**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


**(Mark
      One)**


**x 
ANNUAL
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





**For
      the fiscal year ended December 31, 2006**


**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.
                EmployerIncorporation
                or Organization)
            Identification
                Number)





**603
      West 50th Street, New York, NY 10019**


(Address
      of Principal Executive Offices)





**(212)
      265-1500**


Registrant’s
      telephone number





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


**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
      by
      Rule 405 of the Securities Act. Yes ( ) 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 ( ) 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 (  )





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. ( )




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.




Large
      accelerated filer (  )   Accelerated filer
      (X)   Non-accelerated filer (  )





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





The
      aggregate market value of voting and non-voting stock held by nonaffiliates
      of
      the registrant as of the close of business on June 30, 2006:
      $261,952,582





Number
      of shares of Class A Common Stock, $.01 par value, outstanding as of the close
      of business on February
      23, 2007: 12,016,407




Number of shares of Class B Common Stock, $.01 par value, outstanding as of
      the
      close of business on February
      23, 2007: 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 May 1, 2007.**











**Kenneth
      Cole Productions, Inc.**




**TABLE
      OF CONTENTS**





**Page****PART
                I****Item
                1**
            **Business**
            **2****Item
                1A**
            **Risk
                Factors**
            **17****Item
                1B**
            **Unresolved
                Staff Comments**
            **22****Item
                2**
            **Properties**
            **22****Item
                3**
            **Legal
                Proceedings**
            **22****Item
                4**
            **Submission
                of Matters to a Vote of Security Holders**
            **23****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**
            **36****Item
                9**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**
            **36****Item
                9A**
            **Controls
                and Procedures**
            **36****Item
                9B**
            **Other
                Information**
            **37****PART
                III****Item
                10**
            **Directors,
                Executive Officers and Corporate Governance**
            **37****Item
                11**
            **Executive
                Compensation**
            **37****Item
                12**
            **Security
                Ownership of Certain Beneficial Owners and Management And Related
                Stockholder Matters**
            **37****Item
                13**
            **Certain
                Relationships and Related Transactions, and Director
                Independence**
            **37****Item
                14**
            **Principal
                Accounting Fees and Services**
            **37****PART
                IV****Item
                15**
            **Exhibits,
                Financial Statement Schedules**
            **37**





**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,* and *Tribeca* brand
      names. In addition, the Company, through a license agreement, has the rights
      to
      use the *Bongo* trademark for footwear, as well as *Gentle
      Souls* for
      footwear under a proprietary trademark. 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 more than 6,000 department and specialty store
      locations, as well as through its Consumer Direct business, which includes
      a
      base of retail and Company Stores (formerly “outlet stores”), consumer catalogs
      and websites, including online e-commerce. 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





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. The Company offers
      through these agreements a lifestyle collection of men’s product categories,
      including tailored clothing, dress shirts, dress pants, sportswear, neckwear,
      briefcases, portfolios, jewelry, fragrance, belts, leather and fabric outerwear,
      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 its home collection and boys’ and girls’ apparel
      under the *Kenneth
      Cole Reaction* brand
      and
      several categories under the *Unlisted* brand,
      which further broadens the *Kenneth
      Cole* lifestyle collection.





**Business
      Growth Strategies**





The
      Company’s strategy is to continue to build upon the strength of its lifestyle
      brand franchise, which is comprised of well-differentiated and distinct brands
      including *Kenneth
      Cole New York* , *Kenneth Cole Reaction, Unlisted* ,
      and *Tribeca.* The
      Company is continuing its strategic initiative to elevate its brands. 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 at 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 and the repositioning of its brands through elevation
      of
      its products has given the Company the ability to reach other distribution
      tiers
      and new customers. The Company believes it is in a better 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. The Company believes its strategic initiatives in continuing
      to
      elevate the *Kenneth
      Cole New York* brand as
      an accessible luxury brand will take the Company to its next stage of
      development, 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 catalogs and 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
      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 our 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. Towards the end of 2006, the Company separated the merchandising
      and
      support functions between the Company’s Company Stores and its full-priced
      retail stores, which may lead to weeding out of unproductive 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 was to eliminate the use of the Company’s Company Stores as clearance
      centers. This improved the Company’s presentation, margins, and resulted in
      positive Company Store comparative store sales in the second half of 2006.
      In
      addition, the Company is further 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. As part of management
      changes, the Company hired a *Kenneth
      Cole New York* brand
      President and a President of the Company’s Company Stores during 2006. The
      Company believes it has both the right strategy and leadership to lead the
      effort toward better retail performance.





As
      of
      December 31, 2006, the Company operated 94 full-priced retail and Company Stores
      as compared with 92 stores as of December 31, 2005.


3


The
      Company believes the *Kenneth
      Cole* model
      provides significant growth potential. The brand enjoys strong consumer support
      as evidenced by expansion of the Company’s licensee product categories within
      the brand, a strong retail presence and improving wholesale operations. The
      Company continues to analyze the *Kenneth
      Cole Reaction* brand
      model for further growth potential within its licensing and wholesale product
      categories as the brand is repositioned throughout all of its distribution
      channels.





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 a new distribution channel, build brand
      equity, fortify image, increase consumer awareness, improve customer service,
      provide entertainment and promote support for causes the Company believes are
      important to its customers. The Company has strengths in its existing
      capabilities in customer service, including telemarketing, merchandising,
      catalog, fulfillment and e-commerce. However, the Company is exploring other
      alternatives including outsourcing some or all of these modules.





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 and customer service departments
      regularly interact with its existing and new consumers online.





**Licensing.** The
      strength of the Company’s largest brands, *Kenneth
      Cole New York,*  *Kenneth
      Cole Reaction,* and *Unlisted,* 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. As part of the Company’s brand elevation
      strategy, the Company signed an agreement in 2005 with Bernard Chaus, Inc.
      to
      distribute women’s *Kenneth
      Cole Reaction* apparel.
      Also, 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 to assuming control
      of
      its *Kenneth
      Cole New York* sportswear categories in early 2007 and *Kenneth
      Cole Reaction* by
      the
      end of 2007.





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 2005, the
      Company introduced *Kenneth
      Cole Reaction* fragrance for women, as well as *Kenneth
      Cole Signature* for men.
      In 2006, the Company 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 2006, the Company’s licensees opened 11 new retail stores within
      international markets including Israel, Taiwan, and the Gulf Region, as well
      as
      wholesale accounts throughout Latin America.





The
      Company’s brands are currently licensed for a range of products consistent with
      the Company’s image (see “Licensing” in Item 1).


4





**Products**





The
      Company markets its products principally under its *Kenneth
      Cole New York, Kenneth Cole Reaction,*  *Unlisted* and *Tribeca* 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.





*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. The Company is in the midst of a
      strategic initiative to elevate its brands. 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
      $450. 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 Italian 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 $500. 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 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 $50 to $200.


5





*Kenneth
      Cole Reaction* children’s
      footwear, primarily manufactured in China, includes dress and casual footwear
      sold at price points ranging from $30 to $55 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* 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 $250.  The line is limited to five to ten styles that are
      manufactured with high quality leather around an exclusive comfort
      technology.  The product line was launched for Spring 2007.





*Unlisted*





*Unlisted* products
      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, 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. *Unlisted* men’s
      footwear appeals to a broader young men’s market with shoes that range at retail
      price points from $60 to $80.





*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.





*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.





**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:


6








Year
                Ended
              December
                312006
            
            2005
            
            2004Wholesale
            
            
            59
            %
            
            55
            %
            
            54
            %Consumer
                Direct
            
            
            33
            
            
            37
            
            
            38Licensing
            
            
            8
            
            
            8
            
            
            8Total
            
            
            100
            %
            
            100
            %
            
            100
            %





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





**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 believes its investment in account specialists to support the sales
      function is essential to the maintenance and growth of its wholesale businesses.





The
      Company's products are distributed to more than 1,700 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 the Company’s 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, Western Europe, parts of Asia, the Middle East, Latin America and
      parts of South America and the Caribbean through leasing agreements.





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,* and *Unlisted* 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 *Tribeca* and *Bongo* footwear
      brands.





7


**Consumer
      Direct Operations**





*Retail
      Operations*





The
      Company continues to pursue opportunities to enhance and strengthen its retail
      operations. At December 31, 2006, the Company operated 54 *Kenneth
      Cole New York* full-priced ** retail
      stores and 40 Company Stores under the *Kenneth
      Cole*  *New
      York* name. In
      2006, the Company separated the merchandising and support functions between
      the
      Company’s Company Stores and its full-priced retail stores, which may lead to
      weeding out of unproductive 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 was to eliminate the use of the
      Company’s Company Stores as clearance centers and increase the amount
      specifically made for Company Store. In addition, the Company continues to
      control inventory levels and is adjusting product mix to incorporate a wider
      range of price points, and is evaluating its real estate portfolio.





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 retail stores and wholesale customers. The Company
      opened two full-priced retail stores and closed one store in 2006. As the
      Company evaluates its real estate portfolio, it is reviewing new store locations
      for the later half of 2007 and looking for opportunities to weed out
      unproductive stores.





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.





*Catalog,
      Website and Customer Service*





The
      Company produces consumer catalogs and mailers that feature a variety of *Kenneth
      Cole New York* and *Kenneth
      Cole Reaction* branded
      products. The catalog order-taking process is performed in-house and the
      fulfillment is performed by a third-party distribution center in New Jersey.





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.





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.


8





**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 size 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. 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 continues to elevate the quality, style and price of the *Kenneth
      Cole New York* brand
      through tailored clothing, watches, dress shirts, sportswear and outerwear.
      This
      is an important step in further defining *Kenneth
      Cole*  *New
      York* as
      an
      accessible premier luxury lifestyle brand. The Company continues to grow the *Kenneth
      Cole Reaction* brand
      across expanding products and markets and elevate the brand throughout the
      Company’s distribution channels. 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.





The
      following table summarizes the Company’s product categories under its licensing
      agreements at the end of 2006:





*Kenneth
                Cole*
            *Kenneth
                Cole**Product
                Category*
            *New
                York*
            *Reaction*
            *Unlisted*Men’s
                Tailored Clothing
            X
            X
            XMen’s
                Sportswear
            X
            XMen’s
                Neckwear
            X
            X
            XMen’s
                Dress Shirts
            X
            X
            XMen’s
                Casual Pants
            X
            XMen’s
                Leather & Fabric Outerwear
            X
            XMen’s
                Small Leather Goods
            X
            X
            XMen’s
                Belts
            X
            X
            XMen’s
                Coldweather
            X
            XMen’s
                Socks
            X
            XWomen’s
                Sportswear
            X
            XWomen’s
                Small Leather Goods
            
            X
            XWomen’s
                Leather & Fabric Outerwear
            X
            XWomen’s
                Scarves & Wraps
            X
            XMen’s/Women’s
                Jewelry
            X
            X
            XMen’s/Women’s
                Swimwear
            X
            X
            XMen’s/Women’s
                Watches
            X
            X
            XMen’s/Women’s
                Optical Frames
            X
            XMen’s/Women’s
                Luggage/Briefcases
            X
            XMen’s/Women’s
                Sunglasses
            X
            X
            XMen’s/Women’s
                Fragrances
            X
            X
            XMen’s/Women’s
                Sleepwear
            
            
            XChildren’s
                Apparel
            
            X
            XHome
                Collection
            
            X





All
      of
      the Company’s licensees 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.


9





*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 sun and prescription eyewear.





The
      Company’s continued focus on the Asian market included its licensee opening
      three freestanding stores in Taiwan, as well as shop-in-shops and freestanding
      stores in the Philippines through the Company’s Philippine licensee. The Company
      also maintains agreements for the wholesale distribution of handbags, women’s
      small leather goods, men’s sportswear, and men’s and women’s footwear in
      Australia. In addition, the Company also expanded into the Israeli market in
      2006 with two freestanding stores and six shop-in-shops, while its Gulf Region
      licensee continued to operate six freestanding stores in 2006 with plans to
      open
      four additional stores in 2007.





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 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 27 stores in
      this region. The Company has successfully converted the majority of stores
      in
      this region to *Kenneth
      Cole*  *Reaction* stores
      and maintains three *Kenneth
      Cole New York* stores
      in Mexico City.




In
      Europe, the Company’s licensee operates a store in London and sells footwear,
      luggage, small leather goods, and handbags to department stores within the
      United Kingdom. The Company expects to expand into Germany through direct
      distribution of its footwear and handbag businesses, while continuing to explore
      opportunities in the European market, as well as new markets throughout the
      world. It also sells footwear through footwear agents in Greece and
      Turkey.





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 3-4% of its total brand sales internationally, including
      sales from licensees, and believes it can ultimately achieve a level of 20
      to
      25%.





**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.


10


**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 opened an office in China 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 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 46% of total handbag purchases came from two manufacturers in
      China during the years ended December 31, 2006 and 2005. Approximately 39%
      and
      21% 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, 2006 and December 31, 2005,
      respectively. In addition, approximately 55% of *Kenneth
      Cole Reaction* ladies’
      footwear purchases were sourced through two Chinese manufacturers during the
      year ended December 31, 2006, and 44% were purchased from one Chinese
      manufacturer during the year ended December 31, 2005. 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 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 places 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,
      Harper’s Bazaar,*  *GQ,
      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.


11





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 fixturing, 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.





**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 of America 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 also
      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”) to implement an
      integrated business platform, using SAP software products, across the Company’s
      retail and Company Stores. The estimated expenditures related to the SAP retail
      implementation are expected to be approximately $10 million over the term of
      the
      contract. However, any failure by the Company to continue to upgrade its
      management information systems necessary to support growth or expansion, which
      could arise either with its internal systems or systems of its third parties,
      could have a material adverse effect on the Company’s financial condition and
      its results of operations (See Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”).


12





**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. 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
      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 routinely enters
      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 (see Item 7, “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations”).





**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 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.





13


**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 2006 and 2005, 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 43.9% and
      39.2% of the Company’s net sales for the years ended December 31, 2006 and 2005,
      respectively. While the Company believes that purchasing decisions have
      generally been made independently by each division within a 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 of $77.3 million and $73.7
      million at February 27, 2007 and February 28, 2006, 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, 2006, the Company had approximately 1,900 employees (which includes
      1,000 part-time employees), none of whom are covered under a collective
      bargaining agreement. The Company considers its relationship with its employees
      to be satisfactory. The Company had a collective bargaining agreement, which
      expired in April 2004, at which time it outsourced its distribution operation
      and closed its New Jersey distribution center. Prior to that, the Company
      utilized a local affiliate of the International Leather Goods, Plastics,
      Handbags and Novelty Workers’ Union, Local 1, Division of Local 342-50 United
      Food and Commercial Workers Union. In connection with this transition in 2004,
      the Company incurred approximately $1.1 million in aggregate costs, including
      severance, the write-off of unamortized leasehold improvements and moving costs
      during 2004. These costs were expensed as incurred in accordance with SFAS
      No.
      146 *"Accounting
      for Costs Associated with Exit or Disposal Activity"* within
      the Selling, general and administrative expenses caption on the face of the
      Consolidated Statement of Income.





