | 2-3 years  |  | 4-5 years |            | After 5 years |  
|Operating Leases and Other Obligations |  | $                     | 152,361,000 |                | $ | 24,990,000 |  | $         | 45,747,000 |               | $ | 38,482,000 |  | $ | 43,142,000 | 
|Purchase Obligations                   |  |                       | 45,371,000  |                |   | 45,371,000 |  |           |           |               |   |           |  |   |           | 
|Minimum Licensee Royalties             |  |                       | 3,657,000   |                |   | 1,137,000  |  |           | 2,520,000  |               |   |           |  |   |           | 
|                                       |  |                       |             |                |   |            |  |           |            |               |   |            |  |   |            | 
|Total Contractual Obligations          |  | $                     | 201,389,000 |                | $ | 71,498,000 |  | $         | 48,267,000 |               | $ | 38,482,000 |  | $ | 43,142,000 | 
|                                       |  |                       |             |                |   |            |  |           |            |               |   |            |  |   |            | 

During
2008, the Company anticipates that it will continue to require additional
capital expenditures to support its information systems. The Company
implemented an integrated business platform using SAP software across the
Companys full-priced retail and Company Stores, which resulted in capital
expenditures of approximately $13.0 million. Contingent rent and other charges
amounted to $8.4 million and $7.0 million for the years ended December 31, 2007
and 2006.

In
December 2006, the Company entered into a five-year senior unsecured revolving
credit facility (the Revolving Credit Facility), with various lenders,
which
provides up to $100.0 million to finance working capital requirements and
letters of credit to finance the Companys inventory purchases. A
portion of the Revolving Credit Facility not in excess of $25.0 million shall
be available
for the issuance of standby letters of credit. The full amount of the Revolving
Credit Facility will be available for the issuance of commercial letters of
credit. The Revolving Credit Facility requires, among other things, that the
Company comply with a maximum leverage ratio and various covenants on
indebtedness, dissolutions, mergers, asset sales, pledges and changes in its
lines of business, as defined. Failure by the Company to comply with these
covenants could reduce the borrowings available under the Revolving Credit
Facility. If an event of default occurs, borrowings and interest are payable
immediately, unless cured as defined, allowing borrowings to continue during
the cure period. Loans under the Revolving Credit Facility bear an interest
rate equal to the Alternative Base rate (defined as the higher of the prime
rate or the federal funds rate plus 0.5%) or the Adjusted LIBOR rate plus
applicable margin as defined within the agreement, as elected by the Company.
The Company incurs facility fees of ten basis points on the face amount of the
Revolving Credit Facility. During 2007, the Company incurred facility fees of
approximately $100,000. There were no outstanding advances under this agreement
at December 31, 2007, and 2006. Amounts available under the Revolving Credit
Facility at December 31, 2007 were reduced by $2,695,000 of standby and open
letters of credit. During 2007, the Company did not borrow under the Revolving
Credit Facility.

In
2006, the Company repaid a $3.0 million promissory note, which one of the
Companys foreign subsidiaries entered into with a financial institution in
connection with the Companys tax repatriation plan.

The
Company believes that it will be able to satisfy its current expected cash
requirements for 2008, including requirements for its in-house sportswear
infrastructure, enhanced information systems and the payments of its quarterly
cash dividend, primarily with cash flow from operations and cash on hand.

Off-Balance Sheet
Arrangements

The
Company did not have any off-balance sheet arrangements as of December 31, 2007.

Exchange Rates

The
Company sometimes enters into forward exchange contracts for its future
purchases of inventory denominated in foreign currencies, primarily the Euro.
Gains and losses on forward exchange contracts that are used for hedges are
accounted for on the Companys Consolidated Balance Sheet as inventory and an
adjustment to equity, and are subsequently accounted for as part of the
purchase price of the inventory upon execution of the contract. At December 31,
2007, the Company had no unrealized gains or losses as no forward contracts
were outstanding. Unrealized gains and losses are typically included in Other
Comprehensive Income in the Companys Statement of Changes in Shareholders
Equity and as an adjustment to inventory, which is the underlying exposure on
the Companys consolidated Balance Sheet. While the Company believes that its
current procedures with respect to the reduction of risk associated with
currency exchange rate fluctuations are adequate, there can be no assurance

34

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that such
fluctuations will not have a material adverse effect on the results of
operations of the Company in the future.

Inventory
from contract manufacturers in Asia and Brazil are purchased in United States
dollars and the recent fluctuations of many of these currencies against the
United States dollar has not had any material adverse impact on the Company.
However, future purchase prices for the Companys products may be impacted by
fluctuations in the exchange rate between the United States dollar and the
local currencies of the contract manufacturer, which may affect the Companys
cost of goods in the future. The Company currently does not believe the
potential effects of such fluctuations would have a material adverse effect on
the Company.

Effects of Inflation

The
Company does not believe that the relatively low 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 7A. Quantitative and Qualitative Disclosures about Market Risk

The
Companys marketable securities consist of triple A rated debt obligations
and substantially all have insurers. Recently, several auctions have failed as
a result of illiquidity and imbalance in order flow for auction rate
securities. A failed auction is not an indication of an increased credit risk
or a reduction in the underlying collateral, however, parties wishing to sell
securities could not do so. Based on current market conditions, it is not known
when or if the capital markets will come back into balance to achieve
successful auctions for these securities. If these auctions continue to fail,
it could result in the Company holding securities beyond their next scheduled
auction reset dates and will limit the liquidity of these investments. Based on
the Companys expected operating cash flows, and other sources and uses of
cash, the Company does not anticipate that the lack of liquidity on these
investments will affect its ability to execute its current business plan.

The
Company is primarily exposed to currency exchange rate risks with respect to
its inventory transactions denominated in Euro. Business activities in various
currencies expose the Company to the risk that the eventual net dollar cash
flows from transactions with foreign suppliers denominated in foreign
currencies may be adversely affected by changes in currency rates. The Company
manages these risks by utilizing foreign exchange contracts. The Company does
not enter into foreign currency transactions for speculative purposes.

At
December 31, 2007, the Company had no forward contracts outstanding. The
Companys earnings may also be affected by changes in short-term interest rates
as a result of borrowings under its credit facilities. A two or less percentage
point increase in interest rates affecting the Companys credit facilities
would not have had a material effect on the Companys 2007 and 2006 net income.

The
Company sources a significant amount of product from China and will be subject
to foreign currency exposure to its U.S. dollar denominated transactions if the
Chinese Yuan is allowed to float freely on the open market. If the Yuan is
allowed to float freely against other foreign currency, a two percent change in
exchange rates could have a material effect on the cost of future inventory
purchases to be transacted by the Company.

Item 8. Financial Statements and Supplementary Data

See
page F-1 for an index to the consolidated financial statements, the Report of
Management and the Reports of the Registered Public Accounting Firm submitted
as part of this Annual Report.

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

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

As
of December 31, 2007, the Companys Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the Exchange Act), as amended) and have concluded that
the

35

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Companys
disclosure controls and procedures were effective and designed to ensure that
all material information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act is (1) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and (2) accumulated and communicated to
the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosures.

Managements Report on Internal Control over
Financial Reporting

The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.
Under the supervision and with the participation of Management, including the
Chief Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2007 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation,
management concluded that the Companys internal control over financial
reporting was effective as of December 31, 2007.

The
Companys internal control over financial reporting as of December 31, 2007 was
audited by Ernst & Young, LLP, an independent registered public accounting
firm, as stated in their report which is included herein.

Changes in Internal Control over Financial
Reporting

There
were no changes in the Companys internal controls over financial reporting
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and
Corporate Governance

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, 2008 to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2007 and which 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, 2008 to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2007 and which is incorporated herein by reference in response to
this item.

Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

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, 2008 to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2007 and which is incorporated herein by reference in response to
this item.

Item 13. Certain Relationships and Related
Transactions, and Director Independence

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, 2008 to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2007, and which is incorporated herein by reference in response to
this item.

36

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Item 14.  Principal Accounting Fees and
Services

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, 2008 to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 2007 and which is incorporated herein by reference in response to
this item.

PART IV

Item 15.  Exhibits, Financial Statement
Schedules

|    |                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | (1) See page
  F-1 for an index to the consolidated financial statements submitted as part
  of this Annual Report.                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                        
|    | (2) Schedule
  II  Valuation and Qualifying Accounts is required to be filed by Item 8 of
  Form 10-K.                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                        
|    | All other
  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.
|    |                                                                                                                                                                                                                                                                                        
|    | (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

37

---



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

38

---



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*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 10.6 to the Registrants Quarterly Report on Form 10-Q for
  the quarterly period ended June 30, 1996 and incorporated herein by
  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.11  |  | Sublease
  Agreement, dated June 17, 1996, between Kenneth Cole Productions, Inc. and
  Liz Claiborne Accessories, Inc. (Incorporated by reference to Exhibit 10.11
  to the Companys 1996 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|*10.12 |  | Amended and
  Restated Kenneth Cole Productions, Inc. 1994 Stock Option Plan (Previously
  filed as an Exhibit to the Registrants Proxy Statement filed on April 22,
  1997 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|*10.13 |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Susan Hudson (Previously
  filed as an Exhibit to the Companys 1997 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.14  |  | Lease
  Agreement, dated December 17, 1998, between Kenneth Cole Productions, Inc.
  and SAAR Company, LLC. (Previously filed as Exhibit 10.14 to the Registrants
  Annual Report on Form 10-K for the year ended December 31, 1998 and
  incorporated by reference).                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.15  |  | Common Stock
  Purchase Agreement, dated July 20, 1999, between Liz Claiborne, Inc. and
  Kenneth Cole Productions, Inc. (Previously filed as Exhibit 10.01 to the
  Registrants Quarterly Report on Form 10-Q for the quarterly period ended
  September 30, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.16  |  | Registration
  Rights Agreement, dated July 20, 1999, between Liz Claiborne, Inc. and
  Kenneth Cole Productions, Inc. (Previously filed as Exhibit 10.02 to the
  Registrants Quarterly Report on Form 10-Q for the quarterly period ended
  September 30, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.17  |  | License Agreement,
  dated July 20, 1999, by and between L.C.K.L., LLC and K.C.P.L., Inc.
  (Portions of this exhibit have been omitted pursuant to a request for
  confidential treatment and been filed separately with the Securities and
  Exchange Commission. Such portions are designated by a *. (Previously filed
  as Exhibit 10.03 to the Registrants Quarterly Report on Form 10-Q for the
  quarterly period ended September 30, 1999).                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.18  |  | Amended and
  Restated Employment Agreement, dated as of September 1, 2000, between Kenneth
  Cole Productions, Inc. and Paul Blum (Previously filed as Exhibit 10.10 to
  the Registrants Quarterly Report on Form 10-Q for the quarterly period ended
  June 30, 1996 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                   

39

---



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19  |  | Kenneth Cole
  Productions, Inc. Employee Stock Purchase Plan (Incorporated by reference to
  the Companys Registration Statement on Form S-8 Registration No. 33-31868,
  filed on March 7, 2000).                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.20  |  | Kenneth Cole
  Productions, Inc. 2004 Stock Incentive Plan (Incorporated by reference to the
  Companys Registration Statement on Form S-8 Registration No. 333-119101,
  filed on September 17, 2004).                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.21  |  | Kenneth Cole
  Productions, Inc. 2004 Stock Incentive Plan (Incorporated by reference to the
  Companys Registration Statement on Form S-8 Registration No. 333-131724
  filed on February 10, 2006).                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.22  |  | Stock
  Purchase Agreement between Kenneth Cole Productions, Inc. and Bernard Chaus,
  Inc. dated June 13, 2005 (Previously filed as Exhibit 10.21 to the
  Registrants Quarterly Report on Form 10-Q for the quarterly period ended
  June 30, 2005 and incorporated herein by reference).                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.23  |  | Termination
  Agreement between Kenneth Cole Productions, Inc. and Susan Q. Hudson dated
  October 5, 2005 (Previously filed as Exhibit 10.22 to the Registrants
  Quarterly Report on Form 10-Q for the quarterly period ended September 30,
  2005 and incorporated herein by reference).                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.24  |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Richard S. Olicker dated
  January 3, 2006 (Previously filed as Exhibit 10.1 to the Registrants Current
  Report on Form 8-K filed on January 10, 2006).                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.25  |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Joel Newman dated
  February 13, 2006 (Previously filed as Exhibit 10.1 to the Registrants
  Current Report on Form 8-K, filed on February 16, 2006).                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.26  |  | Kenneth Cole
  Productions, Inc. 2004 Stock Incentive Plan (Amended and Restated as of April
  20, 2005) (Previously filed as Exhibit 10.26 to the Registrants Quarterly
  Report on Form 10-Q for the quarterly period ended March 31, 2006 and
  incorporated herein by reference).                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.27  |  | Kenneth Cole
  Productions, Inc. Sample Grant Award Letter (Previously filed as Exhibit
  10.27 to the Registrants Quarterly Report on Form 10-Q for the quarterly
  period ended March 31, 2006 and incorporated herein by reference).                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.28  |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Michael DeVirgilio dated
  March 31, 2006 (Previously filed as Exhibit 10.28 to the Registrants Quarterly
  Report on Form 10-Q for the quarterly period ended June 30, 2006 and
  incorporated herein by reference).                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.29  |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Joshua G. Schulman dated
  October 9, 2006 (Previously filed as Exhibit 10.29 to the Registrants
  Quarterly Report on Form 10-Q for the quarterly period ended September 30,
  2006 and incorporated herein by reference).                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.30  |  | Employment
  Agreement between Kenneth Cole Productions, Inc. and Douglas Jakubowski dated
  October 12, 2006 (Previously filed as Exhibit 10.30 to the Registrants
  Quarterly Report on Form 10-Q for the quarterly period ended September 30,
  2006 and incorporated herein by reference).                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.31  |  | Credit
  Agreement between J.P. Morgan Securities Inc., JPMorgan Chase Bank, National
  Association, PNC Bank, National Association, Bank of America, N.A., and
  Wachovia Bank, National Association, and Kenneth Cole Productions, Inc. dated
  as of December 20, 2006. (Previously filed as Exhibit 10.31 to the
  Registrants Annual Report on Form 10-K for the year ended December 31, 2006
  and incorporate herein by reference).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.32  |  | Certificate
  of Amendment of the Certificate of Incorporation of Kenneth Cole Productions,
  Inc. dated October 15, 2007 (Previously filed as Exhibit 10.32 to the
  Registrants Quarterly Report on Form 10-Q for the quarterly period ended
  September 30, 2007 and incorporated herein by reference).                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|+21.01 |  | List of
  Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|+23.01 |  | Consent of
  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                