**Directors
      and Executive Officers**








Name
            Age
            Present
                PositionKenneth
                D. Cole
            52
            Chief
                Executive Officer, Chairman of the Board of DirectorsJoel
                Newman
            65
            Vice
                Chairman and Chief Operating OfficerDavid
                P. Edelman
            45
            Chief
                Financial OfficerMichael
                F. Colosi
            41
            Corporate
                Vice President and General Counsel and SecretaryDoug
                Jakubowski
            43
            President,*Kenneth
                Cole**Reaction*BrandJoshua
                Schulman
            35
            President,*Kenneth
                Cole**New
                York*BrandMichael
                DeVirgilio
            38
            Executive
                Vice President, Business DevelopmentRichard
                S. Olicker
            49
            Executive
                Vice President, WholesaleKyle
                Andrew
            40
            Senior
                Vice President, Marketing and AdvertisingHarry
                Kubetz
            53
            Senior
                Vice President, OperationsHenrik
                Madsen
            40
            Senior
                Vice President, International OperationsLinda
                Nash Merker
            50
            Senior
                Vice President, Human ResourcesMartin
                E. Franklin
            42
            DirectorRobert
                C. Grayson
            62
            DirectorDenis
                F. Kelly
            57
            DirectorPhilip
                R. Peller
            67
            Director





14





*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.





*Joel
      Newman* joined
      the Company as Chief Operating Officer in February 2006. Prior to joining the
      Company, he held the positions of Chief
      Operating Officer of Tommy Hilfiger U.S.A., Inc., a subsidiary of Tommy Hilfiger
      Corporation, Inc., and Executive Vice President of Finance and Operations of
      Tommy Hilfiger Corporation, Inc., its parent company. Prior to joining Tommy
      Hilfiger U.S.A., Inc., Mr. Newman held various senior operations and financial
      positions with major companies in the apparel wholesale and retail
      industries.





*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.





*Michael
      F. Colosi* has
      served as Corporate Vice President and General Counsel for the Company since
      July 2000 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 the *Kenneth
      Cole Reaction* brand
      since November 2006. He preveiously served as 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 the
      positions of Vice President of Sales and Marketing at International News, and
      Director of Marketing and Sales at Koral Industries.





*Joshua
      Schulman* joined
      the Company as President of the Kenneth Cole New York brand in October 2006.
      He
      previously served at Gap Inc. where he concurrently held two roles as Managing
      Director/International Strategic Alliances for Gap Inc. and Senior Vice
      President/International Product Development and Merchandising for Gap Brand.
      Prior to serving at the Gap Inc., Mr. Schulman spent seven years at Gucci Group,
      first as Worldwide Director/Women's Ready to Wear for the Gucci brand and then
      as Executive Vice President/ Worldwide Merchandising and Wholesale for the
      Yves
      Saint Laurent brand.





*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).


15





*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 and
      Advertising. ** 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., Kyle worked on the agency side
      at
      various companies, including Arnell Group, Toth and Select
      Communications.





*Harry
      Kubetz* has
      served as Senior Vice President of Operations since joining the Company in
      April
      1996. Mr. Kubetz was President of “No Fear” Footwear, Inc. from 1994 until 1996.
      From 1992 until 1994, Mr. Kubetz was Executive Vice President of Asco General
      Supplies, a wholly owned subsidiary of Pentland, PLC.





*Henrik
      Madsen* joined
      the Company as Senior Vice President and General Manager of International
      Operations in January 2006. Prior to joining the Company, Mr. Madsen served
      as
      Chief Executive Officer and President of Kasper Europe Ltd., a subsidiary of
      Jones Apparel Group. Mr. Madsen has over 14 years of experience in the
      international fashion industry, including senior management roles under the
      IPI
      Spa. (Prada Group) and French Connection Ltd.





*Linda
      Nash Merker* joined
      the Company as Senior Vice President of Human Resources in May of 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 of which was Vice
      President of Human Resources - Merchandise Recruitment and
      Development.





*Martin
      E. Franklin* has
      served as the Chairman and Chief Executive Officer of Jarden Corporation since
      September 2001. He also serves as the Chairman of Freedom Acquisition Holdings,
      Inc. since December 2006. 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
      a
      partner in Berglass-Grayson, a management consulting and executive search firm.
      From 1992 to 1996, Mr. Grayson served initially as 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 Ann Taylor Corporation, Lillian August
      Inc., Urban Brands, and Know Fat.





*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.


16





**Available
      Information**





The
      Company files its annual, quarterly and current reports and other information
      with the Securities and Exchange Commission. 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 Securities and Exchange Commission. 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 our Corporate Governance Guidelines, charters of various committees
      of
      our Board of Directors and our Code of Business Conduct and Ethics applicable
      to
      our employees, officers and directors. A printed copy of our Corporate
      Governance Guidelines and our 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 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 introduce 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.


17





*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 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.





*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.





18


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 87% of the voting power and approximately
      42%
      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 manufactures may be adversely effected by
      addition 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 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,
      dis tri bution
      and sale of various
      products and intend 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.


19





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 catagories
      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 intends to assume greater control over sportswear
      collections*





As
      previously announced, the Company has reached agreement to end its license
      agreement for *Kenneth
      Cole New York* and *Kenneth
      Cole Reaction* men’s
      sportswear and *Kenneth
      Cole New York* women’s
      sportswear. The Company is creating a wholesale apparel division to design
      source and market these products, though the Company is also simultaneously
      considering proposals to enter into a strategic licensing agreement or similar
      venture with a new partner or partners for all or some of these products. In
      addition to all of the risk factors listed in this section, the new wholesale
      apparel division will be a new business for the Company 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
      clasifications, 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 in California and
      New
      Jersey. Any events 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 damage a portion
      of
      the Company’s inventory or impair its ability to use its warehousing and
      distribution facilities.





*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 devotes 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.


20





*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 will continue to implement the SAP information management
      software in its retail operations and consider further expansion 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.





*Sea* *sonality
      of the Company’s business and the timing of new store openings 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.





*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.





*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: (1) the identification and availability of suitable locations and leases;
      (2) the availability of suitable financing to the Company and its landlords;
      (3)
      the timing of the delivery of the leased premises to the Company from its
      landlords in order to commence build-out construction activities; (4) 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; (5) the Company’s ability to manage the construction and
      development costs of new stores, and the availability and/or cost of raw
      materials; (6) the rectification of any unforeseen engineering or environmental
      problems with the leased premises; (7) adverse weather during the construction
      period; and (8) 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.


21





*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.





**Item
      1B. Unresolved Staff Comments**





None.





**Item
      2.**  **Properties**





In
      June
      2006, the Company finalized the purchase of its corporate headquarters building,
      for a purchase price of approximately $24 million. The Company currently
      occupies 119,500 square feet and is located at 603 West 50 th Street,
      New York, New York. The Company held a lease for its former executive offices
      and showrooms, which expired in December 2006, and was under a subtenant lease
      agreement, which also expired in December 2006.





In
      2004,
      the Company entered into a new 10-year lease for 51,000 square feet of office
      space in Secaucus, New Jersey for its administrative offices and completed
      the
      move in June 2004. The former distribution facility was moved to a third-party
      public warehouse and distribution center in New Jersey. 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 China in 2005. The Company does not own
      or
      operate any manufacturing facilities.





As
      of
      December 31, 2006, the Company leased space for all of its 54 full-priced retail
      stores (aggregating approximately 253,000 square feet) and 40 Company Stores
      (aggregating approximately 204,000 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**





In
      April
      2005, a purported class action lawsuit was filed against the Company in the
      Superior Court of California for the County of San Diego.  The individual
      plaintiff was a floor supervisor in one of the Company’s retail stores who
      purported to bring suit on behalf of himself and other similarly situated
      current and former floor supervisors.  Among other claims, the plaintiff
      alleged that he and other floor supervisors worked hours for which they were
      entitled to receive, but did not receive, overtime compensation under California
      law.  The lawsuit sought damages, penalties, restitution, equitable relief,
      interest and attorneys’ fees and costs.  In September 2006, counsel for the
      plaintiffs agreed to dismiss the purported class action.  In October 2006,
      the individual plaintiff and the Company executed a settlement agreement, for
      a
      nominal amount, for his individual claims and the Court entered final judgment
      in the case, which settlement included Plaintiff’s attorneys’ fees as well as
      court costs. All amounts due under the final judgment have now been paid and
      the
      period for any appeal has now been exhausted. The settlement did not have a
      material impact on the Company’s financial statements.





In
      September 2004, a purported class action lawsuit was filed against the Company
      in the Superior Court of California for the County of Los Angeles.  The
      individual plaintiffs were current or former store managers or assistant
      managers who brought a suit on behalf of themselves and other similarly situated
      store managers and assistant managers.  Among other claims, the plaintiffs
      alleged that they worked hours for which they were entitled to receive, but
      did
      not receive, overtime compensation under California law.  The lawsuit
      sought damages, penalties, restitution, reclassification and attorneys’ fees and
      costs.  In January 2006, the Company reached an agreement in principle to
      settle the matter, and the parties filed a fully executed Stipulation of Class
      Settlement and Release.  In June 2006, the Court entered final judgment in
      the case, which settlement included the plaintiffs’ attorneys’ fees as well as
      court and claims administration costs.  All amounts due under the final
      judgment have now been paid and the period for any appeal has now been
      exhausted.  The settlement did not have a material impact on the Company’s
      financial statements.


22





In
      July
      2006, an Italian footwear manufacturer served the Company with a complaint
      claiming that the Company is selling certain styles of footwear that infringe
      on
      its patents.  The complaint seeks unspecified monetary relief and an
      injunction to prohibit the Company from selling allegedly infringing
      shoes.  In December 2006, the Company entered into a settlement agreement
      which resulted in an order from the Federal Court of the Southern District
      of
      New York for dismissal on January 17, 2007. The settlement did not have a
      material impact on the Company’s financial statements.





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.





**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 23, 2007 the closing sale price
      for the Class A Common Stock was $23.95. The following table sets forth the
      high
      and low closing sale prices for the Class A Common Stock for each quarterly
      period for 2006 and 2005, as reported on the NYSE Composite Tape:





**2006:**
            **High**
            **Low**First
                Quarter
            28.52
            25.47Second
                Quarter
            28.56
            22.33Third
                Quarter
            25.52
            22.07Fourth
                Quarter
            26.60
            22.97**2005:**
            **High**
            **Low**First
                Quarter
            31.30
            25.90Second
                Quarter
            32.32
            28.09Third
                Quarter
            35.29
            26.30Fourth
                Quarter
            29.60
            23.81








The
      number of shareholders of record of the Company’s Class A Common Stock on
      February 23, 2007 was 74.





There
      were 8 holders of record of the Company’s Class B Common Stock on February 23,
      2007. There is no established public trading market for the Company’s Class B
      Common Stock.





The
      Company did not repurchase any shares of its own stock during the fourth quarter
      of 2006.





**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.


23





The
      Company established a quarterly dividend policy in 2003 and made the following
      dividend payments to shareholders on record as of the close of business on
      the
      dates noted during the fiscal years ended December 31, 2006 and December 31,
      2005:





$0.18
                per share
            November
                22, 2006$0.18
                per share
            August
                25, 2006$0.18
                per share
            May
                23, 2006$0.18
                per share
            March
                9, 2006$0.18
                per share
            November
                23, 2005$0.16
                per share
            August
                25, 2005$0.16
                per share
            May
                24, 2005$0.16
                per share
            March
                9, 2005




On
      February 21, 2007, the Board of Directors declared a quarterly cash dividend
      of
      $0.18 per share, payable on March 23, 2007, to shareholders of record at the
      close of business on March 8, 2007.





The
      Company had the following securities authorized for issuance under equity
      compensation plans as of December 31, 2006:





Plan
                Category
            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
                securitie
              reflected
                in column (a))(a)
            (b)
            (c)Equity
                compensation plans approved by security holders
            2,118,885
            $23.60
            1,314,881Equity
                compensation plans not approved by security holders
            N/A
            N/A
            N/A














24






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, 2001 and ending on December 31, 2006 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, 2001 in the Class A Common Stock in the foregoing indices and assumes
        the
        reinvestment of dividends.





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.





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





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Income
                Statement Data:**Net
                sales
            
            **$**
            **492,282**
            
            $
            474,060
            
            $
            473,438
            
            $
            430,101
            
            $
            404,336Royalty
                revenue
            
            
            **44,217**
            
            
            43,983
            
            
            42,763
            
            
            38,252
            
            
            28,713Net
                revenue
            
            
            **536,499**
            
            
            518,043
            
            
            516,201
            
            
            468,353
            
            
            433,049Cost
                of goods sold
            
            
            **304,672**
            
            
            283,727
            
            
            284,817
            
            
            258,457
            
            
            235,255Gross
                profit (2)
            
            
            **231,827**
            
            
            234,316
            
            
            231,384
            
            
            209,896
            
            
            197,794Selling
                and general administrativeexpenses
                (1)
            
            
            **194,718**
            
            
            188,953
            
            
            174,519
            
            
            157,824
            
            
            152,618Impairment
                of long-lived assets
            
            
            **121**
            
            
            --
            
            
            448
            
            
            1,153
            
            
            4,446Operating
                income
            
            
            **36,988**
            
            
            45,363
            
            
            56,417
            
            
            50,919
            
            
            40,730Interest
                and other income, net
            
            
            **4,875**
            
            
            4,151
            
            
            1,411
            
            
            825
            
            
            1,102Income
                before provision for income taxes
            
            
            **41,863**
            
            
            49,514
            
            
            57,828
            
            
            51,744
            
            
            41,832Provision
                for income taxes.
            
            
            **15,098**
            
            
            15,988
            
            
            21,976
            
            
            19,145
            
            
            15,687Net
                income
            
            
            **26,765**
            
            
            33,526
            
            
            35,852
            
            
            32,599
            
            
            26,145Earnings
                per share:Basic
            
            **$**
            **1.34**
            
            $
            1.69
            
            $
            1.79
            
            $
            1.66
            
            $
            1.33Diluted
            
            **$**
            **1.31**
            
            $
            1.65
            
            $
            1.74
            
            $
            1.59
            
            $
            1.27Weighted-average
                shares outstanding:Basic
            
            
            **20,046**
            
            
            19,888
            
            
            20,050
            
            
            19,609
            
            
            19,643Diluted
            
            
            **20,396**
            
            
            20,318
            
            
            20,652
            
            
            20,486
            
            
            20,590Cash
                dividends per share
            
            **$**
            **0.72**
            
            $
            0.66
            
            $
            0.52
            
            $
            0.17
            
            
            --








**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Balance
                Sheet Data:**Working
                capital
            
            **$**
            **169,862**
            
            $
            187,106
            
            $
            173,007
            
            $
            154,161
            
            $
            124,103Cash
            
            
            **105,441**
            
            
            63,747
            
            
            80,014
            
            
            111,102
            
            
            91,549Marketable
                Securities
            
            
            **12,250**
            
            
            66,400
            
            
            40,000
            
            
            --
            
            
            --Inventory
            
            
            **46,274**
            
            
            45,465
            
            
            47,166
            
            
            44,851
            
            
            43,724Total
                assets
            
            
            **361,113**
            
            
            340,671
            
            
            304,587
            
            
            273,841
            
            
            240,317Total
                debt, including currenmaturities
            
            
            **--**
            
            
            3,000
            
            
            --
            
            
            --
            
            
            171Total
                shareholders' equity
            
            
            **257,676**
            
            
            244,660
            
            
            216,528
            
            
            196,334
            
            
            164,902










(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, and Tribeca* brand
      names. 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 more than 6,000 department and specialty store
      locations, as well as through its Consumer Direct business, which includes
      an
      expanding base of retail and Company Stores, consumer catalogs 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, sportswear, neckwear, briefcases,
      portfolios, jewelry, fragrance, belts, leather and fabric outerwear, 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, as well as housewares,
      under the *Kenneth
      Cole Reaction* brand,
      as
      well as the *Unlisted* brand in
      certain categories.





The
      Company recorded record revenues of $536.5 million for the year ended December
      31, 2006. Diluted earnings per share decreased
      to $1.31 from $1.65 year over year. The Company’s revenues for the year have
      increased over the prior year, primarily due to the Company’s strength in its
      wholesale operations, and continued success in a variety of licensed product
      classifications. The Company’s Balance Sheet is strong with $117.7 million in
      cash and cash equivalents and marketable securities and remains free of debt.
      In
      addition, the Company entered into a five-year $100 million committed revolving
      credit facility and the Company expects to continue its quarterly cash dividend,
      currently set at $0.18. 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.





**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.


27


*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.





*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 Long-Lived Assets*





The
      Company performs a review of its 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.





*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 judgements 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.


28


*Stock-based
      Compensation*





The
      Company adopted Statement of Financial Accounting Standards No. 123R, *“Share-based
      Payment”* (“SFAS
      123R”) on January 1, 2006 using the modified prospective method. SFAS 123R
      supersedes APB Opinion No. 25 and requires all share-based payments,
      including grants of employee stock options, to be recognized in the financial
      statements based on their fair values. 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.





*New
      Accounting and Tax Pronouncements*




In
      2004,
      Internal Revenue Code Section 965 was enacted, as part of the American Jobs
      Creation Act. This is 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. In 2005, 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.





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes”* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in the Company’s financial statements in accordance with FASB Statement No. 109 *“Accounting
      for Income Taxes.”* 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. FIN 48 is effective for the Company on January 1, 2007. Based
      on
      the Company’s evaluation and analysis, FIN 48 is not expected to have a material
      impact on the Company’s consolidated financial statements.





In
      September 2006, the FASB issued FASB Statement No. 157, “ *Fair
      Value Measurements”* (“FAS 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. FAS 157 is effective for fiscal
      years beginning after November 15, 2007. The
      Company is currently evaluating the requirements and impact of FAS 157 on the
      Company’s consolidated financial statements, and will adopt the provisions on
      January 1, 2008. FAS 157 is not expected to have a material impact on the
      Company’s consolidated financial statements.





Also
      in
      September 2006, the FASB issued FASB Statement No. 158, *“Employers’
      Accounting for Defined Benefit Pension and other Postretirement Plans, an
      amendment of FASB Statements No. 87, 88, 106 and 132-R”* (“FAS
      158”). FAS 158 requires an employer to recognize the overfunded or underfunded
      status of a defined benefit postretirement plan as an asset or liability in
      its
      statement of financial position and to recognize changes in that funded status
      in the year in which the changes occur through comprehensive income of a
      business entity. FAS 158 also requires an employer to measure the funded status
      of a plan as of the date of its year-end statement of financial
      position . This
      statement is effective for the Company as of December 31, 2006, but did not
      have
      an impact on the Company’s consolidated financial statements as the Company does
      not sponsor a defined benefit pension or postretirement plan.





29




In
      June
      2006, the Emerging Issues Task Force (the “Task Force”) issued EITF No. 06-3, *“How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation.”* (the
“Issue”). The Task Force reached a consensus that the scope of this Issue
      includes any tax assessed by a governmental authority that is both imposed
      on
      and concurrent with a specific revenue-producing transaction between a seller
      and a customer, and may include, but is not limited to, sales, use, value added,
      and some excise taxes.  The Task Force also reached a consensus that the
      presentation of taxes within the scope of this Issue on either a gross basis
      (included in revenues and costs) or a net basis (excluded from revenues) is
      an
      accounting policy decision that should be disclosed pursuant to APB
      Opinion No. 22 ,
      “ *Disclosure
      of Accounting Policies.”* An
      entity
      is not required to reevaluate its existing policies related to taxes assessed
      by
      a governmental authority as a result of this consensus.  In addition, for
      any such taxes that are reported on a gross basis, an entity should disclose
      the
      amounts of those taxes in interim and annual financial statements for each
      period for which an income statement is presented if those amounts are
      significant.  The Company currently uses the net basis. The Company adopted
      this Issue on January 1, 2007 and determined that it had no impact on its
      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:




**2006**
            
            **2005**
            
            **2004**Net
                sales
            
            
            91.8
            %
            
            91.5
            %
            
            91.7
            %Royalty
                revenue
            
            
            8.2
            
            
            8.5
            
            
            8.3Net
                revenues
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of goods sold
            
            
            56.8
            
            
            54.8
            
            
            55.2Gross
                profit (1)
            
            
            43.2
            
            
            45.2
            
            
            44.8Selling,
                general and administrative expenses
            
            
            36.2
            
            
            36.5
            
            
            33.8Impairment
                of long-lived assets
            
            
            0.1
            
            
            0.0
            
            
            0.1Operating
                income
            
            
            6.9
            
            
            8.7
            
            
            10.9Income
                before provision for income taxes
            
            
            7.8
            
            
            9.6
            
            
            11.2Provision
                for income taxes
            
            
            2.8
            
            
            3.1
            
            
            4.3Net
                income
            
            
            5.0
            %
            
            6.5
            %
            
            6.9
            %


(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, 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 is 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* ,
      and *Unlisted* 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


30


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
      the Company’s 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, 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.





Selling,
      general and administrative (“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.





31


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.





*Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004*




Net
      revenues increased $1.8 million, or 0.4 *%* , ** to
      $518.0
      million in 2005 from $516.2 million in 2004. 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
      $4.9 million, or 1.7%, ** to ** $287.1
      million in 2005 from $282.2 million in 2004. The increase was primarily
      attributable to a 23.9% increase in *Kenneth
      Cole Reaction* ladies’
and children’s footwear, and an approximate 9.0% growth across its handbags
      businesses, as compared to December 31, 2004. This growth was offset by
      decreases of 15.8% in *Kenneth
      Cole New York* men’s
      and
      women’s ** footwear,
      and 11.7% in *Unlisted* footwear
      categories. In 2005, the Company accelerated its strategic initiative to
      reposition the *Kenneth
      Cole New York* brand as
      an accessible luxury brand and reduce the number of doors it was willing to
      distribute to. The Company believes that this transition is necessary to improve
      the Company’s Wholesale net sales. The Company will continue to focus on
      improving product offerings, advertising campaigns, marketing efforts, website,
      catalogs and growing retail presence, combined with the marketing efforts of
      its
      licensees, which it believes will be significant factors in strengthening and
      defining all of its distinct brands, including *Kenneth
      Cole Reaction, Tribeca,* and *Bongo* across
      all product classifications, thereby increasing consumer demand for these brands
      in the future.





Net
      sales
      in the Company’s Consumer Direct segment decreased $4.3 million, or
      2.3%, ** to
      $186.9
      million in 2005 from $191.2 million in 2004. The decrease was primarily due
      to a
      decrease in retail store sales of $5.4 million, or 2.9%, as compared to year
      ended December 31, 2004. Comparable store sales decreased by $13.2 million,
      or
      7.5%, offset by an increase of $7.8 million of new store sales in 2005 plus
      the
      portion of 2005 sales for stores not open for all of 2004. The Company believes
      the decrease in net sales in the Consumer Direct segment is primarily due to
      the
      Company’s repositioning of the *Kenneth
      Cole New York* brand in
      its retail stores, which was accelerated in 2005. The Company believes
      well-executed *Kenneth
      Cole New York* products
      will be embraced by its customers, as illustrated by the success of the *Kenneth
      Cole New York* handbags
      business. However, some of the other products were not as well executed, and
      did
      not provide the consumer with the Company’s highest standard of price and value,
      and were not well received. The Company is focusing on the design, price and
      value of its *Kenneth
      Cole New York* products
      for 2006. In an effort to maintain, solidify, and build positive sales results,
      the Company will continue to analyze inventory, focus on products and further
      scrutinize consumer trends, as well as concentrate on quality, style and price
      to continue customer acceptance of its brand repositioning
      strategy.





Royalty
      revenue increased $1.2 million, or 2.8%, to $44.0 million in 2005 from $42.8
      million in 2004. The increase was primarily from incremental minimum royalties
      from the Company’s existing licensees, sales increases from fragrance and
      children’s apparel, and its European licensee, offset by a reduction in minimum
      royalties from the transition of the women’s sportswear licensee. Brand
      repositioning has slowed growth in 2005, as a result of the Company’s strategic
      plan. However, the Company believes consumers look toward brands they know
      and
      feel are compatible with their lifestyles; therefore the synergies from its
      efforts to reinforce its brand identities through greater marketing efforts,
      by
      itself and its licensees across all product categories, will continue to
      strengthen and define its brands to improve name recognition allowing growth
      in
      sales both domestically and internationally throughout 2006.





32


Consolidated
      gross profit increased to 45.2% in 2005, as a percentage of net revenues,
      compared to 44.8% in 2004. The increase was primarily a result of an improvement
      in Consumer Direct margins and the change in mix of the Company’s net revenues
      from its Wholesale, Consumer Direct and Licensing segments. The Consumer Direct
      segment’s revenues decreased as a percentage of net revenues, to 36.1%, for the
      year ended December 31, 2005, from 37.0% for the year ended December 31, 2004,
      while the revenues in the Wholesale segment, which operates at a lower gross
      profit percentage as compared to the Consumer Direct segment, increased as
      a
      percentage of net revenues to 55.4% for the year ended December 31, 2005,
      compared to 54.7% for the year ended December 31, 2004. The revenues in the
      Licensing segment, which carries no cost of goods sold, increased as a
      percentage of revenue to 8.5% from the year ended December 31, 2005 compared
      to
      8.3% for the year ended December 31, 2004. Consumer Direct segment margins
      increased from higher price points on better quality products, as part of the
      Company’s strategic initiative to reposition *Kenneth
      Cole New York* as an
      accessible luxury brand.





Selling,
      general and administrative expenses, including warehousing and receiving
      expenses (“SG&A”), increased $14.5 million, or 8.3%, to $189.0 million (or
      36.5% of net revenues) in 2005 from $174.5 million (or 33.8% of net revenues)
      in
      2004, which includes severance costs of approximately $0.8 million in 2005.
      SG&A, as a percentage of net revenues, increased primarily due to
      investments in people and systems, increases in fixed costs from new and
      expanding retail stores, and the Company’s loss of leverage on its comparable
      stores’ sales base. Included within SG&A for the year ended December 31,
      2004 was a one-time cost of $1.1 million associated with the closing and
      transition of the Company’s east cost distribution center to a third-party
      service provider.





The
      Company did not record asset impairment charges for the year ended December
      31,
      2005, as compared to the year ended December 31, 2004, in which the Company
      recorded approximately $0.5 million for the write-down of stores’ leasehold
      improvements, furniture, and fixtures in the Company’s Florida Mall store,
      located in Orlando, Florida and the Lexington Avenue store located in New York
      City.





Interest
      and other income increased to $4.2 million for the year ended December 31,
      2005
      from $1.4 million in 2004. The increase was primarily due to a $1.2 million
      gain
      on the sale of marketable securities during the year ended December 31, 2005
      and
      an average higher rate of return on investments.





The
      Company’s effective tax rate decreased to 32.3% for the year ended December 31,
      2005 from 38.0% for the year ended December 31, 2004, as a result of a temporary
      provision that allows U.S. companies to repatriate earnings from their foreign
      subsidiaries at a reduced tax. The Company repatriated approximately $12.5
      million of prior years’ foreign earnings, which resulted in approximately $3.0
      million in tax savings for the year ended December 31, 2005.





As
      a
      result of the foregoing, net income decreased by $2.4 million, or 6.7%, to
      $33.5
      million (6.5% of net revenue), for the year ended December 31, 2005, from $35.9
      million (6.9% of net revenue) for the year ended December 31, 2004.





**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 newly established 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, 2006, working capital was
      $169.9 million compared to $187.1 million at December 31, 2005.





Net
      cash
      provided by operating activities was $48.1 million for the year ended December
      31, 2006 compared to $34.0 million for the year ended December 31, 2005.
      The **** increase
      in cash flows provided by operations is primarily attributable to the decrease
      in tax benefits and the timings of payables and receivables, partially offset
      by
      the reduction in net income.





Net
      cash
      provided by investing activities increased to $14.2 million for the year ended
      December 31, 2006 compared to $45.0 million used in investing activities for
      the
      year ended December 31, 2005. The increase 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 in 2006, compared to purchases of
      $41.9 million of marketable securities during 2005. This was partially offset
      by
      capital expenditures for the year ended December 31, 2006 of $39.9 million,
      compared to $13.9 million for the year ended


33


December
      31, 2005, which includes the purchase of the Company’s corporate headquarters
      building for approximately $24 million in 2006. Also included in capital
      expenditures were expenditures on furniture, fixtures, and leasehold
      improvements for new retail store openings and expansions of $12.2 million
      and
      $8.3 million for the years ended December 31, 2006 and 2005, respectively.
      The
      remaining increase in capital expenditures was primarily due to investments
      in
      management information systems related to the implementation of the SAP
      integrated business platform for the Company’s retail and Company Stores. In
      addition, during 2005, $6.0 million was used to purchase six millions shares
      of
      Bernard Chaus, Inc.





Net
      cash
      used in financing activities was $20.6 million for the year ended December
      31,
      2006 compared to $5.3 million for the year ended December 31, 2005. The primary
      reason for the increase in cash used in financing activities was the Company’s
      repurchase of 300,000 treasury shares at an aggregate price of $7.2 million
      during 2006 and an increase in cash dividends paid to shareholders of $14.5
      million for the year ended December 31, 2006 compared to $13.1 million for
      the
      year-ended December 31, 2005. In addition, the Company repaid its 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.