40

---



|       |  |                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+23.02 |  | Consent of
  Independent Appraisal Firm.                                                                                                                                        
|       |  |                                                                                                                                                                                 
|+31.1  |  | Certification
  of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14
  and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
|       |  |                                                                                                                                                                                 
|+31.2  |  | Certification
  of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14
  and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
|       |  |                                                                                                                                                                                 
|+32.1  |  | Certification
  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                          
|       |  |                                                                                                                                                                                 
|+32.2  |  | Certification
  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                          

|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
| 
|* | Management
  contract or compensatory plan or arrangement required to be identified
  pursuant to Item 15(a) (3) of this report.
|  |                                                                                                                                 
|+ | Filed
  herewith.                                                                                                               

41

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Index to Consolidated Financial Statements

|                                                                                                                  |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ----
|Reports of Independent Registered Public
  Accounting Firm                                                        |  | F-2 
|                                                                                                                  |  |     
|Consolidated Balance Sheets as of December 31,
  2007 and 2006                                                    |  | F-5 
|                                                                                                                  |  |     
|Consolidated
      Statements of Income for the years ended December 31, 2007, 2006, and 2005                     |  | F-7 
|                                                                                                                  |  |     
|Consolidated Statement of Changes in
  Shareholders Equity for the years ended December 31, 2007, 2006, and 2005 |  | F-8 
|                                                                                                                  |  |     
|Consolidated Statements of Cash Flows for
  the years ended December 31, 2007, 2006 and 2005                      |  | F-9 
|                                                                                                                  |  |     
|Notes to Consolidated Financial
Statements                                                                        |  | F-10

F-1

---



Report of Independent Registered Public
Accounting Firm

To The Board of Directors and
Shareholders of Kenneth Cole Productions, Inc.

We
have audited the accompanying consolidated balance sheets of Kenneth Cole
Productions, Inc. and subsidiaries (the Company) as of December 31, 2007 and
2006, and the related consolidated statements of income, cash flows and changes
in shareholders equity for each of the three years in the period ended
December 31, 2007. Our audits also included the financial statement schedule
listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As
discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Kenneth Cole
Productions, Inc. and subsidiaries internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 5, 2008
expressed an unqualified opinion
thereon.

/s/ Ernst & Young LLP

New York, New
York
March 5, 2008

F-2

---



Report of Independent Registered Public
Accounting Firm

To The Board of Directors and Shareholders of
Kenneth Cole Productions, Inc.

We
have audited Kenneth Cole Productions, Inc.s (the Company) internal control
over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Kenneth
Cole Productions Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In
our opinion, Kenneth Cole Productions, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.

F-3

---



We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Kenneth Cole Productions, Inc. and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of income, cash flows and changes
in shareholders equity for each of the three years in the period ended
December 31, 2007 of Kenneth Cole Productions, Inc. and our report dated March
5, 2008 expressed an unqualified
opinion thereon.

/s/ Ernst & Young LLP

New York, New
York
March 5, 2008

F-4

---



Kenneth Cole Productions, Inc. and
SubsidiariesConsolidated Balance Sheets

|                                                                                                   |  |          |             |      |   |             | 
|-------------------------------------------------------------------------------------------------- |  | -------- | ----------- | ---- | - | ----------- | 
|                                                                                                   |  | December |            
|                                                                                                   |  | 2007     |             | 2006 |  
|                                                                                                   |  |          |             |      |  
|                                                                                                   |  |          |             |      |  
|Assets                                                                                             |  |          |             |      |   |             | 
|Current assets:                                                                                    |  |          |             |      |   |             | 
|Cash and cash equivalents                                                                          |  | $        | 90,653,000  |      | $ | 105,441,000 | 
|Marketable securities                                                                              |  |          |            |      |   | 12,250,000  | 
|Due from factors                                                                                   |  |          | 28,132,000  |      |   | 35,536,000  | 
|Accounts receivable, less allowance for
  doubtful accounts of $230,000 and $249,000, respectively |  |          | 19,805,000  |      |   | 19,641,000  | 
|Inventories                                                                                        |  |          | 48,033,000  |      |   | 46,274,000  | 
|Prepaid expenses and other current assets                                                          |  |          | 2,998,000   |      |   | 2,779,000   | 
|Deferred taxes, net                                                                                |  |          | 5,173,000   |      |   | 2,739,000   | 
|                                                                                                   |  |          |             |      |   |             | 
|Total current assets                                                                               |  |          | 194,794,000 |      |   | 224,660,000 | 
|                                                                                                   |  |          |             |      |   |             | 
|Property and equipment, at cost, less
  accumulated depreciation and amortization                  |  |          | 60,357,000  |      |   | 72,141,000  | 
|                                                                                                   |  |          |             |      |   |             | 
|Other assets:                                                                                      |  |          |             |      |   |             | 
|Intangible assets                                                                                  |  |          | 14,083,000  |      |   | 1,854,000   | 
|Deferred taxes, net                                                                                |  |          | 24,660,000  |      |   | 15,110,000  | 
|Investments and other                                                                              |  |          | 21,490,000  |      |   | 15,253,000  | 
|Deferred compensation plans assets                                                                |  |          | 39,153,000  |      |   | 32,095,000  | 
|                                                                                                   |  |          |             |      |   |             | 
|Total other assets                                                                                 |  |          | 99,386,000  |      |   | 64,312,000  | 
|                                                                                                   |  |          |             |      |   |             | 
|                                                                                                   |  |          |             |      |   |             | 
|Total Assets                                                                                       |  | $        | 354,537,000 |      | $ | 361,113,000 | 
|                                                                                                   |  |          |             |      |   |             | 

See accompanying notes to consolidated financial statements.

F-5

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Consolidated Balance Sheets (continued)

|                                                                                                                                                                   |  |          |              |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ------------ | ---- | - | ----------- | -
|                                                                                                                                                                   |  | December |             
|                                                                                                                                                                   |  | 2007     |              | 2006 |  
|                                                                                                                                                                   |  |          |              |      |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Liabilities and Shareholders Equity                                                                                                                               |  |          |              |      |   |             |  
|Current liabilities:                                                                                                                                               |  |          |              |      |   |             |  
|Accounts payable and accrued expenses                                                                                                                              |  | $        | 39,470,000   |      | $ | 36,554,000  |  
|Other current liabilities                                                                                                                                          |  |          | 10,852,000   |      |   | 10,925,000  |  
|Deferred income                                                                                                                                                    |  |          | 5,071,000    |      |   | 3,958,000   |  
|Income taxes payable                                                                                                                                               |  |          |             |      |   | 3,361,000   |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Total current liabilities                                                                                                                                          |  |          | 55,393,000   |      |   | 54,798,000  |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Accrued rent and other long-term
  liabilities                                                                                                                     |  |          | 18,001,000   |      |   | 16,544,000  |  
|Deferred compensation plans liabilities                                                                                                                           |  |          | 39,153,000   |      |   | 32,095,000  |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Commitments and contingencies                                                                                                                                      |  |          |              |      |   |             |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Shareholders equity:                                                                                                                                              |  |          |              |      |   |             |  
|Series A Convertible Preferred Stock, par
  value $1.00, 1,000,000 shares authorized; none outstanding                                                             |  |          |              |      |   |             |  
|Class A Common Stock, par value $.01,
  40,000,000 shares authorized; 15,604,673 and 15,587,651 issued as of December
  31, 2007 and 2006, respectively            |  |          | 156,000      |      |   | 156,000     |  
|Class B Convertible Common Stock, par value
  $.01, 9,000,000 shares authorized; 8,010,497 issued and outstanding as of
  December 31, 2007 and 2006, respectively |  |          | 80,000       |      |   | 80,000      |  
|Additional paid-in capital                                                                                                                                         |  |          | 99,277,000   |      |   | 92,041,000  |  
|Accumulated other comprehensive income                                                                                                                             |  |          | 914,000      |      |   | 1,884,000   |  
|Retained earnings                                                                                                                                                  |  |          | 242,108,000  |      |   | 249,653,000 |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|                                                                                                                                                                   |  |          | 342,535,000  |      |   | 343,814,000 |  
|Class A Common Stock in treasury, at cost,
  4,236,350 and 3,596,592 shares as of December 31, 2007 and 2006, respectively                                         |  |          | (100,545,000 | )    |   | (86,138,000 | )
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Total Shareholders Equity                                                                                                                                         |  |          | 241,990,000  |      |   | 257,676,000 |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|                                                                                                                                                                   |  |          |              |      |   |             |  
|Total Liabilities and Shareholders Equity                                                                                                                         |  | $        | 354,537,000  |      | $ | 361,113,000 |  
|                                                                                                                                                                   |  |          |              |      |   |             |  

See accompanying notes to consolidated
financial statements.

F-6

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Consolidated Statements of Income

|                                              |  |                          |             |      |   |             |  |   |             | 
|--------------------------------------------- |  | ------------------------ | ----------- | ---- | - | ----------- |  | - | ----------- | 
|                                              |  | Year ended
 December 31, |            
|                                              |  |                          |            
|                                              |  | 2007                     |             | 2006 |   | 2005        | 
|                                              |  |                          |             |      |   |             | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Net sales                                     |  | $                        | 466,405,000 |      | $ | 492,282,000 |  | $ | 474,060,000 | 
|Royalty
 revenue                              |  |                          | 44,315,000  |      |   | 44,217,000  |  |   | 43,983,000  | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Net revenues                                  |  |                          | 510,720,000 |      |   | 536,499,000 |  |   | 518,043,000 | 
|Cost of
 goods sold                           |  |                          | 287,408,000 |      |   | 304,672,000 |  |   | 283,727,000 | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Gross profit                                  |  |                          | 223,312,000 |      |   | 231,827,000 |  |   | 234,316,000 | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Selling,
 general and administrative expenses |  |                          | 207,863,000 |      |   | 194,718,000 |  |   | 188,953,000 | 
|Impairment
 of long-lived assets              |  |                          | 10,564,000  |      |   | 121,000     |  |   |            | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Operating
 income                             |  |                          | 4,885,000   |      |   | 36,988,000  |  |   | 45,363,000  | 
|Interest and
 other income, net               |  |                          | 5,366,000   |      |   | 4,875,000   |  |   | 4,151,000   | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Income
 before provision for income taxes     |  |                          | 10,251,000  |      |   | 41,863,000  |  |   | 49,514,000  | 
|Provision
 for income taxes                   |  |                          | 3,168,000   |      |   | 15,098,000  |  |   | 15,988,000  | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Net income                                    |  | $                        | 7,083,000   |      | $ | 26,765,000  |  | $ | 33,526,000  | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Earnings per
 share:                          |  |                          |             |      |   |             |  |   |             | 
|Basic                                         |  | $                        | 0.35        |      | $ | 1.34        |  | $ | 1.69        | 
|Diluted                                       |  | $                        | 0.35        |      | $ | 1.31        |  | $ | 1.65        | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Dividends
 declared per share                 |  | $                        | 0.72        |      | $ | 0.72        |  | $ | 0.66        | 
|                                              |  |                          |             |      |   |             |  |   |             | 
|Shares used
 to compute earnings per share:   |  |                          |             |      |   |             |  |   |             | 
|Basic                                         |  |                          | 20,057,000  |      |   | 20,046,000  |  |   | 19,888,000  | 
|Diluted                                       |  |                          | 20,325,000  |      |   | 20,396,000  |  |   | 20,318,000  | 

See accompanying notes to consolidated financial statements.

F-7

---



Kenneth
Cole Productions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity

|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|-------------------------------------------------------------------------- |  | -------------------- | - | -------------------- | ------- | --------------- | --------- | ------ | - | ------------------------ | - | -------------------- | ---------- | ------------------------ | - | ---------------- | - | ---------------- | ---------- | ------ | - | ----------- | - | ---------- | - | - | ------------ | - | - | ----------- | -
|                                                                           |  | Class ACommon
 Stock |   | Class BCommon
 Stock |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   | Treasury
 Stock  |            |        |   |            
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |            
|                                                                           |  | Numberof
 Shares     |   | Amount               |         | Numberof Shares |           | Amount |   | AdditionalPaid-InCapital |   | DeferredCompensation |            | OtherComprehensiveIncome |   | RetainedEarnings |   | Numberof
 Shares |            | Amount |   | Total       |  
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |  
|Balance at 12/31/04                                                        |  | 15,054,845           |   | $                    | 150,000 |                 | 8,055,497 |        | $ | 81,000                   |   | $                    | 78,417,000 |                          |   |                 |   | $                | 1,053,000  |        | $ | 216,983,000 |   | (3,388,400 | ) | $ | (80,156,000  | ) | $ | 216,528,000 |  
|Net Income                                                                 |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   | 33,526,000  |   |            |   |   |              |   |   | 33,526,000  |  
|Translation adjustment from                                                |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Foreign currency, net of taxes
$148,000                                    |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | 310,000    |        |   |             |   |            |   |   |              |   |   | 310,000     |  
|Forward contracts, net of taxes
$(351,000)                                 |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | (737,000   | )      |   |             |   |            |   |   |              |   |   | (737,000    | )
|Unrealized gains on available-for-sale
securities, net of taxes
 $301,000  |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | 631,000    |        |   |             |   |            |   |   |              |   |   | 631,000     |  
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Comprehensive income                                                       |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 33,730,000  |  
|Issuance of restricted stock, net of
forfeitures                           |  | 152,960              |   |                      | 2,000   |                 |           |        |   |                          |   |                      | 4,554,000  |                          |   | (4,556,000       | ) |                  |            |        |   |             |   |            |   |   |              |   |   |            |  
|Amortization of deferred compensation                                      |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   | 1,120,000        |   |                  |            |        |   |             |   |            |   |   |              |   |   | 1,120,000   |  
|Shares surrendered by employees to pay taxes on
restricted stock           |  | (4,509               | ) |                      |         |                 |           |        |   |                          |   |                      | (134,000   | )                        |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | (134,000    | )
|Stock-based compensation acceleration
expense                              |  |                      |   |                      |         |                 |           |        |   |                          |   |                      | 100,000    |                          |   | 39,000           |   |                  |            |        |   |             |   |            |   |   |              |   |   | 139,000     |  
|Exercise of stock options and related tax
benefits                         |  | 312,064              |   |                      | 3,000   |                 |           |        |   |                          |   |                      | 6,085,000  |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 6,088,000   |  
|Issuance of Class A Common Stock from
ESPP                                 |  | 13,601               |   |                      |         |                 |           |        |   |                          |   |                      | 329,000    |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 329,000     |  
|Dividends paid on common stock                                             |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   | (13,140,000 | ) |            |   |   |              |   |   | (13,140,000 | )
|Conversion of Class B to Class A Common
Stock                              |  | 45,000               |   |                      | 1,000   |                 | (45,000   | )      |   | (1,000                   | ) |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |            |  
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Balance at 12/31/05                                                        |  | 15,573,961           |   | $                    | 156,000 |                 | 8,010,497 |        | $ | 80,000                   |   | $                    | 89,351,000 |                          | $ | (3,397,000       | ) | $                | 1,257,000  |        | $ | 237,369,000 |   | (3,388,400 | ) | $ | (80,156,000  | ) | $ | 244,660,000 |  
|Net Income                                                                 |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   | 26,765,000  |   |            |   |   |              |   |   | 26,765,000  |  
|Translation adjustment from                                                |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Foreign currency, net of taxes
$(53,000)                                   |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | (88,000    | )      |   |             |   |            |   |   |              |   |   | (88,000     | )
|Forward contracts, net of taxes
$110,000                                   |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | 184,000    |        |   |             |   |            |   |   |              |   |   | 184,000     |  
|Unrealized gains on available-for-sale
securities, net of taxes
 $319,000  |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | 531,000    |        |   |             |   |            |   |   |              |   |   | 531,000     |  
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Comprehensive income                                                       |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 27,392,000  |  
|Reversal of deferred compensation upon adoption
of SFAS 123R               |  | (138,182             | ) |                      | (1,000  | )               |           |        |   |                          |   |                      | (3,396,000 | )                        |   | 3,397,000        |   |                  |            |        |   |             |   |            |   |   |              |   |   |            |  
|Stock-based compensation expense                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      | 3,193,000  |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 3,193,000   |  
|Exercise of stock options and related tax
benefits                         |  | 203,283              |   |                      | 1,000   |                 |           |        |   |                          |   |                      | 4,009,000  |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 4,010,000   |  
|Issuance of restricted stock                                               |  | 34,138               |   |                      |         |                 |           |        |   |                          |   |                      |           |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |            |  
|Shares surrendered by employees to pay taxes on
restricted stock           |  | (12,022              | ) |                      |         |                 |           |        |   |                          |   |                      | (301,000   | )                        |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | (301,000    | )
|Issuance of Class A Common Stock from
ESPP                                 |  | 17,897               |   |                      |         |                 |           |        |   |                          |   |                      | 363,000    |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 363,000     |  
|Purchase of Class A Stock                                                  |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   | (300,000   | ) |   | (7,169,000   | ) |   | (7,169,000  | )
|Reissuance of Treasury Shares                                              |  | (91,808              | ) |                      |         |                 |           |        |   |                          |   |                      | (1,187,000 | )                        |   |                  |   |                  |            |        |   |             |   | 91,808     |   |   | 1,187,000    |   |   |            |  
|Dividends paid on common stock                                             |  | 384                  |   |                      |         |                 |           |        |   |                          |   |                      | 9,000      |                          |   |                  |   |                  |            |        |   | (14,481,000 | ) |            |   |   |              |   |   | (14,472,000 | )
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Balance at 12/31/06                                                        |  | 15,587,651           |   | $                    | 156,000 |                 | 8,010,497 |        | $ | 80,000                   |   | $                    | 92,041,000 |                          |   |                 |   | $                | 1,884,000  |        | $ | 249,653,000 |   | (3,596,592 | ) | $ | (86,138,000  | ) | $ | 257,676,000 |  
|Net Income                                                                 |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   | 7,083,000   |   |            |   |   |              |   |   | 7,083,000   |  
|Translation adjustment from Foreign currency, net
of taxes $388,000        |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | 620,000    |        |   |             |   |            |   |   |              |   |   | 620,000     |  
|Unrealized loss on available-for-sale securities,
net of taxes
 $(995,000) |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  | (1,590,000 | )      |   |             |   |            |   |   |              |   |   | (1,590,000  | )
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Comprehensive income                                                       |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 6,113,000   |  
|Stock-based compensation expense                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      | 7,065,000  |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 7,065,000   |  
|Exercise of stock options and related tax
benefits                         |  | 308,800              |   |                      | 3,000   |                 |           |        |   |                          |   |                      | 5,357,000  |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 5,360,000   |  
|Issuance of restricted stock and related tax
benefits                      |  | 97,320               |   |                      | 1,000   |                 |           |        |   |                          |   |                      | 118,000    |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 119,000     |  
|Shares surrendered by employees to pay taxes on
restricted stock           |  | (37,878              | ) |                      |         |                 |           |        |   |                          |   |                      | (887,000   | )                        |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | (887,000    | )
|Issuance of Class A Common Stock from
ESPP                                 |  | 17,022               |   |                      |         |                 |           |        |   |                          |   |                      | 340,000    |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   | 340,000     |  
|Purchase of Class A Stock                                                  |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   | (1,008,000 | ) |   | (19,168,000  | ) |   | (19,168,000 | )
|Reissuance of Treasury Shares                                              |  | (368,242             | ) |                      | (4,000  | )               |           |        |   |                          |   |                      | (4,757,000 | )                        |   |                  |   |                  |            |        |   |             |   | 368,242    |   |   | 4,761,000    |   |   |            |  
|Dividends paid on common stock                                             |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   | (14,628,000 | ) |            |   |   |              |   |   | (14,628,000 | )
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  
|Balance at
 12/31/07                                                       |  | 15,604,673           |   | $                    | 156,000 |                 | 8,010,497 |        | $ | 80,000                   |   | $                    | 99,277,000 |                          |   |                 |   | $                | 914,000    |        | $ | 242,108,000 |   | (4,236,350 | ) | $ | (100,545,000 | ) | $ | 241,990,000 |  
|                                                                           |  |                      |   |                      |         |                 |           |        |   |                          |   |                      |            |                          |   |                  |   |                  |            |        |   |             |   |            |   |   |              |   |   |             |  

See accompanying notes to consolidated financial statements

F-8

---



Kenneth Cole
Productions, Inc. and Subsidiaries Consolidated Statements of Cash Flows

|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|---------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                                   |  | For the years ended December 31, |            
|                                                                                   |  |                                  |            
|                                                                                   |  | 2007                             |             | 2006 |   | 2005        |  
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Cash flows
 provided by operating activities                                       |  |                                  |             |      |   |             |   |   |             |  
|Net income                                                                         |  | $                                | 7,083,000   |      | $ | 26,765,000  |   | $ | 33,526,000  |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |                                  |             |      |   |             |   |   |             |  
|Depreciation and amortization                                                      |  |                                  | 12,032,000  |      |   | 10,877,000  |   |   | 9,465,000   |  
|Impairment of long-lived assets                                                    |  |                                  | 10,564,000  |      |   | 121,000     |   |   |            |  
|Provision for doubtful accounts                                                    |  |                                  | 188,000     |      |   | 211,000     |   |   | 290,000     |  
|Benefit from deferred taxes                                                        |  |                                  | (10,989,000 | )    |   |            |   |   | (5,791,000  | )
|Unrealized loss/(gain) from investments                                            |  |                                  | 1,590,000   |      |   | (531,000    | ) |   | (631,000    | )
|Realized loss/(gain) on sale of marketable
 securities                             |  |                                  | 295,000     |      |   |            |   |   | (1,246,000  | )
|Stock-based compensation expense                                                   |  |                                  | 7,144,000   |      |   | 3,193,000   |   |   | 1,259,000   |  
|Tax benefit from stock option exercises and
 restricted stock vestings             |  |                                  | (2,309,000  | )    |   | (700,000    | ) |   | 1,403,000   |  
|Changes in operating assets and
 liabilities:                                      |  |                                  |             |      |   |             |   |   |             |  
|Decrease/(increase) in due from
factors                                            |  |                                  | 7,404,000   |      |   | (1,561,000  | ) |   | 961,000     |  
|Decrease in accounts receivable                                                    |  |                                  | (352,000    | )    |   | (1,161,000  | ) |   | (2,003,000  | )
|(Increase)/decrease in inventories                                                 |  |                                  | (1,759,000  | )    |   | (625,000    | ) |   | 964,000     |  
|(Increase)/decrease in prepaid expenses and
 other current assets                  |  |                                  | (219,000    | )    |   | 3,280,000   |   |   | (3,395,000  | )
|Increase in other assets                                                           |  |                                  | (8,265,000  | )    |   | (2,251,000  | ) |   | (6,049,000  | )
|Increase/(decrease) in accounts
payable                                            |  |                                  | 2,916,000   |      |   | 5,425,000   |   |   | (4,638,000  | )
|Increase in deferred income, accrued
 expenses and other current liabilities       |  |                                  | 1,621,000   |      |   | 2,213,000   |   |   | 1,057,000   |  
|(Decrease)/increase in income taxes
payable                                        |  |                                  | (1,052,000  | )    |   | 229,000     |   |   | (421,000    | )
|Increase in other long-term
liabilities                                            |  |                                  | 8,515,000   |      |   | 3,199,000   |   |   | 9,268,000   |  
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Net cash provided by operating activities                                          |  |                                  | 34,407,000  |      |   | 48,684,000  |   |   | 34,019,000  |  
|Cash flows
      used in/provided by investing activities                          |  |                                  |             |      |   |             |   |   |             |  
|Acquisition of property and equipment                                              |  |                                  | (10,573,000 | )    |   | (39,942,000 | ) |   | (13,865,000 | )
|Purchase of intangible assets                                                      |  |                                  | (13,368,000 | )    |   | (601,000    | ) |   | (3,000      | )
|Proceeds from sale of marketable securities                                        |  |                                  | 8,350,000   |      |   | 54,250,000  |   |   | 16,755,000  |  
|Purchase of common stock                                                           |  |                                  |            |      |   |            |   |   | (6,000,000  | )
|Purchases of marketable securities                                                 |  |                                  | (4,700,000  | )    |   | (100,000    | ) |   | (41,909,000 | )
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Net cash (used in) / provided by investing
 activities                             |  |                                  | (20,291,000 | )    |   | 13,607,000  |   |   | (45,022,000 | )
|Cash flows used in financing activities                                            |  |                                  |             |      |   |             |   |   |             |  
|Shares surrendered by employees to pay
 taxes on restricted stock                  |  |                                  | (887,000    | )    |   | (301,000    | ) |   | (134,000    | )
|Excess tax benefit from stock options and
 restricted stock                        |  |                                  | 1,194,000   |      |   | 700,000     |   |   |            |  
|Proceeds from exercise of stock options                                            |  |                                  | 4,285,000   |      |   | 3,310,000   |   |   | 4,685,000   |  
|Proceeds from employee stock purchase plan                                         |  |                                  | 340,000     |      |   | 363,000     |   |   | 329,000     |  
|Proceeds from short-term borrowings                                                |  |                                  |            |      |   |            |   |   | 3,000,000   |  
|Payments of short-term borrowings                                                  |  |                                  |            |      |   | (3,000,000  | ) |   |            |  
|Acquisition of treasury shares                                                     |  |                                  | (19,168,000 | )    |   | (7,169,000  | ) |   |            |  
|Dividends paid to shareholders                                                     |  |                                  | (14,628,000 | )    |   | (14,472,000 | ) |   | (13,140,000 | )
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Net cash used in financing activities                                              |  |                                  | (28,864,000 | )    |   | (20,569,000 | ) |   | (5,260,000  | )
|Effect of exchange rate changes on cash                                            |  |                                  | (40,000     | )    |   | (28,000     | ) |   | (4,000      | )
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Net (decrease)/increase in cash                                                    |  |                                  | (14,788,000 | )    |   | 41,694,000  |   |   | (16,267,000 | )
|Cash and cash equivalents, beginning of
 year                                      |  |                                  | 105,441,000 |      |   | 63,747,000  |   |   | 80,014,000  |  
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Cash and cash equivalents, end of year                                             |  | $                                | 90,653,000  |      | $ | 105,441,000 |   | $ | 63,747,000  |  
|                                                                                   |  |                                  |             |      |   |             |   |   |             |  
|Supplemental disclosures of cash flow
 information                                 |  |                                  |             |      |   |             |   |   |             |  
|Cash paid during the year for:                                                     |  |                                  |             |      |   |             |   |   |             |  
|Interest                                                                           |  | $                                | 14,000      |      | $ | 204,000     |   | $ | 68,000      |  
|Income taxes, net                                                                  |  | $                                | 16,575,000  |      | $ | 17,337,000  |   | $ | 21,194,000  |  

|                                                             
|-------------------------------------------------------------
|                                                             
|See accompanying notes to consolidated
 financial statements.