The
      Company’s material obligations under contractual agreements, primarily
      commitments for future payments under operating lease agreements, as of December
      31, 2006 are summarized as follows:








Payments
                Due by PeriodTotal
            1
                year or less
            2-3
                years
            4-5
                years
            After
                5 yearsOperating
                Leases and Other Obligations
            $175,880,000
            $25,851,000
            $49,539,000
            $41,771,000
            $58,719,000Purchase
                Obligations
            54,438,000
            54,438,000Minimum
                Licensee Royalties
            5,005,000
            1,085,000
            2,520,000
            1,400,000Total
                ContractualObligations
            $235,323,000
            $81,374,000
            $52,059,000
            $43,171,000
            $58,719,000





During
      2007, the Company anticipates that it will continue to require additional
      capital expenditures to support its information systems. In 2006, the Company
      signed an agreement with SAP to implement an integrated business platform across
      the Company’s retail and Company Stores. The estimated expenditures related to
      the implementation are expected to be approximately $10.0 million. The Company
      has incurred approximately $7.9 million in expenditures related to the SAP
      retail implementation as of December 31, 2006. Contingent rent and other charges
      amounted to $7.0 million and $6.4 million for the years ended December 31,
      2006
      and 2005.





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
      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. No fees were paid by the Company for advances or issuances of letters
      of credit under the Revolving Credit Facility as none were outstanding during
      the period ended December 31, 2006. During 2006, the Company did not borrow
      under the Revolving Credit Facility.


34





The
      Company also has an existing Line of Credit Facility (the “Facility”) with
      another bank that, as amended, allows for uncommitted borrowings, letters of
      credit and banker’s acceptances subject to individual maximums and in the
      aggregate, an amount not to exceed the lesser of $25,000,000 or a “Borrowing
      Base.”  The
      Borrowing Base is calculated on a specified percentage of eligible amounts
      due
      under factoring arrangements, eligible non-factored accounts receivable, and
      eligible inventory. Borrowings under the revolving loan portion of the Facility
      (“Advances”) are due on demand. The Company may pay down and re-borrow at will
      under the Facility.  Advances
      bear interest at (i) the higher of The Bank of New York's prime lending rate
      or
      the Federal Funds rate plus 0.5% at the date of borrowing or (ii) a negotiated
      rate. In connection with the line of credit, the Company has agreed to eliminate
      all the outstanding borrowings under the facility for at least 30 consecutive
      days during each calendar year. In addition, borrowings under the line of credit
      are secured by certain receivables of the Company. The Company had no
      outstanding advances during 2006 and 2005 under this line of credit; however
      amounts available under the line were reduced to $21.7 million by $3.3 million
      of standby and open letters of credit at December 31, 2006.




In
      2006,
      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, was repaid.





The
      Company believes that it will be able to satisfy its current expected cash
      requirements for 2007, including requirements for its possible 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. The Company did not have any off-balance sheet arrangements as of December
      31, 2006.





**Exchange
      Rates**





The
      Company routinely 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 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, 2006, the Company had no
      unrealized gains or losses as no forward contracts were outstanding. Unrealized
      gains and losses are typically included in Accumulated Other Comprehensive
      Income in the Statements of Changes in Shareholders’ Equity and as an adjustment
      to inventory, which is the underlying exposure on the consolidated balance
      sheet. The Company expects to continue to routinely enter into additional
      foreign exchange contracts throughout 2007. 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
      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 the Far East 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 does not believe it has a material exposure to market risk. 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.


35





At
      December 31, 2006, 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 2006 and 2005 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 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, 2006, 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 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, 2006 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, 2006.





Management’s
      assessment of the effectiveness of our internal control over financial reporting
      as of December 31, 2006 has been 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 has materially affected, or is reasonably
      likely to materially affect the Company’s internal control over financial
      reporting.





**Item
      9B. Other Information**





None.


36








**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 16, 2007 to be filed with the Securities and Exchange
      Commission within 120 days after December 31, 2006 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 16, 2007 to be
      filed with the Securities and Exchange Commission within 120 days after December
      31, 2006 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 16, 2007 to be
      filed with the Securities and Exchange Commission within 120 days after December
      31, 2006 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 16, 2007 to be
      filed with the Securities and Exchange Commission within 120 days after December
      31, 2006, and which is incorporated herein by reference in response to this
      item.





**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 16, 2007 to be
      filed with the Securities and Exchange Commission within 120 days after December
      31, 2006 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





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:







37





**Exhibit**
              **No.**
            
            **Description**3.01
            —
            Restated
                Certificate of Incorporation of Kenneth Cole Productions, Inc.;
                Certificate of Merger of Cole Fifth Avenue, Inc. into Kenneth Cole
                Productions, Inc.; Certificate of Merger of Cole Productions, Inc.
                into
                Kenneth Cole Productions, Inc.; Certificate of Merger of Cole Sunset,
                Inc.
                into Kenneth Cole Productions, Inc.; Certificate of Merger of Cole
                Union
                Street, Inc. into Kenneth Cole Productions, Inc.; Certificate of
                Merger of
                Cole West, Inc. into Kenneth Cole Productions, Inc.; Certificate
                of Merger
                of Kenneth Cole Woodbury, Inc. into Kenneth Cole Productions, Inc.;
                Certificate of Merger of Kenneth Cole Leather Goods, Inc. into Kenneth
                Cole Productions, Inc.; Certificate of Merger of Unlisted into Kenneth
                Cole Productions, Inc. (Incorporated by reference to Exhibit 3.01
                to the
                Company’s Registration Statement on Form S-1, Registration No.
                33-77636).3.02
            —
            By-laws.
                (Incorporated by reference to Exhibit 3.02 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-77636).4.01
            —
            Specimen
                of Class A Common Stock Certificate. (Incorporated by reference to
                Exhibit
                4.01 to the Company’s Registration Statement on Form S-1, Registration No.
                33-77636).10.01
            —
            Tax
                Matters Agreement, dated as of June 1, 1994, among Kenneth Cole
                Productions, Inc., Kenneth D. Cole, Paul Blum and Stanley A. Mayer.
                (Incorporated by reference to Exhibit 10.01 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-77636).10.02
            3⁄4
            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).







38







*10.04
            —
            Kenneth
                Cole Productions, Inc. 1994 Stock Option Plan. (Incorporated by reference
                to Exhibit 10.04 to the Company’s Registration Statement on Form S-1,
                Registration No. 33-77636).*10.05
            —
            Employment
                Agreement, dated as of April 30, 1994, between Kenneth Cole Productions,
                Inc. and Kenneth D. Cole. (Incorporated by reference to Exhibit 10.05
                to
                the Company’s Registration Statement on Form S-1, Registration No.
                33-77636).*10.06
            —
            Employment
                Agreement, dated as of April 30, 1994, between Kenneth Cole Productions,
                Inc. and Paul Blum. (Incorporated by reference to Exhibit 10.06 to
                the
                Company’s Registration Statement on Form S-1, Registration No.
                33-77636).*10.07
            —
            Employment
                Agreement, dated as of April 30, 1994, between Kenneth Cole Productions,
                Inc. and Stanley A. Mayer; Stock Option Agreement dated as of March
                31,
                1994 between Kenneth Cole Productions, Inc. and Stanley A. Mayer.
                (Incorporated by reference to Exhibit 10.07 to the Company’s Registration
                Statement on Form S-1, Registration No. 33-77636).Stock
                Option Agreement dated as of June 1, 1994, between Kenneth Cole
                Productions, Inc. and Stanley A. Mayer; Stock Option Agreement dated
                as of
                July 7, 1994, between Kenneth Cole Productions, Inc. and Stanley
                A. Mayer
                (Incorporated by reference to Exhibit 10.07 to the Company’s 1994 Form
                10-K).10.08
            —
            Collective
                Bargaining Agreement by and between the New York Industrial Council
                of the
                National Fashion Accessories Association, Inc. and Leather Goods,
                Plastics, Handbags and Novelty Workers' Union, Local 1, dated as
                of April
                25, 1987; Memorandum of Agreement by and between the New York Industrial
                Council of the National Fashion Accessories Association, Inc. and
                Leather
                Goods, Plastics, Handbags and Novelty Workers' Union, Local 1, Division
                of
                Local 342-50 United Food and Commercial Workers Union, dated as of
                June
                16, 1993. (Incorporated by reference to Exhibit 10.08 to the Company’s
                Registration Statement on Form S-1, Registration No.
                33-77636).10.09
            —
            Memorandum
                of Agreement between the New York Industrial Council of the National
                Fashion Accessories Association Inc. and Local 1 Leather Goods, Plastics,
                Handbags, and Novelty Workers Union, Division of Local 342-50 United
                Food
                and Commercial Workers Union (Previously filed as Exhibit 10.1 to
                the
                Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
                June 30, 1996 and incorporated herein by reference).*10.10
            
            Employment
                Agreement between Kenneth Cole Productions, Inc., and Paul Blum.
                (Previously filed as Exhibit 10.6 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).


39





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).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.+21.01
            
            List
                of Subsidiaries.+23.01
            
            Consent
                of Independent Registered Public Accounting 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 14(a) of this
                report.




+
            Filed
                herewith.




(b)
            See
                Item 15(a) (3) above for a listing of the exhibits included as a
                part of
                this report.


(c)
            See
                Items 15(a)(1) and 15(a)(2) above.






40






Kenneth
        Cole Productions, Inc. and Subsidiaries
 
 Index
        to Consolidated Financial Statements
 
 
 
 
 
 **Page**Reports
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of December 31, 2006 and 2005
              F-5Consolidated
                  Statements of Income for the years ended December 31, 2006, 2005
                  and
                  2004
              F-7Consolidated
                  Statements of Changes in Shareholders’ Equity for the years ended December
                  31, 2006, 2005 and 2004
              F-8Consolidated
                  Statements of Cash Flows for the years ended December 31, 2006,
                  2005 and
                  2004
              F-9Notes
                  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, 2006 and
        2005, 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, 2006. 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, 2006 and 2005, and the
        consolidated results of their operations and their cash flows for each of
        the
        three years in the period ended December 31, 2006, 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, 2006, 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 1, 2007 expressed an
        unqualified opinion thereon.
 
 */s/
        Ernst & Young LLP*
 
 
 New
        York,
        New York
 March
        1,
        2007
 
  F-2
  
 **Report
        of Independent Registered Public Accounting Firm**
 
 **To
        The Board of Directors and Shareholders of Kenneth Cole Productions, Inc.**
 
 
 We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting appearing in Item 9A
        that
        Kenneth Cole Productions, Inc. and subsidiaries (the “Company”) maintained
        effective internal control over financial reporting as of December 31, 2006,
        based on criteria established in Internal Control—Integrated Framework issued by
        the Committee of Sponsoring Organizations of the Treadway Commission (the
        COSO
        criteria). The Company’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. Our responsibility
        is to express an opinion on management’s assessment and 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, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, 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, management’s assessment that Kenneth Cole Productions, Inc. and
        subsidiaries maintained effective internal control over financial reporting
        as
        of December 31, 2006 is fairly stated, in all material respects, based on
        the
        COSO criteria. Also, in our opinion, Kenneth Cole Productions, Inc. and
        subsidiaries maintained, in all material respects, effective internal control
        over financial reporting as of December 31, 2006, 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, 2006 and 2005, 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, 2006 of Kenneth Cole Productions,
        Inc. and
        our
        report dated March 1, 2007 expressed an unqualified opinion
        thereon.
 
  */s/
        Ernst & Young LLP*
 
 
 New
        York,
        New York
 March
        1,
        2007
 
  F-4
  Kenneth
        Cole Productions, Inc. and Subsidiaries
 Consolidated
        Balance Sheets
 
 
 **December
                  31,****2006**
              
              2005**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              **$**
              **105,441,000**
              
              $
              63,747,000Marketable
                  securities
              
              
              **12,250,000**
              
              
              66,400,000Due
                  from factors
              
              
              **35,536,000**
              
              
              33,975,000Accounts
                  receivable, less allowance for doubtful accountsof
                  $249,000 and $298,000, respectively
              
              
              **19,641,000**
              
              
              18,691,000Inventories
              
              
              **46,274,000**
              
              
              45,465,000Prepaid
                  expenses and other current assets
              
              
              **2,779,000**
              
              
              6,059,000Deferred
                  taxes, net
              
              
              **2,739,000**
              
              
              3,340,000Total
                  current assets
              
              
              **224,660,000**
              
              
              237,677,000Property
                  and equipment—at cost, less accumulateddepreciation
                  and amortization
              
              
              **72,141,000**
              
              
              42,975,000Other
                  assets:Deferred
                  taxes, net
              
              
              **15,110,000**
              
              
              14,832,000Deposits
                  and sundry
              
              
              **17,107,000**
              
              
              16,776,000Deferred
                  compensation plans assets
              
              
              **32,095,000**
              
              
              28,411,000Total
                  other assets
              
              
              **64,312,000**
              
              
              60,019,000Total
                  Assets
              
              **$**
              **361,113,000**
              
              $
              340,671,000
 
 
 
 
 *See
        accompanying notes to consolidated financial statements.*
  F-5
  Kenneth
        Cole Productions, Inc. and Subsidiaries
 Consolidated
        Balance Sheets (continued)
 
 
 **December
                  31,****2006**
              
              2005**Liabilities
                  and Shareholders’ Equity**Current
                  liabilities:Accounts
                  payable
              
              **$**
              **36,554,000**
              
              $
              31,129,000Accrued
                  expenses and other current liabilities
              
              
              **10,925,000**
              
              
              8,775,000Short-term
                  borrowings
              
              
              **--**
              
              
              3,000,000Deferred
                  income
              
              
              **3,958,000**
              
              
              3,835,000Income
                  taxes payable
              
              
              **3,361,000**
              
              
              3,832,000Total
                  current liabilities
              
              
              **54,798,000**
              
              
              50,571,000Accrued
                  rent and other long-term liabilities
              
              
              **16,544,000**
              
              
              17,029,000Deferred
                  compensation plans liabilities
              
              
              **32,095,000**
              
              
              28,411,000Commitments
                  and contingenciesShareholders’
                  Equity:Series
                  A Convertible Preferred Stock, par value $1.00,
                1,000,000
                  shares authorized; none outstandingClass
                  A Common Stock, par value $.01, 20,000,000 shares authorized; 15,587,651
                  and 15,573,961 issued as of December 31, 2006 and 2005,
                  respectively
              
              
              **156,000**
              
              
              156,000Class
                  B Convertible Common Stock, par value $.01, 9,000,000 shares authorized;
                  8,010,497 and 8,010,497issued
                  and outstanding as of December 31, 2006 and 2005,
                  respectively
              
              
              **80,000**
              
              
              80,000Additional
                  paid-in capital
              
              
              **92,041,000**
              
              
              89,351,000Deferred
                  Compensation
              
              
              **--**
              
              
              (3,397,000
              )Accumulated
                  other comprehensive income
              
              
              **1,884,000**
              
              
              1,257,000Retained
                  Earnings
              
              
              **249,653,000**
              
              
              237,369,000**343,814,000**
              
              
              324,816,000Class
                  A Common Stock in treasury, at cost,3,596,592
                  and 3,388,400 shares as of December 31, 2006 and 2005,
                  respectively
              
              
              **(86,138,000**
              **)**
              
              (80,156,000
              )Total
                  Shareholders’ Equity
              
              
              **257,676,000**
              
              
              244,660,000Total
                  Liabilities and Shareholders’ Equity
              
              **$**
              **361,113,000**
              
              $
              340,671,000
  *See
        accompanying notes to consolidated financial statements.*
  F-6
  Kenneth
        Cole Productions, Inc. and Subsidiaries
 Consolidated
        Statements of Income
 
 
 
 **Year
                  ended December 31,****2006**
              
              2005
              
              2004Net
                  sales
              
              **$**
              **492,282,000**
              
              $
              474,060,000
              
              $
              473,438,000Royalty
                  revenue
              
              
              **44,217,000**
              
              
              43,983,000
              
              
              42,763,000Net
                  revenue
              
              
              **536,499,000**
              
              
              518,043,000
              
              
              516,201,000Cost
                  of goods sold
              
              
              **304,672,000**
              
              
              283,727,000
              
              
              284,817,000Gross
                  profit
              
              
              **231,827,000**
              
              
              234,316,000
              
              
              231,384,000Selling,
                  general, and administrative expenses
              
              
              **194,718,000**
              
              
              188,953,000
              
              
              174,519,000Impairment
                  of long-lived assets
              
              
              **121,000**
              
              
              -
              
              
              448,000Operating
                  income
              
              
              **36,988,000**
              
              
              45,363,000
              
              
              56,417,000Interest
                  and other income, net
              
              
              **4,875,000**
              
              
              4,151,000
              
              
              1,411,000Income
                  before provision for income taxes
              
              
              **41,863,000**
              
              
              49,514,000
              
              
              57,828,000Provision
                  for income taxes
              
              
              **15,098,000**
              
              
              15,988,000
              
              
              21,976,000Net
                  income
              
              **$**
              **26,765,000**
              
              $
              33,526,000
              
              $
              35,852,000Earnings
                  per share:Basic
              
              **$**
              **1.34**
              
              $
              1.69
              
              $
              1.79Diluted
              
              **$**
              **1.31**
              
              $
              1.65
              
              $
              1.74Dividends
                  declared per share
              
              **$**
              **0.72**
              
              $
              0.66
              
              $
              0.52Shares
                  used to compute earnings per share:Basic
              
              
              **20,046,000**
              
              
              19,888,000
              
              
              20,050,000Diluted
              
              
              **20,396,000**
              
              
              20,318,000
              
              
              20,652,000
 
 
 
 *See
        accompanying notes to consolidated financial statements.*
  F-7
   Kenneth
        Cole Productions, Inc. and Subsidiaries
 Consolidated
        Statements of Changes in Shareholders’ Equity
  **Class
                    A**
                  **Common
                    Stock**
                
                **Class
                    B**
                  **Common
                    Stock**
                
                
                
                
                
                **Accumulated**
                  **Other**
                  **Comprehensivee**
                  **Income**
                
                
                
                **Treasury
                    Stock****Number**
                  **of
                    Shares**
                
                **Amount**
                
                **Number**
                  **of
                    Shares**
                
                **Amount**
                
                **Additional**
                  **Paid-In**
                  **Capital**
                
                **Deferred**
                  **Compensation**
                
                
                **Retained**
                  **Earnings**
                
                **Number**
                  **of
                    Shares**
                
                **Amount**
                
                **Total**Balance
                    at 12/31/03
                
                
                14,534,791
                
                
                145,000
                
                
                8,168,497
                
                
                82,000
                
                
                69,992,000
                
                
                
                
                
                751,000
                
                
                191,585,000
                
                
                (2,888,400
                )
                
                (66,221,000
                )
                
                196,334,000Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                35,852,000
                
                
                
                
                
                
                
                
                35,852,000Translation
                    adjustment fromForeign
                    currency, net of taxes $199,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                325,000
                
                
                
                
                
                
                
                
                
                
                
                325,000Forward
                    contracts, net of taxes $(32,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (53,000
                )
                
                
                
                
                
                
                
                
                
                
                (53,000
                )Unrealized
                    gain on available for sale security, net of taxes $18,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                30,000
                
                
                
                
                
                
                
                
                
                
                
                30,000Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                36,154,000Exercise
                    of stock optionsRelated
                    tax benefit $3,031,000
                
                
                398,113
                
                
                4,000
                
                
                
                
                
                
                
                
                8,204,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,208,000Issuance
                    of Class A Stock from ESPP
                
                
                8,941
                
                
                
                
                
                
                
                
                
                
                
                221,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                221,000Dividends
                    paid on common stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (10,454,000
                )
                
                
                
                
                
                
                
                (10,454,000
                )Purchase
                    of Class A stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (500,000
                )
                
                (13,935,000
                )
                
                (13,935,000
                )Conversion
                    of Class B to Class A common stock
                
                
                113,000
                
                
                1,000
                
                
                (113,000
                )
                
                (1,000
                )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
                )
                $
                216,528,000Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                33,526,000
                
                
                
                
                
                
                
                
                33,526,000Translation
                    adjustment from
                  Foreign
                    currency, net of taxes $148,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                310,000
                
                
                
                
                
                
                
                
                
                
                
                310,000Forward
                    contracts, net of taxes $(351,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (737,000
                )
                
                
                
                
                
                
                
                
                
                
                (737,000
                )Unrealized
                    gains on available for sale securities, net of taxes
                    $301,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                631,000
                
                
                
                
                
                
                
                
                
                
                
                631,000Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                33,730,000Issuance
                    of Restricted Stock, net of forfeitures
                
                
                152,960
                
                
                2,000
                
                
                
                
                
                
                
                
                4,554,000
                
                
                (4,556,000
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,120,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,120,000Shares
                    surrendered by employees to pay taxes on restricted stock
                
                
                (4,509
                )
                
                
                
                
                
                
                
                
                
                
                (134,000
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (134,000
                )Stock-based
                    compensation acceleration expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                100,000
                
                
                39,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                139,000Exercise
                    of options, related tax benefit $1,403,000
                
                
                312,064
                
                
                3,000
                
                
                
                
                
                
                
                
                6,085,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,088,000Issuance
                    of Class A Stock from ESPP
                
                
                13,601
                
                
                
                
                
                
                
                
                
                
                
                329,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                329,000Dividends
                    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
                )
                $
                244,660,000Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26,765,000
                
                
                
                
                
                
                
                
                26,765,000Translation
                    adjustment fromForeign
                    currency, net of taxes of $(53,000)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (88,000
                )
                
                
                
                
                
                
                
                
                
                
                (88,000
                )Forward
                    contracts, net of taxes of $110,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                184,000
                
                
                
                
                
                
                
                
                
                
                
                184,000Unrealized
                    gains on available for sale securities, net of taxes of
                    $319,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                531,000
                
                
                
                
                
                
                
                
                
                
                
                531,000Comprehensive
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                27,392,000Reversal
                    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
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,193,000Exercise
                    of stock options, and related tax benefits of $700,000
                
                
                203,283
                
                
                1,000
                
                
                
                
                
                
                
                
                4,009,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,010,000Issuance
                    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
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                363,000Purchase
                    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**
  *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,**Cash
                  flows from operating activities**
              
              
              **2006**
              
              
              2005
              
              
              2004Net
                  income
              
              **$**
              **26,765,000**
              
              $
              33,526,000
              
              $
              35,852,000Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              **10,655,000**
              
              
              9,400,000
              
              
              7,844,000Impairment
                  of long-lived assets
              
              
              **121,000**
              
              
              -
              
              
              448,000Unrealized
                  gain on deferred compensation plans
              
              
              **(1,340,000**
              **)**
              
              (914,000
              )
              
              (1,127,000
              )Realized
                  gain on sale of property and equipment
              
              
              **-**
              
              
              -
              
              
              (14,000
              )Provision
                  for doubtful accounts
              
              
              **211,000**
              
              
              290,000
              
              
              54,000Provision
                  for / (benefit from) deferred taxes
              
              
              **-**
              
              
              (5,791,000
              )
              
              (1,709,000
              )Tax
                  benefit from stock option exercises
              
              
              **-**
              
              
              1,403,000
              
              
              3,031,000Unrealized
                  gains from available-for-sale securities
              
              
              **(531,000**
              **)**
              
              (631,000
              )
              
              -Realized
                  gain on sale of marketable securities
              
              
              **-**
              
              
              (1,246,000
              )
              
              -Stock-based
                  compensation expense
              
              
              **3,193,000**
              
              
              1,259,000
              
              
              -Excess
                  tax benefit from stock option exercises
              
              
              **(700,000**
              **)**
              
              -
              
              
              -Changes
                  in operating assets and liabilities:(Increase)/decrease
                  in due from factors
              
              
              **(1,561,000**
              **)**
              
              961,000
              
              
              (3,449,000
              )Increase
                  in accounts receivable
              
              
              **(1,161,000**
              **)**
              
              (2,003,000
              )
              
              (5,778,000
              )(Increase)/decrease
                  in inventories
              
              
              **(625,000**
              **)**
              
              964,000
              
              
              (2,368,000
              )Decrease/(increase)
                  in prepaid expenses andother
                  current assets
              
              
              **3,280,000**
              
              
              (3,395,000
              )
              
              (1,321,000
              )Increase
                  in other assets
              
              
              **(1,290,000**
              **)**
              
              (5,073,000
              )
              
              (4,404,000
              )Increase/(decrease)
                  in accounts payable
              
              
              **5,425,000**
              
              
              (4,638,000
              )
              
              1,920,000Increase
                  in deferred income, accrued expenses andother
                  current liabilities
              
              
              **2,213,000**
              
              
              1,057,000
              
              
              1,044,000Increase/(decrease)
                  in income taxes payable
              
              
              **229,000**
              
              
              (421,000
              )
              
              1,314,000Increase
                  in other long-term liabilities
              
              
              **3,199,000**
              
              
              9,268,000
              
              
              6,604,000Net
                  cash provided by operating activities
              
              
              **48,083,000**
              
              
              34,016,000
              
              
              37,941,000**Cash
                  flows used in investing activities**Acquisition
                  of property and equipment
              
              
              **(39,942,000**
              **)**
              
              (13,865,000
              )
              
              (10,101,000
              )Proceeds
                  from sale of marketable securities
              
              
              **54,250,000**
              
              
              16,755,000
              
              
              -Proceeds
                  from sale of property and equipment
              
              
              **-**
              
              
              -
              
              
              68,000Purchase
                  of stock
              
              
              **-**
              
              
              (6,000,000
              )
              
              -Purchases
                  of marketable securities and other investments
              
              
              **(100,000**
              **)**
              
              (41,909,000
              )
              
              (40,000,000
              )Net
                  cash provided by/(used in) investing activities
              
              
              **14,208,000**
              
              
              (45,019,000
              )
              
              (50,033,000
              )**Cash
                  flows used in financing activities**Shares
                  surrendered by employees to pay taxes on restricted stock
              
              
              **(301,000**
              **)**
              
              (134,000
              )
              
              -Tax
                  benefit from stock option exercises
              
              
              **700,000**
              
              
              -
              
              
              -Proceeds
                  from exercise of stock options
              
              
              **3,310,000**
              
              
              4,685,000
              
              
              5,177,000Proceeds
                  from employee stock purchase plan
              
              
              **363,000**
              
              
              329,000
              
              
              221,000Proceeds
                  from short-term borrowings
              
              
              **-**
              
              
              3,000,000
              
              
              -Payments
                  of short-term borrowings
              
              
              **(3,000,000**
              **)**
              
              -
              
              
              -Dividends
                  paid to shareholders
              
              
              **(14,472,000**
              **)**
              
              (13,140,000
              )
              
              (10,454,000
              )Acquisition
                  of treasury shares
              
              
              **(7,169,000**
              **)**
              
              -
              
              
              (13,935,000
              )Net
                  cash used in financing activities
              
              
              **(20,569,000**
              **)**
              
              (5,260,000
              )
              
              (18,991,000
              )**Effect
                  of exchange rate changes on cash**
              
              
              **(28,000**
              **)**
              
              (4,000
              )
              
              (5,000
              )Net
                  increase/(decrease) in cash
              
              
              **41,694,000**
              
              
              (16,267,000
              )
              
              (31,088,000
              )Cash
                  and cash equivalents, beginning of year
              
              
              **63,747,000**
              
              
              80,014,000
              
              
              111,102,000Cash
                  and cash equivalents, end of year
              
              **$**
              **105,441,000**
              
              $
              63,747,000
              
              $
              80,014,000**Supplemental
                  disclosures of cash flow information**Cash
                  paid during the period for:Interest
              
              $
              204,000
              
              $
              68,000
              
              $
              27,000Income
                  taxes
              
              $
              17,337,000
              
              $
              21,194,000
              
              $
              19,341,000
 
 *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 quality footwear and handbags, and through license
        agreements, designs and markets men’s, women’s and children’s apparel and
        accessories under its *Kenneth
        Cole New York, Kenneth Cole Reaction, Unlisted* ,
        and *Tribeca* brands
        for the fashion conscious consumer. In addition, the Company, through a license
        agreement, has the rights to use the *Bongo* trademark for footwear, as well as *Gentle
        Souls* for
        footwear under a proprietary trademark. The Company markets its products
        for
        sale to more than 6,000 department stores and specialty store locations in
        the
        United States, as well as other locations throughout the world, through its
        retail and Company Store base, and its interactive websites. The Company
        also
        distributes consumer catalogs that feature a variety of *Kenneth
        Cole New York* and *Kenneth
        Cole Reaction* branded
        products.
 
 *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 2006 presentation (see Note 7).
 
 *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.*
              *Marketable
                  securities*
 
 In
        2004,
        the Company began investing in auction rate securities, of which the Company
        holds mostly debt securities backed by student loans with maturity dates
        ranging
        from approximately 2009 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”). They are recorded at fair value, and are ** reset
        every 7 to 35 days, and repurchased based on the Company’s cash needs. The
        purchase of these securities is included in the accompanying Consolidated
        Statements of Cash Flows as an investing activity.
 
  F-10
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 
 **Note
        1 - Summary of Significant Accounting Policies (continued)**
 
 *F.*
              *Inventories*
 
 Inventories,
        which consist of finished goods, are stated at the lower of cost or fair
        market
        value. Cost is determined by the first-in, first-out 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 recorded at the lesser of their
        carrying value or fair value.
 
 *H.*
              *Income
                  taxes*
 
 Income
        taxes are accounted for in accordance with SFAS No. 109, “ *Accounting
        for Income Taxes.”* 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.
  *I.*
              *Revenue
                  recognition*
 
 Wholesale
        revenues are recognized upon shipment of products to customers since title
        passes upon shipment. 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
        period,
        as defined in each license agreement. In circumstances whereby licensee sales
        exceed the quarterly contractual minimums, but not the annual minimums, royalty
        contributions are deferred on the Consoldiated Balance Sheets. As the licensee
        sales exceed the annual contractual minimums, the royalty contributions are
        recognized.
 