F-9

---



Kenneth Cole
Productions, Inc. and Subsidiaries Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

A. Description of business

Kenneth
Cole Productions, Inc. and its subsidiaries (the Company) designs, sources
and markets a broad range of fashion footwear and handbags and, through license
agreements, designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole Reaction,
Unlisted, Tribeca and Gentle Soulsbrand names. The Company also
has the rights to use the Bongo
trademark for footwear through a license agreement. In addition, the Company
acquired the Le Tigre brand from
Le Tigre, LLC during 2007. The Company markets its products to approximately
6,000 department and specialty store locations in the United States, as well as
through its Consumer Direct business, which includes its full-priced retail
stores, Company Stores and websites.

B. Principles of consolidation

The
consolidated financial statements include the accounts of Kenneth Cole
Productions, Inc. and its wholly owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. Certain amounts in the
Companys previous financial statements have been reclassified to conform to
the 2007 presentation (see Note 9).

C. Use of estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

D.
Cash and cash equivalents

The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.

E. Investments

The
Company has marketable security investments in triple A rated auction rate debt
securities, which at December 31, 2007 consists substantially of insured
securities issued by life insurance companies. Maturity dates for these
securities range from approximately 2025 to 2050. The Company accounts for
these investments as marketable securities, and has classified them as
available-for-sale securities under SFAS No. 115 Accounting for Certain Investments in Debt and Equity
Securities
(SFAS 115). The interest rate on these securities is reset every 28 days. The
securities are marketable through a monthly auction process and the Company
records the securities at fair value. The purchase and sale of these securities
is included in the accompanying Consolidated Statements of Cash Flows as an
investing activity. In addition, the Company also has equity investments that
are classified as available-for-sale securities under SFAS 115. (See Note 4.)

The
Company reviews its security investments to determine whether a decline in fair
value is other-than-temporary. Any decline in fair value of the investment that
is determined to be other-than-temporary is adjusted as an impairment charge
through the Consolidated Statements of Income. The primary factors the
Company considers in its determination are the length of time that the fair
value of the

F-10

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 -
Summary of Significant Accounting Policies (continued)

E.
Investments (continued)

investment is below the Companys carrying value, the
financial condition/operating performance of the investee, the reason for the
decline in the fair value and the Companys intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair
value. Other-than-temporary declines for the Companys investment securities
are included in the Consolidated Statements of Income.

F.
Inventories

Inventories,
which consist of finished goods, are stated at the lower of cost or fair market
value. Cost for the wholesale segment inventory is determined by the first-in,
first-out method. Full-priced retail and Company Store inventories are based on
the moving-average cost method.

G.
Property and equipment

Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization is computed using the estimated useful lives of
the related assets ranging from three to forty years on a straight-line basis.
Leasehold improvements are amortized using the straight-line method over the
term of the related lease or the estimated useful life, whichever is less.

The
Company reviews long-lived assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable as measured by comparing the undiscounted future cash flows to
the assets net book value. Impaired assets are written down to fair value.

H.
Intangible Assets

Intangible
assets are recorded at cost. Intangible assets that have indefinite lives are
not subject to amortization and are subject to impairment review at least
annually. Intangible assets that have finite lives are subject to amortization
over their estimated useful lives.

I.
Income Taxes

Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes(SFAS
109). 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.

On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), which did not have an
impact on the Companys consolidated financial statements. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the Companys
financial statements in accordance with SFAS 109. FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a return, as well as guidance on derecognition, classification, interest and
penalties and financial statement reporting disclosures. (See Note 14.)

F-11

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 -
Summary of Significant Accounting Policies (continued)

J.
Revenue recognition

Wholesale
revenues are recognized upon shipment of products to customers since title
passes upon shipment. Full-priced retail and Company Store revenues are
recognized at the time of sale. Both wholesale and retail store revenues are
shown net of returns, discounts, and other allowances. Reserves for estimated
returns and allowances for discounts are provided when sales are recorded. The
Company has also entered into various trade name license agreements that
provide revenues based on minimum royalties and additional revenues based on
percentage of defined sales. Minimum royalty revenue is recognized on a
straight-line basis over each contract period, as defined in each license
agreement. In circumstances whereby licensee sales exceed the quarterly
contractual minimums, but not the annual minimums, royalties are deferred on
the Consolidated Balance Sheets. As the licensee sales exceed the annual
contractual minimums, the royalties are recognized.

K.
Advertising
costs

The
Company incurred advertising costs, including certain in-house marketing
expenses of $19.5 million, $19.0 million, and $21.8 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Advertising costs are expensed
as incurred and are included in Selling, general, and administrative expenses
in the accompanying Consolidated Statements of Income. Included in advertising
expenses are costs associated with cooperative advertising programs, under
which the Company generally shares the cost of a customers advertising
expenditures. In addition, licensee contributions toward advertising are
recognized when licensed products are sold by the Companys licensees. Such
contributions are based on contractual percentages of sales and contain
minimums. For licensees whose sales are not expected to exceed contractual
sales minimums, contributions relating to advertising are recognized based on
the contractual minimums. In circumstances whereby licensee sales exceed the
quarterly contractual minimums, but not the annual minimums, such contributions
toward advertising are deferred on the Consolidated Balance Sheets. As the
licensee sales exceed the annual contractual minimums, the licensee
contributions toward advertising are recognized.

L.
Stock-based compensation

Effective
January 1, 2006, the Company adopted SFAS No. 123R Share-based Payment (SFAS
123R) which requires all share-based payments, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The Company elected to use the modified prospective transition method
to record stock-based compensation expense; therefore, prior period results
were not restated. Under SFAS 123R, the Company measures the cost of
services received in exchange for stock options and similar awards based on the
grant-date fair value of the award and recognizes this cost in the income
statement over the period during which an award recipient is required to
provide service in exchange for the award. The Company uses the Black-Scholes
model to assess the fair value of share-based payments and amortizes this cost
over the service period. In addition, stock compensation expense is reduced for
estimated forfeitures prior to vesting primarily based on historical annual
forfeiture rates and by employee classification. Estimated forfeitures are
reassessed on a quarterly basis and may change based on new facts and circumstances.
(See Note 13.)

In
2005, the Company measured compensation expense for its stock-based
compensation plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and its
related
Interpretations.

F-12

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 -
Summary of Significant Accounting Policies (continued)

M.
Derivative
instruments and hedging activities

The
Company may use derivative instruments, typically forward contracts, to
manage its risk associated with movements in the Euro exchange rates in
purchasing inventory. In accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedge
Activities (SFAS 133), the Company recognizes all derivatives
on
the Consolidated Balance Sheets. Also, derivative instruments that meet certain
criteria in SFAS 133 are classified as cash flow hedges, and changes in fair
value are recognized in Other Comprehensive Income, in the accompanying
Consolidated Statements of Changes in Shareholders Equity, until the
underlying transaction is completed and the derivative is settled. Upon
settlement, any amounts remaining in Other Comprehensive Income are
reclassified to earnings. Those derivatives that are not classified as cash
flow hedges are adjusted to fair value through earnings. The Company does not
hold derivative instruments for the purpose of trading or speculation. (See
Note 8.)

N. Shipping and Handling Costs

The
Company includes amounts billed to customers for shipping costs in net sales.
The related internal and external shipping and handling costs incurred by the
Company are included in the Cost of goods sold line item in the accompanying
Consolidated Statements of Income. Such costs include inbound freight costs,
purchasing costs, inspection costs, internal transfer costs, and other product
procurement related charges.

O. Cost of Goods Sold and Selling,
General and Administrative Expenses

Costs
associated with the production and procurement of product are included in the
Cost of goods sold line item in the accompanying Consolidated Statements of
Income, including inbound freight costs, purchasing costs, inspection costs,
and other product procurement related charges. All other expenses, excluding
interest and income taxes, are included in Selling, general, and administrative
expenses, including receiving, warehousing, and distribution expenses that are
general and administrative in nature.

P. Research and Development Costs

The
Company does not incur research and development costs.

Note 2 - Earnings Per Share

The
Company calculates earnings per share in accordance with SFAS No. 128, Earnings Per
Share (SFAS 128). Basic earnings per share are calculated by
dividing net income by weighted-average common shares outstanding. Diluted
earnings per share are calculated similarly, except that it includes the
dilutive effect of the assumed exercise of securities under the Companys stock
incentive plans. Dilutive securities, which include stock options and
restricted stock, are determined under the treasury stock method by calculating
the assumed proceeds available to repurchase stock using the weighted-average
shares outstanding for the period. Stock options amounting to 1,423,000,
783,000 and 946,000 as of December 31, 2007, 2006, and 2005, respectively, have
been excluded from the diluted per share calculations, since their effect would
be antidilutive. Basic and diluted earnings per common share consist of the
following:

F-13

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 2 - Earnings Per Share (continued)

|                                                                        |  |                                 |            |      |  |            |  |  |            | 
|----------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- |  | ---------- |  |  | ---------- | 
|                                                                        |  | For the Year Ended December 31, |           
|                                                                        |  | 2007                            |            | 2006 |  | 2005       | 
|                                                                        |  |                                 |            |      |  |            | 
|Weighted-average common shares outstanding                              |  |                                 | 20,057,000 |      |  | 20,046,000 |  |  | 19,888,000 | 
|Effect of dilutive securities:                                          |  |                                 |            |      |  |            |  |  |            | 
|Restricted stock & employee stock purchase plan                         |  |                                 | 132,000    |      |  | 113,000    |  |  | 5,000      | 
|Stock options                                                           |  |                                 | 136,000    |      |  | 237,000    |  |  | 425,000    | 
|                                                                        |  |                                 |            |      |  |            |  |  |            | 
|Weighted-average common shares outstanding and
common share equivalents |  |                                 | 20,325,000 |      |  | 20,396,000 |  |  | 20,318,000 | 
|                                                                        |  |                                 |            |      |  |            |  |  |            | 

Note 3 - Due from Factors and Accounts Receivable

The
Company sells substantially all of its accounts receivable to its factors,
without recourse, subject to credit limitations established by the factor 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, 2007 and 2006 is accounts receivable subject to recourse totaling
approximately $760,000 and $677,000 respectively. The agreements with the
factors provide for payment of a service fee on receivables sold.

At
December 31, 2007 and 2006, the balance due from factors, which includes
chargebacks, is net of allowances for returns, discounts, and other deductions
of approximately $10,556,000 and $8,956,000, respectively. The allowances are
provided for known chargebacks reserved for but not written off the Companys
financial records and for potential future customer deductions based on
managements estimates.

In
the ordinary course of business, the Company has accounts receivable that are
non-factored and are at the Companys risk. At December 31, 2007 and 2006, the
accounts receivable balance includes allowance for doubtful accounts and
Consumer Direct sales returns of approximately $1,130,000 and $1,029,000. These
customers include non-factored accounts and credit card receivables from
third-party service providers. The allowances provided for sales returns are
for potential future retail customer merchandise returns based on managements
estimates. The allowance for doubtful accounts is provided for estimated losses
resulting from the inability of its customers to make required payments.

Note 4 - Investments

The
Company reviews its investments for other-than-temporary impairment whenever
the fair value of an investment is less than amortized cost and evidence
indicates that an investments carrying value may not be recoverable within
a
reasonable period of time. In the Companys evaluation of its investments
in
2007, it considered its ability and intent to hold the investment until the
market price recovers, the reasons for the decline in fair value, the duration
of the decline in fair value and expected future performance. Based on this
evaluation, the Company recorded a loss of $0.3 million on its marketable
securities and determined that declines on its other investments were not
other-than-temporary. The following table presents gross unrealized losses on,
and estimated fair value of the Companys short-term and long-term investments
as of December 31, 2007 and 2006:

F-14

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note
4 - Investments (continued)

|                      |  |                       |            |                            |  |                       |   |                            |            |  |   |           | 
|--------------------- |  | --------------------- | ---------- | -------------------------- |  | --------------------- | - | -------------------------- | ---------- |  | - | --------- | 
|                      |  | December 31,          |           
|                      |  | 2007                  |            | 2006                       | 
|                      |  |                       |            |                            | 
|                      |  | Estimated
 Fair Value |            | Unrealized
 Gains/(Losses) |  | Estimated
 Fair Value |   | Unrealized
 Gains/(Losses) |           
|                      |  |                       |            |                            |  |                       |   |                            |           
|                      |  |                       |            |                            |  |                       |   |                            |            |  |   |           | 
|Marketable Securities |  | $                     | 8,305,000  |                            |  |                      |   | $                          | 12,250,000 |  |   |          | 
|Other Investments     |  | $                     | 4,648,000  |                            |  | ($  690,000           | ) | $                          | 7,232,000  |  | $ | 1,895,000 | 
|                      |  |                       |            |                            |  |                       |   |                            |            |  |   |           | 
|Total                 |  | $                     | 12,953,000 |                            |  | ($  690,000           | ) | $                          | 19,482,000 |  | $ | 1,895,000 | 

Marketable
securities were recorded as long term at December 31, 2007 based on the lack of
an active credit market for investors to purchase and sell these investments.
At December 31, 2006, these securities were actively traded and as such, the
Company recorded them as a short-term investment under the caption Marketable
securities in the accompanying Consolidated Balance Sheets.

Note 5 - Property and Equipment

Property
and equipment consist of the following:

|                                   |  |              |             |      |   |             | 
|---------------------------------- |  | ------------ | ----------- | ---- | - | ----------- | 
|                                   |  | December 31, |            
|                                   |  | 2007         |             | 2006 |  
|                                   |  |              |             |      |  
|Property and equipmentat
 cost:   |  |              |             |      |   |             | 
|Land                               |  | $            | 5,462,000   |      | $ | 5,462,000   | 
|Building and building improvements |  |              | 33,615,000  |      |   | 33,356,000  | 
|Furniture and fixtures             |  |              | 29,886,000  |      |   | 30,115,000  | 
|Machinery and equipment            |  |              | 30,561,000  |      |   | 25,607,000  | 
|Leasehold improvements             |  |              | 37,267,000  |      |   | 37,091,000  | 
|                                   |  |              |             |      |   |             | 
|                                   |  |              | 136,791,000 |      |   | 131,631,000 | 
|Less accumulated depreciation      |  |              | 76,434,000  |      |   | 59,490,000  | 
|                                   |  |              |             |      |   |             | 
|Net property and equipment         |  | $            | 60,357,000  |      | $ | 72,141,000  | 
|                                   |  |              |             |      |   |             | 

In
2006, the Company purchased its corporate headquarters building, located in New
York City, for approximately $24 million, which is included in building and
building improvements, and land at cost. (See Note 7 for impairment
discussion.)

Note 6 - Intangible Assets

Intangible assets, primarily
trademarks, consist of the following:



|                                    |  |              |            |      |   |           |  
|----------------------------------- |  | ------------ | ---------- | ---- | - | --------- | -
|                                    |  | December 31, |           
|                                    |  | 2007         |            | 2006 |  
|                                    |  |              |            |      |  
|Indefinite lived
 intangible assets |  | $            | 12,291,000 |      |   |          |  
|                                   
|Finite lived intangible
 assets     |  |              | 2,426,000  |      | $ | 2,249,000 |  
|Less accumulated
 amortization      |  |              | (634,000   | )    |   | (395,000  | )
|                                    |  |              |            |      |   |           |  
|Net finite lived
 intangible assets |  |              | 1,792,000  |      |   | 1,854,000 |  
|                                   
|                                    |  |              |            |      |   |           |  
|Net intangible assets               |  | $            | 14,083,000 |      | $ | 1,854,000 |  
|                                    |  |              |            |      |   |           |  

F-15

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 6 - Intangible Assets (continued)

Amortization
expense amounted to $239,000, $222,000, and $65,000 for the years ended
December 31, 2007, 2006, and 2005, respectively. The weighted-average
amortization period of intangible assets acquired in 2007 is 4.4 years.
Amortization expense for the following five years is estimated to be as
follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2008 |  | $ | 255,000 | 
|2009 |  |   | 255,000 | 
|2010 |  |   | 250,000 | 
|2011 |  |   | 238,000 | 
|2012 |  |   | 229,000 | 

In
2007, the Company acquired the Le Tigre
trademark and other intellectual property associated with the Le Tigre brand from Le Tigre, LLC (the
Seller). The Company paid the Seller approximately $13 million and will
potentially make additional payments of up to $12 million to the Seller based
upon the achievement of performance targets. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
the Company recorded the intellectual property in Intangible Assets on the
accompanying Consolidated Balance Sheets at fair value. Management
preliminarily allocated the majority of the $13 million paid, based on an
independent third-party valuation, to the trademark and a nominal amount to
other intellectual property. Any additional payments will be recorded as an
increase substantially to the trademark.

Note 7  Impairment of Long-Lived Assets

Management
reviews its retail stores estimated undiscounted future cash flows and
determines whether or not a write-down to fair value is required. In 2007 and
2006, the Company recorded non-cash asset impairment charges of $10,564,000 and
$121,000, respectively. The impairment charges related to stores leasehold
improvements, and furniture and fixtures.

Note 8 - Foreign Currency Transactions,
Derivative Instruments and Hedging Activities

The
Company, in the normal course of business, may enter into forward contracts in
anticipation of future purchases of inventory denominated in foreign
currencies. These forward contracts are used to hedge against the Companys
exposure to changes in Euro exchange rates to protect the purchase price of
merchandise under such commitments. The Company classifies these contracts as
cash flow hedges under SFAS 133. The Company had no forward contracts
outstanding as of December 31, 2007 and 2006.

Note 9 - Segment Reporting

The
Company has three reportable segments: Wholesale, Consumer Direct, and
Licensing. The Wholesale segment designs and sources a broad range of fashion
footwear, handbags and accessories and markets its products for sale to
approximately 6,000 department and specialty store locations and to the
Companys Consumer Direct segment. The Consumer Direct segment markets a broad
selection of the Companys branded products, including licensee products, for
sale directly to the consumer through its own channels of distribution, which
include full-priced retail stores, Company Stores and e-commerce (at website
addresses www.kennethcole.com
and www.kennethcolereaction.com).
The Licensing segment, through third-party licensee agreements, has evolved the
Company from a footwear resource to a diverse

F-16

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 9 - Segment Reporting (continued)

lifestyle brand competing
effectively in approximately 30 apparel and accessories categories for both men
and women. The Company maintains control over quality, image and distribution
of the licensees. This segment primarily consists of royalties earned on
licensee sales to third parties of the Companys branded products and royalties
earned on the purchase and sale to foreign retailers, distributors, or to
consumers in foreign countries. The Companys reportable segments are business
units that offer products to overlapping consumers through different channels
of distribution. Each segment is managed separately,
although planning, implementation
and results are reviewed internally by the executive management committee. The
Company evaluates performance of each of its segments and allocates resources
based on profit or loss before unallocated corporate overhead, stock-based
compensation expense and income taxes for each segment. The accounting policies
of the reportable segments are the same as those described in the Summary of
Significant Accounting Policies. Intersegment sales between the Wholesale and
Consumer Direct segment are eliminated in consolidation.

Financial
information of the Companys reportable segments is as follows (dollars in thousands):

|                                    |  |           |         |                  |   |           |   |        |        |  |   |         | 
|----------------------------------- |  | --------- | ------- | ---------------- | - | --------- | - | ------ | ------ |  | - | ------- | 
|                                    |  | Wholesale |         | Consumer
 Direct |   | Licensing |   | Totals |       
|                                    |  |           |        
|Year Ended December 31,
 2007       |  |           |         |                  |   |           |   |        |        |  |   |         | 
|Revenues                            |  | $         | 290,768 |                  | $ | 175,637   |   | $      | 44,315 |  | $ | 510,720 | 
|Intersegment revenues               |  |           | 27,804  |                  |   |           |   |        |        |  |   | 27,804  | 
|Interest income, net                |  |           | 5,366   |                  |   |           |   |        |        |  |   | 5,366   | 
|Depreciation expense                |  |           | 3,575   |                  |   | 8,145     |   |        | 73     |  |   | 11,793  | 
|Impairment of long-lived
 assets    |  |           |         |                  |   | 10,564    |   |        |        |  |   | 10,564  | 
|Segment income/(loss) (1)           |  |           | 13,544  |                  |   | (23,937   | ) |        | 36,655 |  |   | 26,262  | 
|Segment assets (2)                  |  |           | 254,233 |                  |   | 51,904    |   |        | 48,400 |  |   | 354,537 | 
|Expenditures for
 long-lived assets |  |           | 1,309   |                  |   | 9,364     |   |        | 13,268 |  |   | 23,941  | 
|Year Ended December 31,
 2006 (4)   |  |           |         |                  |   |           |   |        |        |  |   |         | 
|Revenues                            |  | $         | 314,981 |                  | $ | 177,301   |   | $      | 44,217 |  | $ | 536,499 | 
|Intersegment revenues               |  |           | 28,262  |                  |   |           |   |        |        |  |   | 28,262  | 
|Interest income, net                |  |           | 4,875   |                  |   |           |   |        |        |  |   | 4,875   | 
|Depreciation expense                |  |           | 3,454   |                  |   | 7,197     |   |        | 4      |  |   | 10,655  | 
|Impairment of long-lived
 assets    |  |           |         |                  |   | 121       |   |        |        |  |   | 121     | 
|Segment income/(loss) (1)           |  |           | 31,956  |                  |   | (12,623   | ) |        | 34,562 |  |   | 53,895  | 
|Segment assets (2)                  |  |           | 251,851 |                  |   | 64,914    |   |        | 44,348 |  |   | 361,113 | 
|Expenditures for long-lived
 assets |  |           | 24,063  |                  |   | 15,870    |   |        | 610    |  |   | 40,543  | 
|Year Ended December 31,
 2005 (4)   |  |           |         |                  |   |           |   |        |        |  |   |         | 
|Revenues                            |  | $         | 287,190 |                  | $ | 186,870   |   | $      | 43,983 |  | $ | 518,043 | 
|Intersegment revenues               |  |           | 27,927  |                  |   |           |   |        |        |  |   | 27,927  | 
|Interest income, net                |  |           | 4,151   |                  |   |           |   |        |        |  |   | 4,151   | 
|Depreciation expense                |  |           | 3,059   |                  |   | 6,333     |   |        | 8      |  |   | 9,400   | 
|Segment income (1)(3)               |  |           | 18,197  |                  |   | 6,025     |   |        | 36,059 |  |   | 60,281  | 
|Segment assets (2)                  |  |           | 270,345 |                  |   | 57,657    |   |        | 12,669 |  |   | 340,671 | 
|Expenditures for
 long-lived assets |  |           | 3,048   |                  |   | 10,817    |   |        | 3      |  |   | 13,868  | 
|                                    |  |           |         |                  |   |           |   |        |        |  |   |         | 

|    |                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Before unallocated
 corporate overhead, stock-based compensation expense and income taxes. In
 2007, the Company eliminated the intersegment profit on sales between the
 Wholesale and Consumer Direct segments. Accordingly, amounts in 2006 and 2005
 have been reclassified to conform to the 2007 presentation.
|    |                                                                                                                                                                                                                                                                                                                     
|(2) | The Wholesale segment
 includes corporate assets.                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                     
|(3) | Segment income for the
 Wholesale segment includes one-time payment of $0.8 million for severance.                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                     
|(4) | In 2006, the Company
 reclassified its gift program from the Consumer Direct segment to the
 Wholesale segment. Net sales were less than 1% of consolidated sales. Amounts
 in 2005 have been reclassified to conform to the 2007 and 2006 presentation.                                                            

F-17

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 9 -
Segment Reporting (continued)

The
reconciliation of the Companys reportable segment revenues and profit and loss
are as follows (dollars in thousands):

|                                                                     |  |   |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------- |  | - | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                     |  |   |         | 2006 |   | 2005    |  
|                                                                     |  |   |         |      |   |         |  
|Revenues                                                             |  |   |         |      |   |         |   |   |         |  
|Revenues for reportable segments                                     |  | $ | 510,720 |      | $ | 536,499 |   | $ | 518,043 |  
|Intersegment revenues (1)                                            |  |   | 27,804  |      |   | 28,262  |   |   | 27,927  |  
|Elimination of intersegment revenues                                 |  |   | (27,804 | )    |   | (28,262 | ) |   | (27,927 | )
|                                                                     |  |   |         |      |   |         |   |   |         |  
|Total consolidated revenues                                          |  | $ | 510,720 |      | $ | 536,499 |   | $ | 518,043 |  
|                                                                     |  |   |         |      |   |         |   |   |         |  
|                                                                     |  |   |         |      |   |         |   |   |         |  
|Income                                                               |  |   |         |      |   |         |   |   |         |  
|Total profit for reportable segments (1)                             |  | $ | 26,262  |      | $ | 53,895  |   | $ | 60,281  |  
|Stock-based compensation expense and
 unallocated corporate overhead |  |   | (16,011 | )    |   | (12,032 | ) |   | (10,767 | )
|                                                                     |  |   |         |      |   |         |   |   |         |  
|Total income before provision for income
 taxes                      |  | $ | 10,251  |      | $ | 41,863  |   | $ | 49,514  |  
|                                                                     |  |   |         |      |   |         |   |   |         |  

| |     |                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Before unallocated corporate
 overhead, stock-based compensation expense and income taxes. In 2007, the
 Company eliminated the intersegment profit on sales between the Wholesale and
 Consumer Direct segments. Accordingly, amounts in 2006 and 2005 have been
 reclassified to conform to the 2007 presentation.

Revenues
from international customers, primarily Canada, were approximately 3.0%, 2.5%,
and 2.6% of the Companys consolidated revenues for the years ended December
31, 2007, 2006, and 2005 respectively.

Note 10 - Other
Current Liabilities

Other
current liabilities consist of the following:

|                                 |  |               |            |      |   |            | 
|-------------------------------- |  | ------------- | ---------- | ---- | - | ---------- | 
|                                 |  | December
 31, |           
|                                 |  | 2007          |            | 2006 |  
|                                 |  |               |            |      |  
|Rent                             |  | $             | 1,158,000  |      | $ | 570,000    | 
|Compensation                     |  |               | 6,252,000  |      |   | 6,345,000  | 
|Customer
 credits                |  |               | 1,876,000  |      |   | 2,031,000  | 
|Other                            |  |               | 1,566,000  |      |   | 1,979,000  | 
|                                 |  |               |            |      |   |            | 
|Total other
 current liabilities |  | $             | 10,852,000 |      | $ | 10,925,000 | 
|                                 |  |               |            |      |   |            | 

Note 11 - Short-term
Borrowings

In
2005, one of the Companys foreign subsidiaries entered into a promissory note
with a financial institution, which provided the foreign subsidiary with $3,000,000.
In addition, the Company entered into a Cash Collateral Pledge Agreement, for
$3,000,000, with a financial institution, which served as collateral on the
loan to the foreign subsidiary. In 2006, the foreign subsidiary repaid the
promissory note and, as a result, the collateral was released back to the
Company.

Note 12 - Benefit
Plans

A. 401(k) Plan

The
Companys 401(k) profit-sharing plan covers all non-union employees, subject to
certain minimum age and length of service requirements who are permitted to
contribute specified percentages of

F-18

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 12 - Benefit
Plans (continued)

A. 401(k) Plan (continued)

their salary
up to the maximum permitted by the Internal Revenue Service. The Company is
obligated to make a matching contribution and may make additional discretionary
contributions, as defined. No additional discretionary contributions were made
during 2007. Contributions to the plan for the years ended December 31, 2007,
2006 and 2005 were approximately $543,000, $551,000, and $487,000,
respectively.