 *J.*
              *Advertising
                  costs*
 
 The
        Company incurred advertising costs, including certain in-house marketing
        expenses of $19.0 million, $21.8 million, and $20.0 million for the years
        ended
        December 31, 2006, 2005 and 2004, 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
  F-11
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        1 - Summary of Significant Accounting Policies (continued)**
 
 *J.*
              *Advertising
                  costs (continued)*
 
 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.
 
 *K.*
              *Stock-based
                  compensation*
 
 The
        Company adopted Statement of Financial Accounting Standards No. 123R, *“Share-based
        Payment”* (“SFAS
        123R”) on January 1, 2006 using the modified prospective method. SFAS 123R
        supersedes Accounting Principles Board Opinion No. 25, “ *Accounting
        for Stock Issued to*  *Employees* ”
(“APB
        25”) and its interpretations and revises SFAS No. 123, *“Accounting
        for Stock-based Compensation”* (“SFAS
        123”) and requires all share-based payments, including grants of employee stock
        options, to be recognized in the financial statements based on their fair
        values. 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
        11.)
 
 In
        2005
        and 2004, the Company measured compensation expense for its stock-based
        compensation plans using the intrinsic value method prescribed in APB 25
        and
        related Interpretations.
 
 *L.*
              *Derivative
                  instruments and hedging
                  activities*
 
 The
        Company uses 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
        Accumulated 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 Accumulated 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, and designated all
        hedges
        as cash flow hedges in 2006. (See Note 6.)
  F-12
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 
 **Note
        1 - Summary of Significant Accounting Policies (continued)**
 
 *M.*
              *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.
 
 *N.*
              *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, as
        the
        predominant expenses associated therewith, are general and administrative
        in
        nature.
 
 *O.*
              *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 783,000, 946,000 and 916,000 as of December 31,
        2006,
        2005, and 2004, respectively, have been excluded from the diluted per share
        calculations, since their effect would be antidilutive. The following is
        an
        analysis of the differences between basic and diluted earnings per common
        share
        in accordance with SFAS 128:
 
  **For
                  the Year Ended December
                  31,****2006**
              
              2005
              
              2004Weighted-average
                    commonshares
                    outstanding
              
              
              **20,046,000**
              
              
              19,888,000
              
              
              20,050,000Effect
                  of dilutive securities:Restricted
                  stock & employee stock purchase plan
              
              
              **113,000**
              
              
              5,000Stock
                  options
              
              
              **237,000**
              
              
              425,000
              
              
              602,000Weighted-average
                      commonshares
                      outstanding and commonshare
                      equivalents
              
              
              **20,396,000**
              
              
              20,318,000
              
              
              20,652,000
 
  F-13
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **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, 2006 and 2005 is accounts receivable subject to recourse totaling
        approximately $677,000 and $1,115,000 respectively. The agreements with the
        factors provide for payment of a service fee on receivables sold.
 
 At
        December 31, 2006 and 2005, the balance due from factors, which includes
        chargebacks, is net of allowances for returns, discounts, and other deductions
        of approximately $8,956,000 and $8,068,000, 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, 2006 and 2005, the
        accounts receivable balance includes allowance for doubtful accounts and
        consumer direct sales returns of approximately $1,029,000 and $1,108,000.
        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 - Property and Equipment**
  Property
        and equipment consist of the following:
 
 **December
                  31,****2006**
              
              2005Property
                  and equipment—at cost:Land
              
              **$**
              **5,462,000**
              
              
              -Building
                  and building improvements
              
              
              **33,356,000**
              
              
              -Furniture
                  and fixtures
              
              
              **30,115,000**
              
              $
              27,871,000Machinery
                  and equipment
              
              
              **25,607,000**
              
              
              17,473,000Leasehold
                  improvements
              
              
              **37,091,000**
              
              
              50,212,000**131,631,000**
              
              
              95,556,000Less
                  accumulated depreciation
              
              
              **59,490,000**
              
              
              52,581,000Net
                  property and equipment
              
              **$**
              **72,141,000**
              
              $
              42,975,000
 
 In
        June
        2006, the Company finalized the purchase of its corporate headquarters building,
        located in New York City, for a purchase price of approximately $24 million,
        which is included in building and building improvements, and land at cost.
        Approximately $15 million of leasehold improvements were reclassified to
        building and building improvements during 2006.
  F-14
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        5 - Impairment of Long-Lived Assets**
 
 In
        2006
        and 2004, the Company recorded non-cash asset impairment charges of $121,000
        and
        $448,000, respectively. Management reviews its retail stores’ estimated
        undiscounted future cash flows and determines whether or not a write-down
        to
        current value is required. The impairment charges related to stores’ leasehold
        improvements, and furniture and fixtures, and were separately disclosed in
        the
        accompanying Consolidated Statements of Income.
 
 **Note
        6 - Foreign Currency Transactions, Derivative Instruments and Hedging
        Activities**
 
 The
        Company, in the normal course of business, routinely enters 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 has classified these
        contracts as cash flow hedges under SFAS 133. The Company had no forward
        contracts outstanding as of December 31, 2006, and had $7,000,000, and
        $24,000,000 outstanding at December 31, 2005 and 2004, respectively.
 
 All
        terms
        and conditions of the forward contracts are included in the measurement of
        the
        related hedge effectiveness. The critical terms of the forward contracts
        are the
        same as the underlying forecasted transactions; therefore changes in the
        fair
        value of the contracts should be highly effective in offsetting changes in
        the
        expected cash flows from the forecasted transactions. No gains or losses
        related
        to ineffectiveness of cash flow hedges were recognized in earnings during
        2006,
        2005, and 2004. At December 31, 2006, the Company had no unrealized gains
        or
        losses, as no forward contracts were outstanding. Unrealized gains and losses
        are typically included in Accumulated Other Comprehensive Income in the
        Consolidated Statements of Changes in Shareholders’ Equity and as an adjustment
        to inventory, which is the underlying exposure on the Consolidated Balance
        Sheet. The unrealized gains and/or losses would then be reclassified from
        Accumulated Other Comprehensive Income into earnings based upon the actual
        executions of forward contracts to purchase merchandise and the Company’s
        ultimate sale of that merchandise.
 
 **Note
        7 - 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 more
        than 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-price retail stores, Company Stores, catalogs, 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 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
  F-15
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        7 - Segment Reporting (continued)**
 
 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 elimination of intersegment profit, 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 include a markup, which is eliminated
        in consolidation. Financial information of the Company’s reportable segments is
        as follows (dollars in thousands):
 
 **Consumer****Wholesale**
              
              **Direct**
              
              **Licensing**
              
              **Totals****Year
                  Ended December 31, 2006 (4)**Revenues
              
              $
              314,981
              
              $
              177,301
              
              $
              44,217
              
              $
              536,499Intersegment
                  revenues
              
              
              38,534
              
              
              
              
              
              
              
              
              38,534Interest
                  income, net
              
              
              4,875
              
              
              
              
              
              
              
              
              4,875Depreciation
                  expense
              
              
              3,454
              
              
              7,197
              
              
              4
              
              
              10,655Impairment
                  of long-lived assets
              
              
              
              
              
              121
              
              
              
              
              
              121Segment
                  income (1)
              
              
              42,228
              
              
              (12,623
              )
              
              34,562
              
              
              64,167Segment
                  assets
              
              
              254,752
              
              
              64,914
              
              
              44,348
              
              
              364,
                  014Expenditures
                  for long-lived assets
              
              
              24,063
              
              
              15,870
              
              
              9
              
              
              39,942**Year
                  Ended December 31, 2005 (4)**Revenues
              
              $
              287,190
              
              $
              186,870
              
              $
              43,983
              
              $
              518,043Intersegment
                  revenues
              
              
              38,932
              
              
              
              
              
              
              
              
              38,932Interest
                  income, net
              
              
              4,151
              
              
              
              
              
              
              
              
              4,151Depreciation
                  expense
              
              
              3,059
              
              
              6,333
              
              
              8
              
              
              9,400Segment
                  income (1) (2)
              
              
              29,202
              
              
              6,025
              
              
              36,059
              
              
              71,286Segment
                  assets
              
              
              273,336
              
              
              57,657
              
              
              12,669
              
              
              343,662Expenditures
                  for long-lived assets
              
              
              3,048
              
              
              10,817
              
              
              
              
              
              13,865**Year
                  Ended December 31, 2004 (4)**Revenues
              
              $
              282,258
              
              $
              191,180
              
              $
              42,763
              
              $
              516,201Intersegment
                  revenues
              
              
              35,133
              
              
              
              
              
              
              
              
              35,133Interest
                  income, net
              
              
              1,411
              
              
              
              
              
              
              
              
              1,411Depreciation
                  expense
              
              
              2,745
              
              
              5,087
              
              
              12
              
              
              7,844Impairment
                  of long-lived assets
              
              
              
              
              
              448
              
              
              
              
              
              448Segment
                  income (1)(3)
              
              
              29,669
              
              
              11,698
              
              
              35,454
              
              
              76,821Segment
                  assets
              
              
              249,225
              
              
              49,930
              
              
              8,190
              
              
              307,345Expenditures
                  for long-lived assets
              
              
              3,150
              
              
              6,949
              
              
              2
              
              
              10,101
 (1)
              Before
                  elimination of intersegment profit, unallocated corporate overhead,
                  stock-based compensation expense and income taxes.
 (2)
              Segment
                  income for the Wholesale segment includes one-time payment of $0.8
                  million
                  for severance.
 (3)
              Segment
                  income for the Wholesale segment includes one-time payment of $1.1
                  million
                  for costs associated with the Company’s transfer to a third-party
                  distribution center.
 (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 and 2004 have been reclassified
                  to
                  conform to 2006 presentation.
  F-16
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        7 - Segment Reporting (continued)**
 
 The
        reconciliation of the Company’s reportable segment revenues, profit and loss,
        and assets are as follows (dollars in thousands):
 
 **Revenues**
              
              **2006**
              
              2005
              
              2004Revenues
                  for reportable segments
              
              **$**
              **536,499**
              
              $
              518,043
              
              $
              516,201Intersegment
                  revenues for reportable segments
              
              
              **38,534**
              
              
              38,932
              
              
              35,133Elimination
                  of intersegment revenues
              
              
              **(38,534**
              **)**
              
              (38,932
              )
              
              (35,133
              )Total
                  consolidated revenues
              
              **$**
              **536,499**
              
              $
              518,043
              
              $
              516,201**Income**Total
                  profit for reportable segments
              
              
              **64,167**
              
              
              71,286
              
              $
              76,821Elimination
                  of intersegment profit
              
              
              **(10,272**
              **)**
              
              (11,005
              )
              
              (9,303
              )Unallocated
                  corporate overhead & stock-based compensation expense
              
              
              **(12,032**
              **)**
              
              (10,767
              )
              
              (9,690
              )Total
                  income before provision for income taxes
              
              **$**
              **41,863**
              
              $
              49,514
              
              $
              57,828**Assets**Total
                  assets for reportable segments
              
              **$**
              **364,014**
              
              $
              343,662
              
              $
              307,345Elimination
                  of inventory profit in consolidation
              
              
              **(2,901**
              **)**
              
              (2,991
              )
              
              (2,758
              )Total
                  consolidated assets
              
              **$**
              **361,113**
              
              $
              340,671
              
              $
              304,587
 
 Revenues
        from international customers were approximately 2.1%, 2.4%, and 1.9% of the
        Company’s consolidated revenues for the years ended December 31, 2006, 2005, and
        2004 respectively.
 
 **Note
        8 - Accrued Expenses and Other Liabilities**
 
 Accrued
        expenses and other current liabilities consist of the following:
 **December
                  31,****2006**
              
              2005Rent
              
              **$**
              **570,000**
              
              $
              723,000Compensation
              
              
              **6,345,000**
              
              
              4,268,000Customer
                  credits
              
              
              **2,031,000**
              
              
              2,020,000Other
              
              
              **1,979,000**
              
              
              1,764,000**$**
              **10,925,000**
              
              $
              8,775,000
 
 **Note
        9 - 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. This was included in Prepaid
        expenses and other current assets in the accompanying Consolidated Balance
        Sheets. In 2006, the foreign subsidiary repaid the promissory note and, as
        a
        result, the collateral was released back to the Company.
  F-17
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        10 - 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 their salary up to the maximum permitted
        by
        the Internal Revenue Service. The Company is obligated to make a matching
        contribution and may make an additional discretionary contribution, as defined.
        Contributions to the plan for the years ended December 31, 2006, 2005 and
        2004
        were approximately $551,000, $487,000, and $395,000, 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 plan assets, and the related liability
        is
        included in deferred compensation plan liabilities.
 
 In
        2006,
        2005 and 2004, the Company deposited $915,000 $1,215,000, and $1,516,000,
        respectively, into Supplemental Executive Retirement Plans (“SERP”) for certain
        key executives. The amounts have been recorded in Deposits and Sundry 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 from issuance, and become 60% vested after 9 years of service, 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, 2006 and 2005 were $5,287,000 and $5,818,000, 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 an accumulated long-term vested
        benefit obligation of approximately $2,599,000 and $2,377,000 at December
        31,
        2006 and 2005, 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 lower of the closing price at the beginning or end of each quarterly
        stock purchase period. For the years ended December 31, 2006, 2005, and 2004,
        employees purchased 17,897, 13,601, and 8,941 shares, respectively. Total
        shares
        purchased through December 31, 2006 were 94,452.
  F-18
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        11 - Stock -Based Compensation**
 
 The
        Company’s 2004 Incentive Stock Option Plan (the “Plan”), authorizes the grant of
        options to employees for up to 5,320,162 shares of the Company’s Class A Common
        Stock. The Company amended the Plan in 2005 and authorized an additional
        1,000,000 shares. Certain options granted under the Plan vest in one-third
        increments in each of the first, second and third years following the date
        of
        grant, while certain other options vest over five years. Options granted
        under
        the Plan have ten-year terms. Non-employee Director stock options granted
        have
        ten-year terms and vest 50% on the first anniversary of the date of grant
        and
        become fully exercisable at the end of two years.
 
 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 will 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
        Statement 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 lookback
        feature and 15% purchase price discount.
 