B. Deferred compensation plans

The
Kenneth Cole Productions, Inc. Deferred Compensation Plans are non-qualified
plans maintained primarily to provide deferred compensation benefits for the
Companys Chief Executive Officer, as well as a select group of highly
compensated employees, which includes certain Company management. The Company
accounts for the investments in the deferred compensation plans as trading
securities in accordance with SFAS 115. The amounts, deferred at the election
of the employee, are invested based upon various asset alternatives. The assets
are included in Deferred compensation plans assets, and the related liability
is included in Deferred compensation plans liabilities.

In
2007, 2006 and 2005, the Company deposited $813,000, $915,000, and $1,215,000,
respectively, into Supplemental Executive Retirement Plans (SERP) for certain
key executives. The amounts have been recorded in Investments and other in the
accompanying Consolidated Balance Sheets. These plans are non-qualified
deferred compensation plans. Benefits payable under these plans are based upon
the performance of the individual directed investments from the Companys
cumulative and future contributions. Benefits earned under the SERP begin
vesting after 3 years of participation in the SERP, and become 60% vested after
9 years of participation in the SERP, 75% vested upon the participant retiring
at age 60 or later and 100% vested if the employee dies while in the Companys
employment. The value of these investments at December 31, 2007 and 2006 were
$6,575,000 and $5,287,000, respectively, which the Company accounts for as
trading securities in accordance with SFAS 115. The unrealized gains and losses
on the investments were recorded in Selling, general and administrative
expenses in the accompanying Consolidated Statements of Income. In addition,
the Company has recorded a liability of approximately $3,239,000 and $2,599,000
at December 31, 2007 and 2006, respectively, within Accrued rent and other
long-term liabilities in the accompanying Consolidated Balance Sheets. In
addition, SERP participants are covered by life insurance through a portion of
the Companys contribution.

C. Employee Stock Purchase Plan

The
Company sponsors a qualified employee stock purchase plan (ESPP), the terms
of which allow for qualified employees (as defined) to participate in the
purchase of designated shares of the Companys Class A Common Stock at a price
equal to 85% of the closing price at the end of each quarterly stock purchase
period. For the years ended December 31, 2007, 2006, and 2005, employees
purchased 17,022, 17,897, and 13,601 shares, respectively. Total shares
purchased through December 31, 2007 were 111,474.

Note 13 - StockBased
Compensation

The
Companys 2004 Stock Incentive Plan (the Plan), as amended, authorizes the
grant of options and restricted stock to employees for up to 6,320,162 shares
of the Companys Class A Common

F-19

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 13 - StockBased
Compensation (continued)

Stock. The Plan provides for
the grant of stock options, restricted stock awards and other stock unit awards
to directors, officers and other eligible employees. Stock options are granted
with an exercise price equal to the market value of a share of common stock on
the date of grant. Stock option grants expire within 10 years and vest on a
graded basis within two to five years from the date of grant. Restricted stock
unit awards generally vest on a graded basis over a three to four year period
    or cliff vest after three years. All awards are expensed on a straight-line
    basis.

Effective
January 1, 2006, the Company adopted SFAS 123R. The Company elected to use the
modified prospective transition method to record stock-based compensation
expense; therefore, prior period results were not restated. Prior to the
adoption of SFAS 123R, stock-based compensation expense related to stock
options was not recognized in the results of operations if the exercise price
was at least equal to the market value of the common stock on the grant date,
in accordance with APB 25. As a result, the recognition of stock-based
compensation expense was generally limited to the expense attributed to
restricted stock unit awards and stock option modifications.

SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense over the
service period (generally the vesting period) in the consolidated financial
statements based on their fair values. Under the modified prospective method,
awards that were granted, modified, or settled on or after January 1, 2006 are
measured and accounted for in accordance with SFAS 123R. Unvested equity-based
awards that were granted prior to January 1, 2006 continue to be accounted for
in accordance with SFAS 123, except that all awards are recognized in the
results of operations over the remaining vesting periods. The impact of
forfeitures that may occur prior to vesting is also estimated and considered in
the amount recognized. Also, the realization of tax benefits in excess of
amounts recognized for financial reporting purposes is recognized in the
Consolidated Statements of Cash Flows as a financing activity. In addition, the
Companys ESPP is now considered compensatory under SFAS 123R, due to the
ESPPs 15% purchase price discount. In accordance with the guidance set forth
in SFAS 123R, the Company reversed the deferred compensation amount in
Shareholders Equity related to restricted stock as of January 1, 2006.

F-20

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 13 - StockBased
Compensation (continued)

The
following table summarizes stock option activity for the years ended December
31, 2007, 2006 and 2005:

|                                     |  |        |           |                                                 |  |   |       |  | 
|------------------------------------ |  | ------ | --------- | ----------------------------------------------- |  | - | ----- |  | 
|                                     |  | Shares |           | Weighted-
 
 average exercise 
 price per share | 
|                                     |  |        |           |                                                 | 
|Outstanding as of December
 31, 2004 |  |        | 2,948,936 |                                                 |  | $ | 22.71 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Granted                              |  |        | 46,667    |                                                 |  | $ | 29.28 |  | 
|Exercised                            |  |        | (312,064  | )                                               |  | $ | 15.01 |  | 
|Forfeited                            |  |        | (82,822   | )                                               |  | $ | 26.31 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Outstanding as of December
 31, 2005 |  |        | 2,600,717 |                                                 |  | $ | 23.64 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Granted                              |  |        | 27,000    |                                                 |  | $ | 24.73 |  | 
|Exercised                            |  |        | (203,283  | )                                               |  | $ | 16.28 |  | 
|Forfeited                            |  |        | (305,549  | )                                               |  | $ | 28.91 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Outstanding as of December
 31, 2006 |  |        | 2,118,885 |                                                 |  | $ | 23.60 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Granted                              |  |        | 20,000    |                                                 |  | $ | 23.75 |  | 
|Exercised                            |  |        | (308,800  | )                                               |  | $ | 13.88 |  | 
|Forfeited                            |  |        | (75,306   | )                                               |  | $ | 28.85 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Outstanding as of December
 31, 2007 |  |        | 1,754,779 |                                                 |  | $ | 25.08 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 
|Exercisable as of December
 31, 2007 |  |        | 1,617,112 |                                                 |  | $ | 25.19 |  | 
|                                     |  |        |           |                                                 |  |   |       |  | 

The
weighted-average grant-date fair value of options granted during the years
ended December 31, 2007 and 2006 was $0.2 million and $0.3 million,
respectively. The weighted-average remaining term for stock options outstanding
and exercisable, as of December 31, 2007, was 4.3 years and 4.1 years,
respectively. The aggregate intrinsic value of stock options outstanding and
exercisable as of December 31, 2007 was $1.0 million and $1.0 million,
respectively. The intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the market price of the Companys
common stock as of the reporting date. The total fair value of options vested
during the years ended December 31, 2007 and 2006 was $1.4 million and $2.1
million, respectively.

The
intrinsic value related to the exercise of stock options was $2.9 million for
the year ended December 31, 2007, which is currently deductible for tax
purposes. The intrinsic value related to the exercise of stock options was $1.9
million for the year ended December 31, 2006. In addition, 368,242 treasury
shares were re-issued for options exercised and restricted stock vestings
during the year ended December 31, 2007.

F-21

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 13 - StockBased
Compensation (continued)

The
following table summarizes restricted stock unit activity for the years ended
December 31, 2007, 2006 and 2005. No shares of restricted stock were granted
prior to 2005:

|                                   |  |        |          |  
|---------------------------------- |  | ------ | -------- | -
|                                   |  | Shares |         
|                                   |  |        |         
|Unvested as of January 1,
  2005   |  |        |         |  
|                                   |  |        |          |  
|Granted                            |  |        | 158,044  |  
|Vested                             |  |        | (14,782  | )
|Forfeited                          |  |        | (5,080   | )
|                                   |  |        |          |  
|Unvested as of December
  31, 2005 |  |        | 138,182  |  
|                                   |  |        |          |  
|Granted                            |  |        | 515,616  |  
|Vested                             |  |        | (34,138  | )
|Forfeited                          |  |        | (53,557  | )
|                                   |  |        |          |  
|Unvested as of December
  31, 2006 |  |        | 566,103  |  
|                                   |  |        |          |  
|Granted                            |  |        | 305,044  |  
|Vested                             |  |        | (97,320  | )
|Forfeited                          |  |        | (111,647 | )
|                                   |  |        |          |  
|Unvested as of December
  31, 2007 |  |        | 662,180  |  
|                                   |  |        |          |  
|                                   |  |        |          |  
|Vested as of December 31,
  2007   |  |        | 146,240  |  
|                                   |  |        |          |  

The
weighted-average grant-date fair value of restricted stock awards granted
during the years ended December 31, 2007 and 2006 was $7.2 million and $13.1
million, respectively. The total grant-date fair value of restricted shares
vested during the years ended December 31, 2007 and 2006 was $2.6 million and
$0.7 million, respectively. The weighted-average remaining contractual term of
unvested shares of restricted stock as of December 31, 2007 and 2006 was 1.9
years and 2.5 years, respectively.

The
following table summarizes the pro forma effect of stock-based compensation as
if the fair value method of accounting for stock compensation had been applied
for the year ended December 31, 2005:

|                                                                                                                           |  |                                |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | -
|                                                                                                                           |  | Year Ended December 31,
  2005 |           
|                                                                                                                           |  |                                |           
|Net income, as reported                                                                                                    |  | $                              | 33,526,000 |  
|Add: Stockbased compensation,
  related to restricted stock, included in reported net income, net of related
  tax effect |  |                                | 852,000    |  
|Deduct: Stock-based employee compensation
  expense determined under fair value method, net of related tax effects         |  |                                | (7,318,000 | )
|                                                                                                                           |  |                                |            |  
|Pro forma net income                                                                                                       |  | $                              | 27,060,000 |  
|                                                                                                                           |  |                                |            |  
|Earnings per share:                                                                                                        |  |                                |            |  
|Basic - as reported                                                                                                        |  | $                              | 1.69       |  
|Basic - pro forma                                                                                                          |  | $                              | 1.36       |  
|Diluted - as reported                                                                                                      |  | $                              | 1.65       |  
|Diluted - pro forma                                                                                                        |  | $                              | 1.33       |  

F-22

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 13 - StockBased
Compensation (continued)

In
April 2005, the Company accelerated the vesting of 250,000 out-of-the-money
stock options held by Kenneth D. Cole. The estimated future expense recognition
that was eliminated was approximately $2,115,000. Also, in December 2005, the
Company accelerated the vesting of 224,500 stock options held by various
employees. The estimated future expense recognition that was eliminated was
approximately $1,400,000. The following table summarizes the components of
stock-based compensation expense, which is recorded in Selling, general and
administrative expenses in the Consolidated Statements of Income, for the years
ended December 31, 2007 and 2006.

|                                                          |  |                           |           |      |   |           | 
|--------------------------------------------------------- |  | ------------------------- | --------- | ---- | - | --------- | 
|                                                          |  | Year ended
  December 31, |          
|                                                          |  | 2007                      |           | 2006 |  
|                                                          |  |                           |           |      |  
|Stock options                                             |  | $                         | 1,714,000 |      | $ | 1,137,000 | 
|Restricted stock units and
  employee stock purchase plan |  |                           | 5,532,000 |      |   | 2,056,000 | 
|                                                          |  |                           |           |      |   |           | 
|Total stock-based
  compensation expense                  |  | $                         | 7,246,000 |      | $ | 3,193,000 | 
|                                                          |  |                           |           |      |   |           | 

Tax
benefits were attributed to the stock-based compensation expense. The Company
elected to adopt the alternative method of calculating the historical pool of
windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS
123R-c, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.This is a simplified method to determine the pool of
windfall tax benefits that is used in determining the tax effects of stock
compensation in the results of operations and cash flow reporting for awards
that were outstanding as of the adoption of SFAS 123R.

The
fair value of stock options was estimated using the Black-Scholes
option-pricing model. This model requires the input of subjective assumptions
that will usually have a significant impact on the fair value estimate. The
assumptions for the current period grants were developed based on SFAS 123R and
SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, Share-Based
Payment.

The
following table summarizes the assumptions used to compute the weighted-average
fair value of stock option grants:

|                                  |  |                           |  |             | 
|--------------------------------- |  | ------------------------- |  | ----------- | 
|                                  |  | Year Ended
  December 31, | 
|                                  |  | 2007                      |  | 2006        | 
|                                  |  |                           |  |             | 
|Weighted-average
  volatility     |  | 54.9%                     |  | 48.3%       | 
|Risk-free interest rate           |  | 3.8 to
  5.2%             |  | 5.1%        | 
|Weighted-average dividend
  yield |  | 2.0%                      |  | 2.9%        | 
|Expected term                     |  | 3-9 years                 |  | 3-9
  years | 

The
weighted-average volatility for the options granted during the years ended
December 31, 2007 and 2006 was developed using historical volatility for
periods equal to the expected term of the options. An increase in the
weighted-average volatility assumption will increase stock compensation
expense. The expected volatility used in the calculation of the Companys
stock-based compensation expense for the year ended December 31, 2007 ranged
from 25.4% to 69.4%.

The
risk-free interest rate was developed using the U.S. Treasury yield curve for
periods equal to the expected term of the options on the grant date. An
increase in the risk-free interest rate will increase stock compensation
expense.

The
dividend yield is a ratio that estimates the expected dividend payments to
shareholders. The dividend yield is calculated by using the dividends declared
per share and the Companys stock price on

F-23

---



Kenneth Cole Productions, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements

Note 13 - StockBased
Compensation (continued)

the date of grant. An
increase in the dividend yield will increase stock compensation expense. The
dividend yields used in the calculations of the Companys stock-based
compensation expense for the year ended December 31, 2007 ranged from 0% (for
grants prior to 2004) to 3.9%.

The
expected term of the stock option grants was developed after considering
vesting schedules, life of the option, historical experience and estimates of
future exercise behavior patterns. An increase in the expected holding period
will increase stock compensation expense.