 The
        Company has stock-based compensation plans under which directors, officers
        and
        other eligible employees receive stock options and other equity-based awards.
        The plans provide for the grant of stock options, restricted stock awards
        and
        other stock unit awards. Historically, stock options have been granted to
        broad
        groups of employees on a discretionary basis. Recently, the Company’s
        equity-based compensation program has migrated toward an emphasis on restricted
        stock awards.
  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.
  F-19
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        11 - Stock-Based Compensation (continued)**
 
 The
        following table summarizes stock option activity for the years ended December
        31, 2006, 2005 and 2004:
 
 **Shares**
              
              **Weighted-**
                **average
                  exercise**
                **price
                  per share**Outstanding
                  as of December 31, 2003
              
              
              2,931,335
              
              $
              19.36Granted
              
              
              574,900
              
              $
              32.97Exercised
              
              
              (398,113
              )
              $
              12.97Forfeited
              
              
              (159,186
              )
              $
              22.20Outstanding
                  as of December 31, 2004
              
              
              2,948,936
              
              $
              22.71Granted
              
              
              46,667
              
              $
              29.28Exercised
              
              
              (312,064
              )
              $
              15.01Forfeited
              
              
              (82,822
              )
              $
              26.31Outstanding
                  as of December 31, 2005
              
              
              2,600,717
              
              $
              23.64Granted
              
              
              27,000
              
              $
              24.73Exercised
              
              
              (203,283
              )
              $
              16.28Forfeited
              
              
              (305,549
              )
              $
              28.91Outstanding
                  as of December 31, 2006
              
              
              2,118,885
              
              $
              23.60Exercisable
                  as of December 31, 2006
              
              
              1,890,137
              
              $
              23.52
 
 The
        weighted-average grant-date fair value of options granted during the years
        ended
        December 31, 2006 and 2005 was $0.3 million and $0.6 million, respectively.
        The
        weighted-average remaining term for stock options outstanding and exercisable,
        as of December 31, 2006, was 4.8 years and 4.5 years, respectively. The
        aggregate intrinsic value of stock options outstanding and exercisable as
        of
        December 31, 2006 was $6.8 million and $6.7 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, 2006 and 2005 was $2.1 million and $3.4 million, respectively.
 
 The
        intrinsic value related to the exercise of stock options was $1.9 million
        for
        the year ended December 31, 2006, which is currently deductible for tax
        purposes. The intrinsic value related to the exercise of stock options was
        $4.3
        million for the year ended December 31, 2005. In addition, 91,808 treasury
        shares were re-issued for options exercised during the year ended December
        31,
        2006.
  F-20
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 
 **Note
        11 - Stock-Based Compensation (continued)**
 
 The
        following table summarizes restricted stock unit activity for the years ended
        December 31, 2006 and 2005. No shares of restricted stock were granted prior
        to
        2005.
 
 **Shares**Unvested
                  as of January 1, 2005
              
              
              --Granted
              
              
              158,044Vested
              
              
              (14,782
              )Forfeited
              
              
              (5,080
              )Unvested
                  as of December 31, 2005
              
              
              138,182Granted
              
              
              515,616Vested
              
              
              (34,138
              )Forfeited
              
              
              (53,557
              )Unvested
                  as of December 31, 2006
              
              
              566,103Vested
                  as of December 31, 2006
              
              
              48,920
 
 The
        weighted-average grant-date fair value of restricted stock awards granted
        during
        the years ended December 31, 2006 and 2005 was $13.1 million and $4.7 million,
        respectively. The total grant-date fair value of restricted shares vested
        during
        the years ended December 31, 2006 and 2005 was $0.7 million and $0.3 million,
        respectively. The weighted-average remaining contractual term of unvested
        shares
        of restricted stock as of December 31, 2006 and 2005 was 2.5 years and 3.0
        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 years ended December 31, 2005 and 2004:
 
 **Year
                  Ended December
                  31,****2005**
              
              **2004**Net
                  income, as reported
              
              $
              33,526,000
              
              $
              35,852,000Add:
                  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
              )
              
              (3,429,000
              )Pro
                  forma net income
              
              $
              27,060,000
              
              $
              32,423,000Earnings
                  per share:Basic
                  - as reported
              
              $
              1.69
              
              $
              1.79Basic
                  - pro forma
              
              $
              1.36
              
              $
              1.62Diluted
                  - as reported
              
              $
              1.65
              
              $
              1.74Diluted
                  - pro forma
              
              $
              1.33
              
              $
              1.57
 
  F-21
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  **Note
        11 - 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 and classification of stock-based
        compensation expense for the years ended December 31, 2006 and 2005.
  **Year
                  ended**
                **December
                  31, 2006**
              
              **Year
                  ended**
                **December
                  31, 2005**Stock
                  options
              
              $
              1,137,000
              
              $
              100,000Restricted
                  stock units and employee stock purchase plan
              
              
              2,056,000
              
              
              1,159,000Total
                  stock-based compensation expense (1)
              
              **$**
              **3,193,000**
              
              **$**
              **1,259,000**
 
 (1)
        Total
        stock-based compensation expense is recorded in Selling, general, and
        administrative expenses in the Consolidated Statements of Income.
 
 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, 2006**
              **Year
                  Ended**
                **December
                  31, 2005**Weighted-average
                  volatility
              48.3%
              49.1%Risk-free
                  interest rate
              5.1%
              4.1%Weighted-average
                  dividend yield
              2.9%
              2.2%Expected
                  Term
              3-9
                  years
              3-9
                  years
 
  F-22
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  **Note
        11 - Stock-Based Compensation (continued)**
 
 The
        weighted-average volatility for the options granted during the current period
        was developed using historical volatility for periods equal to the expected
        term
        of the options. Prior to fiscal 2006, historical volatility was also used.
        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, 2006
        ranged from 32.4% 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 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, 2006 ranged from 0% (for grants prior to 2003)
        to
        2.9%.
 
 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. This is currently
        being amortized over the vesting periods of the individual grants. 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 20% to 100% for stock options, and 10% to 75%
        for
        restricted stock. As part of the Company’s forfeiture evaluation, the Company
        recorded a favorable adjustment of approximately $0.9 million for the year
        ended
        December 31, 2006. Estimated forfeitures will continue to be reassessed in
        subsequent periods and may change based on new facts and circumstances.
 
 As
        of
        December 31, 2006, approximately $13.5 million of unrecognized stock
        compensation related to unvested awards (net of estimated forfeitures) is
        expected to be recognized over a weighted-average period of 2.4
        years.
 
 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, and as such, all future compensation cost will be
        charged
        to compensation expense.
 
 **Note
        12 - Income Taxes**
 
 In
        June 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, for the year
        ended December 31, 2006.
  F-23
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        12 - Income Taxes (continued)**
 
 In
        2004, Internal Revenue Code Section 965 was enacted, 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. In 2005, 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:
 
 Years
                  Ended December 31
              
              2006
              
              2005
              
              2004Domestic
              
              **$**
              **37,700,000**
              
              $
              45,341,000
              
              $
              54,460,000International
              
              
              **4,163,000**
              
              
              4,173,000
              
              
              3,368,000**$**
              **41,863,000**
              
              $
              49,514,000
              
              $
              57,828,000
 
 Significant
        items comprising the Company’s deferred tax assets and liabilities are as
        follows:
 ****   ****
 **December****31,****2006**
              
              2005Deferred
                  tax assets:Inventory
                  allowances and capitalization
              
              **$**
              **2,197,000**
              
              $
              1,927,000Allowance
                  for doubtful accounts andsales
                  allowances
              
              
              **538,000**
              
              
              940,000Deferred
                  rent
              
              
              **4,451,000**
              
              
              4,449,000Deferred
                  compensation
              
              
              **11,337,000**
              
              
              10,137,000Asset
                  impairment
              
              
              **1,396,000**
              
              
              1,835,000Depreciation
              
              
              **166,000**
              
              
              -Deferred
                  Income - Licensing Agreements
              
              
              **586,000**
              
              
              791,000Stock-based
                  compensation
              
              
              **1,246,000**
              
              
              -Other
              
              
              **42,000**
              
              
              511,000**$**
              **21,959,000**
              
              $
              20,590,000Deferred
                  tax liabilities:Depreciation
              
              
              **-**
              
              
              (1,662,000
              )Tax
                  effect on unrealized gains on available-for-sale
                  securities
              
              
              **(703,000**
              **)**
              
              (381,000
              )Undistributed
                  foreign earnings
              
              
              **(3,407,000**
              **)**
              
              (375,000
              )**(4,110,000**
              **)**
              
              (2,418,000
              )Net
                  deferred tax assets
              
              **$**
              **17,849,000**
              
              $
              18,172,000
 
  F-24
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        12 - Income Taxes (continued)**
 
 The
        provision for income taxes consists of the following:
 **December
                  31,****2006**
              
              **2005**
              
              **2004**Current:Federal
              
              **$**
              **13,402,000**
              
              $
              19,477,000
              
              $
              21,005,000State
                  and local
              
              
              **1,465,000**
              
              
              1,882,000
              
              
              2,483,000Foreign
              
              
              **231,000**
              
              
              420,000
              
              
              197,000**15,098,000**
              
              
              21,779,000
              
              
              23,685,000Deferred:Federal
              
              
              **-**
              
              
              (5,486,000
              )
              
              (1,574,000
              )State
                  and local
              
              
              **-**
              
              
              (305,000
              )
              
              (135,000
              )**-**
              
              
              (5,791,000
              )
              
              (1,709,000
              )**$**
              **15,098,000**
              
              $
              15,988,000
              
              $
              21,976,000
 
 The
        reconciliation of income tax computed at the U.S. federal statutory tax rate
        to
        the effective income tax rate for 2006, 2005 and 2004 is as
        follows:
 
 **2006**
              
              **2005**
              
              **2004**Federal
                  income tax at statutory rate
              
              
              **35.0**
              **%**
              
              35.0
              %
              
              35.0
              %State
                  and local taxes, net of federal tax benefit
              
              
              **2.5**
              **%**
              
              3.0
              %
              
              3.0
              %Repatriation
                  Benefit
              
              
              **--**
              
              
              (5.7
              %)
              
              --Favorable
                  adjustment to state tax accruals from audit settlement
              
              
              **(1.4**
              **)%**
              
              --
              
              
              --**36.1**
              **%**
              
              32.3
              %
              
              38.0
              %
 
 **Note
        13 - 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, 2006:
 
 2007
              
              $
              25,851,0002008
              
              
              25,349,0002009
              
              
              24,190,0002010
              
              
              22,162,0002011
              
              
              19,609,000Thereafter
              
              
              58,719,000Total
                  minimum cash payments
              
              $
              175,880,000
 
  F-25
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        13 - Commitments and Contingencies (continued)**
 
 *A.
        Operating leases and Other Property Agreements (continued)*
 
 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 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:
  For
                  the years ended December
                  31,2006
              
              2005
              
              2004Minimum
                  Rent
              
              $
              27,894,000
              
              $
              27,711,000
              
              $
              24,340,000Contingent
                  Rent and other
              
              
              6,972,000
              
              
              6,413,000
              
              
              7,530,000Total
                  Rent Expense
              
              $
              34,866,000
              
              $
              34,124,000
              
              $
              31,870,000
 
 Sub-tenants
        rental income for 2006, 2005, and 2004 was $855,000, $849,000, and $1,073,000,
        respectively. Future minimum rental income from sub-tenants is $34,000 for
        2007. **** Future
        minimum rental income from sub-tenants does not include rent escalation and
        other charges that are subsequently passed through to the
        sub-tenant.
 
 In
        2004,
        the Company entered into a new 10-year lease for 51,000 square feet of office
        space in Secaucus, New Jersey for its administrative offices and completed
        the
        move in June 2004. Also, in 2004, the Company’s distribution facility was moved
        to a third-party public warehouse and distribution center in New Jersey.
        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 signed a lease for a similar office in China in 2005.
        The
        Company does not own or operate any manufacturing facilities.
 
 The
        Company leases space for all of its 54 full-priced retail stores (aggregating
        approximately 253,000 square feet) and 40 Company Stores (aggregating
        approximately 204,000 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 $196,000 of open letters of credit as
        of
        December 31, 2006, and was not contingently liable for any open letters of
        credit as of December 31, 2005. In addition, at December 31, 2006 and 2005,
        the
        Company was contingently liable for approximately $3,067,000 and $6,679,000
        of
        standby letters of credit, respectively.
 
 
  F-26
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  **Note
        13 - Commitments and Contingencies (continued)**
 
 *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, 2006, 2005, and 2004.
 
 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 46% of total handbag
        purchases came from two manufacturers in China during the years ended December
        31, 2006 and 2005. Approximately 39% and 21% of *Kenneth
        Cole* and *Kenneth Cole Reaction* men’s
        footwear purchases were from one manufacturer in China utilizing many different
        factories during the years ended December 31, 2006 and December 31, 2005,
        respectively. Approximately 55% of *Kenneth
        Cole Reaction* ladies’
        footwear purchases were sourced through two Chinese manufacturers during
        the
        year ended December 31, 2006, and 44% were purchased from one Chinese
        manufacturer during the year ended December 31, 2005. 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.*
              *Severance*
 
 In
        2005,
        the Company entered into an agreement with a senior executive of the Company
        relating to termination of employment and the Company incurred approximately
        $900,000 of severance and other benefits related to such agreement,
        substantially all in 2005.
 
 In
        2004,
        in conjunction with the Company’s decision to close its east coast distribution
        center and transfer the operation to a third-party service provider, the
        Company
        entered into a shutdown agreement in 2004, with a local affiliate of the
        International Leather Goods, Plastics, Handbags and Novelty Workers Union,
        Local
        I Division of Local 342-50 United Food and Commercial Workers Union, which
        provided for, among other things, severance payments for employees covered
        by
        the expiring collective bargaining agreement. In connection with this
        transition, the Company incurred approximately $1.1 million in aggregate
        costs,
        including severance from the aforementioned agreement, the write-off of
        unamortized leasehold improvements and moving costs. These costs were expensed
        as incurred in accordance with SFAS No. 146 “ *Accounting
        for Costs Associated with Exit or Disposal Activity* ”
and
        recorded in Selling, general and administrative expenses in the Consolidated
        Statement of Income. As of December 31, 2006 and 2005, the Company did not
        have
        any employees covered under a collective bargaining agreement with a local
        union.
  F-27
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 
 **Note
        13 - Commitments and Contingencies (continued)**
 
 *E.*
              *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. No fees
        were
        paid by the Company for advances or issuances of letters or credit under
        the
        Revolving Credit Facility as none were outstanding during the period ended
        December 31, 2006 . During
        2006, the Company did not borrow under the Revolving Credit
        Facility.
 
 The
        Company also has an existing Line of Credit Facility (the “Facility”) with
        another bank that, as amended, allows for uncommitted borrowings, letters
        of
        credit and banker’s acceptances subject to individual maximums and in the
        aggregate, an amount not to exceed the lesser of $25.0 million or a “Borrowing
        Base.” The Borrowing Base is calculated on a specified percentage of eligible
        amounts due under factoring arrangements, eligible non-factored accounts
        receivable, and eligible inventory. Borrowings under the revolving loan portion
        of the Facility (“Advances”) are due on demand. The Company may pay down and
        re-borrow at will under the Facility. Advances bear interest at the Alternate
        Base Rate (defined as the higher of the Prime Rate or the Federal Funds in
        effect at borrowing date plus 1/2 of 1%) **** or
        the
        Note Rate (which will be agreed upon between the lender and the Company).
        There
        were no outstanding advances under this agreement at December 31, 2006, and
        2005. Amounts available under the Facility at December 31, 2006 were reduced
        by
        $3,300,000 of standby and open letters of credit. In connection with the
        line of
        credit, the Company has agreed to eliminate all the outstanding advances
        under
        the Facility for at least 30 consecutive days during each calendar year,
        which
        the Company has complied with. In addition, borrowings under the line of
        credit
        are secured by certain assets of the Company.
 
 *F.*
                  *Other*
 
 In
        April
        2005, a purported class action lawsuit was filed against the Company in the
        Superior Court of California for the County of San Diego.  The individual
        plaintiff was a floor supervisor in one of the Company’s retail stores who
        purported to bring suit on behalf of himself and other similarly situated
        current and former floor supervisors.  Among other claims, the plaintiff
        alleged that he and other floor supervisors
  F-28
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        13 - Commitments and Contingencies (continued)**
 
 *F.*
              *Other
                  (continued)*
 
 worked
        hours for which they were entitled to receive, but did not receive, overtime
        compensation under California law.  The lawsuit sought damages, penalties,
        restitution, equitable relief, interest and attorneys’ fees and costs.  In
        September 2006, counsel for the plaintiffs agreed to dismiss the purported
        class
        action.  In October 2006, the individual plaintiff and the Company executed
        a settlement agreement, for a nominal amount, for his individual claim and
        the
        Court entered final judgment in the case, which settlement included plaintiff’s
        attorneys’ fees as well as court costs. All amounts due under the final judgment
        have now been paid and the period for any appeal has now been exhausted.
        The
        settlement did not have a material impact on the Company’s financial
        statements.
 
 In
        September 2004, a purported class action lawsuit was filed against the Company
        in the Superior Court of California for the County of Los Angeles.  The
        individual plaintiffs were current or former store managers or assistant
        managers who brought a suit on behalf of themselves and other similarly situated
        store managers and assistant managers.  Among other claims, the plaintiffs
        alleged that they worked hours for which they were entitled to receive, but
        did
        not receive, overtime compensation under California law.  The lawsuit
        sought damages, penalties, restitution, reclassification and attorneys’ fees and
        costs.  In January 2006, the Company reached an agreement in principle to
        settle the matter, and the parties filed a fully executed Stipulation of
        Class
        Settlement and Release.  In June 2006, the Court entered final judgment in
        the case, which settlement included the plaintiffs’ attorneys’ fees as well as
        court and claims administration costs.  All amounts due under the final
        judgment have now been paid and the period for any appeal has now been
        exhausted.  The settlement did not have a material impact on the Company’s
        financial statements.
 
 In
        July
        2006, an Italian footwear manufacturer served the Company with a complaint
        claiming that the Company is selling certain styles of footwear that infringe
        on
        its patents.  The complaint seeks unspecified monetary relief and an
        injunction to prohibit the Company from selling allegedly infringing
        shoes.  In December 2006, the Company entered into a settlement agreement
        which resulted in an order from the Federal Court of the Southern District
        of
        New York for dismissal on January 17, 2007. The settlement did not have a
        material impact on the Company’s financial statements.
 
 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
        14 - 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
  F-29
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        14 - Shareholders’ Equity (continued)**
 
 *A.*
              *Common
                  stock (continued)*
 
 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.*
              *Common******Stock
                  Repurchase*
 
 During
        2006, the Company repurchased 300,000 of its shares at an aggregate price
        of
        $7.2 million. No shares were repurchased in 2005. In December 2004, the Company
        repurchased 500,000 of its shares from Liz Claiborne, Inc. at an aggregate
        price
        of $13.9 million, which were originally acquired by Liz Claiborne, Inc. in
        connection with its licensing agreement with the Company. The Company’s stock
        purchase plan authorizes the repurchase of an aggregate of 4,250,000 of shares
        of Class A common stock. In 2006, the Company’s Board of Directors increased the
        authorization for the Company’s repurchase plan by approximately 1,138,400
        shares. The Company had 1,700,000 and 861,600 shares available for repurchase
        as
        of December 31, 2006 and 2005, respectively.
 
 **Note
        15 - Licensing Agreements**
 
 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 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 Reaction* sportswear
        business in 2007.  These
        amendments are 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, the Company expects incremental advertising
        and
        infrastructure costs of approximately $3 million to $5 million before
        implementing any mitigating actions.
 
 In
        2005,
        the Company entered into a Stock Purchase Agreement (the “Stock Purchase
        Agreement”) with Bernard Chaus, Inc., (“Chaus”), pursuant to which the Company
        purchased 6,000,000 shares of Chaus common stock for an aggregate purchase
        price
        of $6,000,000. The Stock Purchase Agreement provides the Company with one
        demand
        and one piggyback registration right. The Company recorded the shares at
        their
        fair value at the date of acquisition, and classified the shares as “available
        for sale”
  F-30
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  **Note
        15 - Licensing Agreements (continued)**
 
 under
        SFAS 115, which is included in Deposits and sundry ** in
        the
        accompanying Consolidated Balance Sheets. As of December 31, 2006 and 2005,
        the
        Company recorded unrealized gains of $72,000 and $414,000, respectively,
        net of
        taxes, related to the Chaus shares, in Accumulated Other Comprehensive Income
        in
        the accompanying Statements of Changes in Shareholders’ Equity.
 
 In
        addition, the Company also entered into a license agreement (“License
        Agreement”) with Chaus, dated June 13, 2005. The License Agreement grants Chaus
        an exclusive license to design, manufacture, sell and distribute women’s
        sportswear under the Company’s trademark, *Kenneth
        Cole Reaction.* The
        initial term of the License Agreement expires on December 31, 2010. Chaus
        has
        the option to renew the License Agreement for an additional term of three
        years
        if it meets specified sales targets and is in compliance with the License
        Agreement. The License Agreement provides that the Company receives payment
        of
        specified royalties on net sales. The License Agreement also requires Chaus
        to
        achieve certain minimum sales levels, to pay certain minimum royalties and
        to
        maintain a minimum net worth. Chaus is also obligated to pay specified
        percentages of net sales to support advertising and to expend a specified
        amount
        in the period ending December 31, 2007 to support the initial launch of the
        Licensed Products, as defined.
 
 In
        November 2004, the Company entered into a licensing agreement with G-III
        Apparel
        Group, LTD (“G-III”), in connection with worldwide manufacture, sale, and
        distribution of women’s and men’s outerwear. The agreement commenced on January
        1, 2005 and continues through December 31, 2008, with options to renew based
        on
        certain milestones to be met by G-III. As part of the agreement, the Company
        earns royalties based on a percentage of G-III’s net sales. The Company will
        receive $3,000,000 over the term of the agreement, as consideration for the
        grant of the license, and also received 50,000 shares of G-III’s unregistered
        stock, with a value of $297,000 at the date of receipt. The cash and stock
        consideration are being amortized over the term of the agreement as part
        of the
        royalty stream. In addition, the Company recorded the shares as an “available
        for sale” investment under SFAS 115 *,* which
        is
        included in Deposits and sundry in the accompanying Consolidated Balance
        Sheets.
 
 **Note
        16 - Related Party Transactions**
 
 The
        Company has an exclusive license agreement with Iconix Brand Group, Inc.,
        formerly Candies, 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 initial term of the agreement is through
        December 31, 2007, with options to renew through December 31, 2016 based
        upon
        the Company reaching certain sales thresholds. 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 $1,400,000
        and $1,260,000 in aggregate royalty and advertising expense with respect
        to
        Iconix for the years ended December 31, 2006 and December 31, 2005,
        respectively.
  F-31
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        17 - New Accounting Pronouncements**
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48, *“Accounting
        for Uncertainty in Income Taxes”* (“FIN
        48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in the Company’s financial statements in accordance with FASB Statement No. 109 *“Accounting
        for Income Taxes.”* 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. FIN 48 is effective for the Company on January 1, 2007. Based
        on
        the Company’s evaluation and analysis, FIN 48 is not expected to have a material
        impact on the Company’s consolidated financial statements.
 
 In
        September 2006, the FASB issued FASB Statement No. 157, *“Fair
        Value Measurements”* (“FAS
        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. FAS 157 is effective for fiscal
        years beginning after November 15, 2007.  The
        Company is currently evaluating the requirements and impact of FAS 157 on
        the
        Company’s consolidated financial statements, and will adopt the provisions on
        January 1, 2008. FAS 157 is not expected to have a material impact on the
        Company’s consolidated financial statements.
 
 Also
        in
        September 2006, the FASB issued FASB Statement No. 158, *“Employers’
        Accounting for Defined Benefit Pension and other Postretirement Plans, an
        amendment of FASB Statements No. 87, 88, 106 and 132- R”* (“FAS
        158”). FAS 158 requires an employer to recognize the overfunded or underfunded
        status of a defined benefit postretirement plan as an asset or liability
        in its
        statement of financial position and to recognize changes in that funded status
        in the year in which the changes occur through comprehensive income of a
        business entity. FAS 158 also requires an employer to measure the funded
        status
        of a plan as of the date of its year-end statement of financial
        position . This
        statement is effective for the Company as of December 31, 2006, but did not
        have
        an impact on the Company’s consolidated financial statements as the Company does
        not sponsor a defined benefit pension or postretirement plan.
  In
        June
        2006, the Emerging Issues Task Force (the “Task Force”) issued EITF No. 06-3, *“How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement (That Is, Gross versus Net
        Presentation)”* (the
“Issue”). The Task Force reached a consensus that the scope of this Issue
        includes any tax assessed by a governmental authority that is both imposed
        on
        and concurrent with a specific revenue-producing transaction between a seller
        and a customer, and may include, but is not limited to, sales, use, value
        added,
        and some excise taxes.  The Task Force also reached a consensus that the
        presentation of taxes within the scope of this Issue on either a gross basis
        (included in revenues and costs) or a net basis (excluded from revenues)
        is an
        accounting policy decision that should be disclosed pursuant to APB
        Opinion No. 22 ,
        “ *Disclosure
        of Accounting Policies.”* An
        entity
        is not required to reevaluate its existing policies related to taxes assessed
        by
        a governmental authority as a result of this consensus.  In addition, for
        any such taxes that are reported on a gross basis, an entity should disclose
        the
        amounts of those taxes in interim and annual financial statements for each
        period for which an income statement is presented if those amounts are
        significant.  The Company currently uses the net basis. The Company adopted
        this Issue on January 1, 2007 and determined that it had no impact on its
        consolidated financial statements.
  
  F-32
 Kenneth
            Cole Productions, Inc. and Subsidiaries
 Notes
            to Consolidated Financial Statements
  
 **Note
        18- Quarterly Financial Data (Unaudited)**
 
 Summarized
        quarterly financial data for 2006 and 2005 appear below (in thousands, except
        per share data):
  **First**
                **Quarter**
              
              **Second**
                **Quarter**
              
              **Third**
                **Quarter**
              
              **Fourth**
                **Quarter****2006**Net
                  sales
              
              $
              112,201
              
              $
              124,877
              
              $
              132,839
              
              $
              122,365Royalty
                  revenue
              
              
              10,374
              
              
              10,384
              
              
              10,850
              
              
              12,609Net
                  revenues
              
              
              122,575
              
              
              135,261
              
              
              143,689
              
              
              134,974Gross
                  profit
              
              
              51,297
              
              
              56,736
              
              
              62,372
              
              
              61,422Operating
                  income
              
              
              3,650
              
              
              8,145
              
              
              13,622
              
              
              11,571Net
                  income
              
              
              3,064
              
              
              6,487
              
              
              9,220
              
              
              7,994Earnings
                  per share basic
              
              $
              0.15
              
              $
              0.32
              
              $
              0.46
              
              $
              0.40Earnings
                  per share diluted
              
              $
              0.15
              
              $
              0.32
              
              $
              0.45
              
              $
              0.39Dividends
                  Declared
              
              $
              0.18
              
              $
              0.18
              
              $
              0.18
              
              $
              0.18**2005**Net
                  sales
              
              $
              120,292
              
              $
              109,281
              
              $
              124,720
              
              $
              119,767Royalty
                  revenue
              
              
              9,606
              
              
              10,054
              
              
              11,059
              
              
              13,264Net
                  revenues
              
              
              129,898
              
              
              119,335
              
              
              135,779
              
              
              133,031Gross
                  profit
              
              
              56,166
              
              
              55,369
              
              
              60,533
              
              
              62,248Operating
                  income
              
              
              11,184
              
              
              11,208
              
              
              12,618
              
              
              10,353Net
                  income
              
              
              7,489
              
              
              7,708
              
              
              10,853
              
              
              7,476Earnings
                  per share basic
              
              $
              0.38
              
              $
              0.39
              
              $
              0.54
              
              $
              0.37Earnings
                  per share diluted
              
              $
              0.37
              
              $
              0.38
              
              $
              0.53
              
              $
              0.37Dividends
                  Declared
              
              $
              0.16
              
              $
              0.16
              
              $
              0.16
              
              $
              0.18
 
 **Note
        19- Subsequent Event**
 
 On
        February 21, 2007, the Board of Directors declared a quarterly cash dividend
        of
        $0.18 per share payable on March 23, 2007 to shareholders of record at the
        close
        of business on March 8, 2007.
 
 
 
 
 
  F-33
   **Kenneth
                  Cole Productions, Inc.****Schedule
                  II****Valuation
                  and Qualifying Accounts****For
                  the Years Ended December 31, 2006, 2005, and 2004**
 
 
 **Balance
                  at**
              
              **Charged
                  to**
              
              
              
              **Balance****Beginning**
              
              **Costs
                  and**
              
              
              
              **at
                  End****Description**
              
              **of
                  Period**
              
              **Expenses**
              
              **Deductions**
              
              **of
                  Period****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**
              **)****Year
                  ended December 31, 2004****Allowance
                  for doubtful accounts**
              
              **$**
              **(475,000**
              **)**
              **$**
              **(54,000**
              **)**
              **$**
              **227,000**
              
              **$**
              **(302,000**
              **)****Reserve
                  for returns and sales allowances**
              
              **$**
              **(9,425,000**
              **)**
              **$**
              **(23,535,000**
              **)**
              **$**
              **24,583,000**
              
              **$**
              **(8,377,000**
              **)****$**
              **(9,900,000**
              **)**
              **$**
              **(23,589,000**
              **)**
              **$**
              **24,810,000**
              
              **$**
              **(8,679,000**
              **)**
 
  
   
 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. COLEKenneth
                  D. Cole*Chief
                  Executive Officer*Date:
                  March 2, 2007
 
 
 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
                  2, 2007Kenneth
                  D. Cole/s/
                  JOEL NEWMAN
              
              Vice
                  Chairman & Chief Operating Officer
              March
                  2, 2007Joel
                  Newman/s/
                  DAVID P. EDELMAN
              
              Chief
                  Financial Officer
              March
                  2, 2007David
                  P. Edelman/s/
                  ROBERT C. GRAYSON
              
              Director
              March
                  2, 2007Robert
                  C. Grayson/s/
                  DENIS F. KELLY
              
              Director
              March
                  2, 2007Denis
                  F. Kelly/s/
                  PHILIP R. PELLER
              
              Director
              March
                  2, 2007Philip
                  R. Peller/s/
                  MARTIN E. FRANKLIN
              
              Director
              March
                  2, 2007Martin
                  E. Franklin