The
fair value of restricted stock was calculated by multiplying the Companys
stock price on the date of grant by the number of shares granted and is being
amortized on a straight-line basis over the vesting periods. SFAS 123R requires
the recognition of stock-based compensation for the number of awards that are
ultimately expected to vest. As a result, for most awards, recognized stock
compensation was reduced for estimated forfeitures prior to vesting primarily
based on historical annual forfeiture rates and by employee classification
ranging from 0% to 100% for stock options, and 0% to 75% for restricted stock.
Estimated forfeitures will continue to be reassessed in subsequent periods and
may change based on new facts and circumstances.

As
of December 31, 2007, approximately $10.9 million of unrecognized stock
compensation related to unvested stock options and restricted stock awards (net
of estimated forfeitures) is expected to be recognized over a weighted-average
period of 1.9 years.

Note 14 - Income
Taxes

The
Company accounts for income taxes in accordance with SFAS 109 and FIN 48. As
such, the Companys policy on classification of interest and penalties is
to
include these amounts in the provision for income taxes in the accompanying
Consolidated Statements of Income. During the year ended December 31, 2007, the
Company recognized a tax benefit of $0.2 million for interest and penalties.
Interest and penalties accrued at December 31, 2007 were $0.9 million. The
total amount of unrecognized tax benefits at December 31, 2007 is approximately
$2.4 million; $1.3 million, if recognized, would affect the Companys effective
tax rate. If settlements are effected in accordance with the Companys
expectations, the total unrecognized tax benefits could decrease by
approximately $1.3 million within the next twelve months.

Unrecognized
tax benefits consist of the following:

|                                              |  |   |           |  
|--------------------------------------------- |  | - | --------- | -
|Balance as
  of January 1, 2007               |  | $ | 2,160,000 |  
|Additions to
  current period positions       |  |   | 504,000   |  
|Additions
  for positions of prior years      |  |   | 301,000   |  
|Reductions
  for tax positions of prior years |  |   | (542,000  | )
|                                              |  |   |           |  
|Balance as
  of December 31, 2007             |  | $ | 2,423,000 |  
|                                              |  |   |           |  

The
Company and certain of its subsidiaries are subject to U.S. federal income tax
as well as income tax of multiple state, local, and foreign jurisdictions. U.S.
federal income tax returns have been examined through 2003. In addition, audits
are currently being conducted for certain state and federal tax jurisdictions
ranging from 2003 to 2006.

F-24

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 14 - Income Taxes (continued)

In
2006, the Company reached agreements with various taxing authorities which
closed certain outstanding audit periods, for which the Company had previously
established reserves. The Company recorded a tax benefit of approximately
$600,000, net of certain tax liabilities that were established, during the year
ended December 31, 2006.

Internal
Revenue Code Section 965 was enacted in 2004, as part of the American Jobs
Creation Act. This was a temporary provision that allows U.S. companies to
repatriate earnings from their foreign subsidiaries at a reduced tax rate
provided that specified conditions and restrictions are satisfied. In addition,
FASB Staff Position FAS 109-2 was issued to provide accounting and disclosure
guidance relating to the repatriation provision. The Companys Board of
Directors approved and adopted a repatriation plan and, as such, the Company repatriated
$12.5 million of unremitted foreign earnings, which resulted in a tax benefit
of approximately $3.0 million for the year ended December 31, 2005, as a result
of the Company providing for taxes for the foreign earnings at the prior
statutory rate.

The
components of income before provision for income taxes are as follows:

|                         |  |      |            |      |   |            |  |   |            | 
|------------------------ |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|Year Ended
 December 31, |  | 2007 |            | 2006 |   | 2005       | 
|                         |  |      |            |      |   |            | 
|Domestic                 |  | $    | 3,286,000  |      | $ | 35,649,000 |  | $ | 44,425,000 | 
|International            |  |      | 6,965,000  |      |   | 6,214,000  |  |   | 5,089,000  | 
|                         |  |      |            |      |   |            |  |   |            | 
|                         |  | $    | 10,251,000 |      | $ | 41,863,000 |  | $ | 49,514,000 | 

Significant
items comprising the Companys deferred tax assets and liabilities are as
follows:

|                                                      |  |               |            |      |   |            |  
|----------------------------------------------------- |  | ------------- | ---------- | ---- | - | ---------- | -
|                                                      |  | December
 31, |           
|                                                      |  | 2007          |            | 2006 |  
|                                                      |  |               |            |      |  
|Deferred tax assets:                                  |  |               |            |      |   |            |  
|Inventory
 allowances and capitalization              |  | $             | 2,274,000  |      | $ | 2,197,000  |  
|Allowance for
 doubtful accounts and sales allowances |  |               | 819,000    |      |   | 538,000    |  
|Deferred rent                                         |  |               | 4,536,000  |      |   | 4,451,000  |  
|Deferred
 compensation                                |  |               | 13,558,000 |      |   | 11,337,000 |  
|Depreciation and
 asset impairment                    |  |               | 5,450,000  |      |   | 1,562,000  |  
|Stock-based
 compensation                             |  |               | 3,017,000  |      |   | 1,246,000  |  
|Losses on
 available-for-sale securities              |  |               | 406,000    |      |   |           |  
|Deferred income,
 customer obligations, and other     |  |               | 1,956,000  |      |   | 628,000    |  
|Non-deductible
 accruals                              |  |               | 950,000    |      |   |           |  
|                                                      |  |               |            |      |   |            |  
|                                                      |  | $             | 32,966,000 |      | $ | 21,959,000 |  
|                                                      |  |               |            |      |   |            |  
|Deferred tax liabilities:                             |  |               |            |      |   |            |  
|Amortization of
 intangible assets                    |  |               | (106,000   | )    |   |           |  
|Unrealized gains
 on available-for-sale securities    |  |               |           |      |   | (703,000   | )
|Undistributed
 foreign earnings                       |  |               | (3,027,000 | )    |   | (3,407,000 | )
|                                                      |  |               |            |      |   |            |  
|                                                      |  |               | (3,133,000 | )    |   | (4,110,000 | )
|                                                      |  |               |            |      |   |            |  
|Net deferred tax assets                               |  | $             | 29,833,000 |      | $ | 17,849,000 |  
|                                                      |  |               |            |      |   |            |  

F-25

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 14 - Income Taxes (continued)

The
provision for income taxes consists of the following:

|                |  |               |             |      |   |            |  |   |            |  
|--------------- |  | ------------- | ----------- | ---- | - | ---------- |  | - | ---------- | -
|                |  | December
 31, |            
|                |  | 2007          |             | 2006 |   | 2005       | 
|                |  |               |             |      |   |            | 
|Current:        |  |               |             |      |   |            |  |   |            |  
|Federal         |  | $             | 13,045,000  |      | $ | 13,402,000 |  | $ | 19,477,000 |  
|State and local |  |               | 414,000     |      |   | 1,465,000  |  |   | 1,882,000  |  
|Foreign         |  |               | 698,000     |      |   | 231,000    |  |   | 420,000    |  
|                |  |               |             |      |   |            |  |   |            |  
|                |  |               | 14,157,000  |      |   | 15,098,000 |  |   | 21,779,000 |  
|Deferred:       |  |               |             |      |   |            |  |   |            |  
|Federal         |  |               | (10,104,000 | )    |   |           |  |   | (5,486,000 | )
|State and local |  |               | (885,000    | )    |   |           |  |   | (305,000   | )
|                |  |               |             |      |   |            |  |   |            |  
|                |  |               | (10,989,000 | )    |   |           |  |   | (5,791,000 | )
|                |  |               |             |      |   |            |  |   |            |  
|                |  | $             | 3,168,000   |      | $ | 15,098,000 |  | $ | 15,988,000 |  
|                |  |               |             |      |   |            |  |   |            |  

The
reconciliation of income tax computed at the U.S. federal statutory tax rate to
the effective income tax rate for 2007, 2006 and 2005 is as follows:

|                                                  |  |      |    |  |      |    |  |      |    | 
|------------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | -- | 
|                                                  |  | 2007 |    |  | 2006 |    |  | 2005 |    | 
|                                                  |  |      |    |  |      |    | 
|Federal income tax at statutory rate              |  | 35.0 | %  |  | 35.0 | %  |  | 35.0 | %  | 
|State and local taxes, net of federal tax benefit |  | 0.7  | %  |  | 2.5  | %  |  | 3.0  | %  | 
|Repatriation benefit                              |  |     |    |  |     |    |  | (5.7 | )% | 
|Adjustment to accruals                            |  | (1.8 | )% |  | (1.4 | )% |  |     |    | 
|Effect of rate changes                            |  | (4.8 | )% |  |     |    |  |     |    | 
|Other permanent differences                       |  | 1.8  | %  |  |     |    |  |     |    | 
|                                                  |  |      |    |  |      |    |  |      |    | 
|                                                  |  | 30.9 | %  |  | 36.1 | %  |  | 32.3 | %  | 
|                                                  |  |      |    |  |      |    |  |      |    | 

Note 15 - Commitments and
Contingencies

A.
Operating leases and Other Property Agreements

The
Company leases office, retail and warehouse facilities under non-cancelable
operating leases between 5 and 20 years with options to renew at varying terms.
Future minimum lease payments for non-cancelable leases with initial terms of
one year or more consisted of the following at December 31, 2007:

|                            |  |   |             | 
|--------------------------- |  | - | ----------- | 
|2008                        |  | $ | 24,990,000  | 
|2009                        |  |   | 23,767,000  | 
|2010                        |  |   | 21,980,000  | 
|2011                        |  |   | 20,343,000  | 
|2012                        |  |   | 18,139,000  | 
|Thereafter                  |  |   | 43,142,000  | 
|                            |  |   |             | 
|Total minimum cash payments |  | $ | 152,361,000 | 
|                            |  |   |             | 

In
addition, certain of these leases contain rent escalation provisions and
require additional percentage rent payments to be made. Step rent provisions
and escalation clauses are taken into account in computing the minimum lease
payments, recognized on a straight-line basis over the minimum lease term. The
Company may also receive capital improvement funding from landlords, primarily
as an

F-26

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 15 - Commitments and
Contingencies (continued)

A. Operating leases and Other Property Agreements
(continued)

incentive for the Company to lease retail and outlet
store space from the landlords. Such amounts are amortized as a reduction of
rent expense over the life of the related lease.

Rent
expense is as follows:

|                          |  |      |            |      |   |            |  |   |            | 
|------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|                          |  | 2007 |            | 2006 |   | 2005       | 
|                          |  |      |            |      |   |            |  |   |            | 
|Minimum rent              |  | $    | 26,835,000 |      | $ | 27,894,000 |  | $ | 27,711,000 | 
|Contingent rent and other |  |      | 8,414,000  |      |   | 6,972,000  |  |   | 6,413,000  | 
|                          |  |      |            |      |   |            |  |   |            | 
|Total rent expense        |  | $    | 35,249,000 |      | $ | 34,866,000 |  | $ | 34,124,000 | 

Sub-tenants
rental income for 2007, 2006, and 2005 was $171,000, $855,000, and $849,000,
respectively. Future minimum rental income from sub-tenants is $208,000 for
2008.Future minimum rental income from sub-tenants
does not include rent escalation and other charges that are subsequently passed
through to the sub-tenant.

The
Company leases 51,000 square feet of office space in Secaucus, New Jersey for
its administrative offices. In addition, the Company also leases a 23,500
square foot facility in Secaucus used for Company Store space, as well as an
additional distribution warehousing facility. The Company also has a technical
and administrative office in Florence, Italy, and a similar office in Dongguan,
China, which began operating in 2005. The Company does not own or operate any
manufacturing facilities.

The
Company leases space for all of its 49 full-priced retail stores (aggregating
approximately 237,000 square feet) and 42 Company Stores (aggregating
approximately 208,000 square feet). Generally, the leases provide for an
initial term of five to ten years and certain leases provide for renewal
options permitting the Company to extend the term thereafter.

B.
Letters of credit

The
Company was contingently liable for $175,000 and $196,000 of open letters of
credit as of December 31, 2007 and 2006, respectively. In addition, at December
31, 2007 and 2006, stand-by letters of credit amounted to approximately
$2,520,000 and $3,067,000, respectively.

C.
Concentrations

In
the normal course of business, the Company sells to major department stores and
specialty retailers and believes that its broad customer base will mitigate the
impact that financial difficulties of any such retailers might have on the
Companys operations. The Company had no customer account for more than 10% of
consolidated net sales for the years ended December 31, 2007, 2006, and 2005.

The
Company sources each of its product lines separately, based on the individual
design, styling and quality specifications of such products. The Company
primarily sources its products directly or indirectly through manufacturers in
Italy, Spain, Brazil, and China. However, approximately 47% and 46% of total
handbag purchases came from two manufacturers in China during the years ended
December 31, 2007 and 2006, respectively. Approximately 42% and 39% of Kenneth ColeandKenneth
Cole Reactionmens footwear purchases were from one manufacturer in
China utilizing many different factories during the years ended December 31,
2007 and December 31, 2006, respectively.

F-27

---



Kenneth Cole Productions,
Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 15 - Commitments and
Contingencies (continued)

C.
Concentrations
(continued)

Approximately 52% and 55% of Kenneth Cole Reactionladies footwear
purchases were sourced through two Chinese manufacturers during the years ended
December 31, 2007 and December 31, 2006, 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 Companys
production needs.

D. Lines of Credit Facilities

In
December 2006, the Company entered into a five-year senior unsecured revolving
credit facility (the Revolving Credit Facility), with various lenders, which
provides up to $100.0 million to finance working capital requirements and
letters of credit to finance the Companys inventory purchases. A portion of
the Revolving Credit Facility not in excess of $25.0 million shall be available
for the issuance of standby letters of credit. The full amount of the Revolving
Credit Facility shall be available for the issuance of commercial letters of
credit. The Revolving Credit Facility requires, among other things, that the
Company comply with a maximum leverage ratio and various covenants on
indebtedness, dissolutions, mergers, asset sales, pledges and changes in lines
of business, as defined. Failure by the Company to comply with these covenants
could reduce the borrowings available under the Revolving Credit Facility. If
an event of default occurs, borrowings and interest are payable immediately,
unless cured as defined, allowing borrowings to continue during the cure
period. Loans under the Revolving Credit Facility bear an interest rate equal
to the Alternate Base Rate (defined as the higher of the Prime Rate or the
Federal Funds Rate plus 0.5%) or the Adjusted LIBOR rate plus applicable margin
as defined within the agreement as elected by the Company. The Company incurs
facility fees of ten basis points on the face amount of the Revolving Credit
Facility. During 2007, the Company incurred facility fees of approximately
$100,000. There were no outstanding advances under this agreement at December 31,
2007 and 2006. Amounts available under the Revolving Credit Facility at
December 31, 2007 were reduced by $2,695,000 of standby and open letters of
credit. During 2007, the Company did not borrow under the Revolving Credit
Facility.

E. Other

On
April 17, 2007, a class action was filed in Superior Court for the State of
California, County of San Diego. The class action alleged that the Companys
policies and practices regarding the request of personal information during
credit card purchases violated California Civil Code Section 1747.08 (the
Song-Beverly Credit Card Act). On October 29, 2007, the parties participated in
mediation and reached an agreement in principle to settle the dispute. The
amounts reserved at December 31, 2007 were sufficient to cover the proposed
settlement preliminarily approved by the court on January 25, 2008. A hearing
on final approval is scheduled for March 21, 2008.

A
former store manager brought suit against the Company seeking back overtime pay
for time worked in the store in excess of forty hours per week. On appeal the
California Supreme Court ruled that amounts owed to employees for meal breaks
should be treated as wage claims subject to a three-year statute of
limitations. The Company has fully satisfied the judgment including attorneys
fees for the original trial. The plaintiff petitioned the court of appeals for
attorneys fees for the appellate proceedings, and the court of appeals
subsequently referred the petition back to the trial court. On October 3, 2007,
the trial court heard oral argument on the parties positions and made
preliminary

F-28

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 15 - Commitments and
Contingencies (continued)

E. Other (continued)

rulings. Based on those
rulings, the Company established a reserve in September 2007. The amounts
reserved at December 31, 2007 were sufficient to cover the judgment that was
settled and paid in January 2008.

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

Note 16 - Shareholders Equity

A. Common stock

Class
A Common Shareholders are entitled to one vote for each share held of record
and Class B Common Shareholders 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 Class A
Common Shareholders vote together with Class B Common Shareholders on all
matters subject to shareholder approval, except that Class A Common
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.

B.
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.

C. CommonStock Repurchase

In
2006, the Companys Board of Directors increased the authorization for the
Companys common stock repurchase plan by approximately 1,138,400 shares to an
aggregate of 5,388,400 of shares of Class A common stock. During 2007, the Company repurchased
1,008,000 of its shares at an aggregate price of $19.2 million and during 2006,
repurchased 300,000 of its shares at an aggregate price of $7.2 million. The
Company had 692,000 and 1,700,000 shares available for repurchase as of
December 31, 2007 and 2006, respectively.

Note 17 - Licensing Agreements

A.
Kenneth Cole and Reaction

In 2006, the Company amended its license
agreement with Paul Davril Inc. (PDI), which covered the manufacture and
distribution of mens and womens sportswear under the Kenneth Cole New York
trademark and mens sportswear under the Kenneth Cole Reaction trademark. The
amended agreement allows the Company to assume control of its Kenneth Cole
New York sportswear categories in 2007. In January 2007, the Company
reached an agreement with PDI to end its license agreement at the end of 2007
and assume control over its Kenneth Cole Reactionsportswear business
in 2007.

F-29

---



Kenneth Cole
Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 17 - Licensing Agreements (continued)

B. Le Tigre

In
conjunction with the purchase of the Le Tigre trademark, as described in Note
6, Intangible Assets, the Company entered into a license agreement with Le
Tigre, LLC (the Seller) to continue manufacturing and selling sportswear
under the Le
Tigrebrand. During January 2008, the Company announced an agreement
with JCPenney to launch sportswear under the Le Tigre brand with possible
expansion into other categories effectively ending the aforementioned license
agreement with the former Seller of the trademark.

Note 18 - Related Party
Transactions

The
Company has an exclusive license agreement with Iconix Brand Group, Inc., and
its trademark holding company, IP Holdings, LLC (Iconix), to use the Bongo
trademark in connection with worldwide manufacture, sale and distribution of
womens, mens and childrens footwear. The Chief Executive Officer and
Chairman of Iconix is the brother of the Companys Chief Executive Officer and
Chairman. The term of the agreement is through December 31, 2010. Management
believes that the license agreement with Iconix was entered into at
arms-length. During these periods, the Company is obligated to pay Iconix a
percentage of net sales based upon the terms of the agreement. The Company
recorded approximately $1,083,000 and $1,400,000 in aggregate royalty and
advertising expense under the agreement for the years ended December 31, 2007
and December 31, 2006, respectively.

During
2007, the Company recorded expenses of approximately $510,000 and $515,000 for
the years ended December 31, 2007 and 2006 to a third-party aviation company
which hires and uses an aircraft partially owned by Emack LLC, a company which
is wholly-owned by the Companys Chief Executive Officer and Chairman.
Management believes that all transactions were made on terms and conditions
similar to or more favorable than those available in the marketplace from
unrelated parties.

Note 19 - New Accounting
Pronouncements

In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements
(SFAS 157), which addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles. The FASB believes that the new standard
will make the measurement of fair value more consistent and comparable and
improve disclosures about those measures. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. In February 2008, the FASB deferred
the effective date of SFAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. The Company adopted the
provisions on January 1, 2008, and has determined that it will not have a
material impact on the Companys consolidated financial statements.

In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including an amendment
of FASB Statement
No.115 (SFAS 159). SFAS 159 allows entities to choose,
at
specified election dates, to measure eligible financial assets and liabilities
at fair value in situations in which they are not otherwise required to be
measured at fair value. If a company elects the fair value option for an
eligible item, changes in that items fair value in subsequent reporting
periods must be recognized in current period earnings. SFAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes
for similar assets and liabilities. The Company adopted the provisions

F-30

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Kenneth
Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 19 - New Accounting
Pronouncements (continued)

on January 1, 2008, and has determined that it will
not have a material impact on the Companys consolidated financial statements.

In
December 2007, the FASB issued FASB Statement No. 141 (R), Business Combinations (SFAS
141R). SFAS 141R requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS 141R is effective for
all business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008. The Company is currently evaluating the
requirements and impact of FAS 141R on the Companys consolidated financial
statements.

In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51 (SFAS 160). SFAS 160 clarifies that a noncontrolling
interest in a subsidiary should be reported as equity in the consolidated
financial statements. The calculation
of earnings per share will continue to be based on income amounts attributable
to the parent. SFAS 160 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The Company is
currently evaluating the requirements and impact of SFAS 160 on the Companys
consolidated financial statements.

Note 20- Quarterly Financial Data
(Unaudited)

Summarized
quarterly financial data for 2007 and 2006 appear below (in thousands, except
per share and dividend data):

|                           |  |              |         |               |   |              |  |               |         |  |   |         |  
|-------------------------- |  | ------------ | ------- | ------------- | - | ------------ |  | ------------- | ------- |  | - | ------- | -
|                           |  | FirstQuarter |         | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |        
|                           |  |              |         |               |   |              |  |               |        
|2007                       |  |              |         |               |   |              |  |               |         |  |   |         |  
|Net sales                  |  | $            | 119,868 |               | $ | 108,337      |  | $             | 118,644 |  | $ | 119,556 |  
|Royalty revenue            |  |              | 9,470   |               |   | 10,612       |  |               | 11,669  |  |   | 12,564  |  
|Net revenues               |  |              | 129,338 |               |   | 118,949      |  |               | 130,313 |  |   | 132,120 |  
|Gross profit               |  |              | 52,554  |               |   | 52,725       |  |               | 57,851  |  |   | 60,182  |  
|Operating income/(loss)    |  |              | 4,333   |               |   | 3,819        |  |               | 4,057   |  |   | (7,324  | )
|Net income                 |  |              | 3,440   |               |   | 3,304        |  |               | 3,433   |  |   | (3,094  | )
|Earnings per share basic   |  | $            | 0.17    |               | $ | 0.16         |  | $             | 0.17    |  | $ | (0.16   | )
|Earnings per share diluted |  | $            | 0.17    |               | $ | 0.16         |  | $             | 0.17    |  | $ | (0.16   | )
|Dividends declared         |  | $            | 0.18    |               | $ | 0.18         |  | $             | 0.18    |  | $ | 0.18    |  
|                           |  |              |         |               |   |              |  |               |         |  |   |         |  
|2006                       |  |              |         |               |   |              |  |               |         |  |   |         |  
|Net sales                  |  | $            | 112,201 |               | $ | 124,877      |  | $             | 132,839 |  | $ | 122,365 |  
|Royalty revenue            |  |              | 10,374  |               |   | 10,384       |  |               | 10,850  |  |   | 12,609  |  
|Net revenues               |  |              | 122,575 |               |   | 135,261      |  |               | 143,689 |  |   | 134,974 |  
|Gross profit               |  |              | 51,297  |               |   | 56,736       |  |               | 62,372  |  |   | 61,422  |  
|Operating income           |  |              | 3,650   |               |   | 8,145        |  |               | 13,622  |  |   | 11,571  |  
|Net income                 |  |              | 3,064   |               |   | 6,487        |  |               | 9,220   |  |   | 7,994   |  
|Earnings per share basic   |  | $            | 0.15    |               | $ | 0.32         |  | $             | 0.46    |  | $ | 0.40    |  
|Earnings per share diluted |  | $            | 0.15    |               | $ | 0.32         |  | $             | 0.45    |  | $ | 0.39    |  
|Dividends declared         |  | $            | 0.18    |               | $ | 0.18         |  | $             | 0.18    |  | $ | 0.18    |  

F-31

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Kenneth
Cole Productions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 21- Subsequent Events

On
March 3, 2008, the Board of Directors declared a quarterly cash dividend of
$0.09 per share payable on March 28, 2008 to shareholders of record at the
close of business on March 14, 2008.

Also, on
March 3, 2008, the Board of Directors approved a four million share increase to
the Companys authorized stock buyback plan.

F-32

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Kenneth Cole Productions, Inc.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2007, 2006, and 2005

|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|---------------------------------------- |  | - | -------------------------------- | - | - | ------------------------------- | - | - | ---------- |  | - | -------------------------- | -
|Description                              |  |   | Balance at
 Beginning
 of Period |   |   | Charged to
 Costs and
 Expenses |   |   | Deductions |  |   | Balance
 at End
 of Period |  
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Year ended December 31, 2007             |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Allowance for doubtful accounts          |  | $ | (249,000                         | ) | $ | (188,000                        | ) | $ | 207,000    |  | $ | (230,000                   | )
|Reserve for returns and sales allowances |  | $ | (8,956,000                       | ) | $ | (24,910,000                     | ) | $ | 23,310,000 |  | $ | (10,556,000                | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|                                         |  | $ | (9,205.000                       | ) | $ | (25,098,000                     | ) | $ | 23,517,000 |  | $ | (10,786.000                | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Year ended December 31, 2006             |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Allowance for doubtful accounts          |  | $ | (298,000                         | ) | $ | (211,000                        | ) | $ | 260,000    |  | $ | (249,000                   | )
|Reserve for returns and sales allowances |  | $ | (8,068,000                       | ) | $ | (18,735,000                     | ) | $ | 17,847,000 |  | $ | (8,956,000                 | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|                                         |  | $ | (8,366,000                       | ) | $ | (18,946,000                     | ) | $ | 18,107,000 |  | $ | (9,205,000                 | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Year ended December 31, 2005             |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|Allowance for doubtful accounts          |  | $ | (302,000                         | ) | $ | (290,000                        | ) | $ | 294,000    |  | $ | (298,000                   | )
|Reserve for returns and sales allowances |  | $ | (8,377,000                       | ) | $ | (20,064,000                     | ) | $ | 20,373,000 |  | $ | (8,068,000                 | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  
|                                         |  | $ | (8,679,000                       | ) | $ | (20,354,000                     | ) | $ | 20,667,000 |  | $ | (8,366,000                 | )
|                                         |  |   |                                  |   |   |                                 |   |   |            |  |   |                            |  

---



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                 
| | Chief
  Executive Officer       
| |                                 
| | Date: March 7, 2008             

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.

|                       |  |                                                   |  |              
|---------------------- |  | ------------------------------------------------- |  | -------------
|Signature              |  | Title                                             |  | Date         
|                       |  |                                                   |  |              
|/s/ KENNETH D. COLE    |  | Chief Executive Officer and Chairman of the Board |  | March 7, 2008
|                       |  |                                                   |  |              
|Kenneth D. Cole        |  |                                                   |  |              
|                       |  |                                                   |  |              
|/s/ DAVID P. EDELMAN   |  | Chief Financial Officer                           |  | March 7, 2008
|                       |  |                                                   |  |              
|David P. Edelman       |  |                                                   |  |              
|                       |  |                                                   |  |              
|/s/ ROBERT C. GRAYSON  |  | Director                                          |  | March 7, 2008
|                       |  |                                                   |  |              
|Robert  C. Grayson     |  |                                                   |  |              
|                       |  |                                                   |  |              
|/s/ DENIS F. KELLY     |  | Director                                          |  | March 7, 2008
|                       |  |                                                   |  |              
|Denis F. Kelly         |  |                                                   |  |              
|                       |  |                                                   |  |              
|/s/ PHILIP R. PELLER   |  | Director                                          |  | March 7, 2008
|                       |  |                                                   |  |              
|Philip R. Peller       |  |                                                   |  |              
|                       |  |                                                   |  |              
|/s/ MARTIN E. FRANKLIN |  | Director                                          |  | March 7, 2008
|                       |  |                                                   |  |              
|Martin E. Franklin     |  |                                                   |  |              

---