**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**xAnnual Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**Forthe Fiscal Year Ended December 31, 2006**

**OR**

**o Transition Report Pursuant to Section 13or 15(d) of the SecuritiesExchange Act of 1934**

**Forthe transition period from             to**

**CommissionFile Number 1-11893**

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**GUESS?, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                       |   | **95-3679695**          |
|------------------------------------|--------|-------------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer        |
| of incorporation  or organization) |   | Identification  Number) |

**1444 South Alameda Street**

**Los Angeles, California90021**

**(213) 765-3100**

(Address, including zip code, and telephone number,including area code)

Securities registered pursuant to Section 12(b) ofthe Act:

|                                          |   | **Name of  Each Exchange** |
|------------------------------------------|--------|----------------------------|
| **Title  of Each Class**                 |   | **on  Which Registered**   |
| common stock, par  value $0.01 per share |   | New York Stock  Exchange   |

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

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check mark whether registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large accelerated filer x     Acceleratedfiler o    Non-accelerated filer o

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

As of the close of business on July 1, 2006, thelast business day of the registrant’s most recently completed second fiscalquarter, the aggregate market value of the voting and non-voting commonequity stock held by non-affiliates of the registrant was $977,882,152based upon the closing price of $20.88 on the New York Stock Exchange compositetape on such date (as adjusted to reflect the two-for-one stock split announcedon February 14, 2007). For this computation, the registrant has excludedthe market value of all shares of its common stock reported as beneficiallyowned by executive officers and directors of the registrant. Such exclusionshall not be deemed to constitute an admission that any such person is an “affiliate”of the registrant.

As of the close of business on February 20, 2007,the registrant had 93,198,238 shares of common stock outstanding.

**DOCUMENTS INCOPORATED BYREFERENCE**

Portionsof the proxy statement for the registrant’s 2007 Annual Meeting of Stockholdersare incorporated by reference into Part III herein.

 

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**TABLEOF CONTENTS**

| Item   | ** ** | **Description** | ** ** | **Page**                                                                                                           | ** ** |
|--------|------------|-----------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
|   | ** ** | ** **      |       | **PART I**                                                                                                    | ** ** |   | ** ** | ** ** |   |
|   | 1          | ** **      |       | Business                                                                                                           |       |   | 1 | ** ** |   |
|   | 1A         | ** **      |       | Risk  Factors                                                                                                      |       |   | 14 | ** ** |   |
|   | 1B         | ** **      |       | Unresolved Staff Comments                                                                                          |       |   | 21 | ** ** |   |
|   | 2          | ** **      |       | Properties                                                                                                         |       |   | 22 | ** ** |   |
|   | 3          | ** **      |       | Legal  Proceedings                                                                                                 |       |   | 23 | ** ** |   |
|   | 4          | ** **      |       | Submission of Matters to a Vote of Security Holders                                                                |       |   | 24 | ** ** |   |
|   | ** ** | ** **      |       | **PART II**                                                                                                   | ** ** |   | ** ** | ** ** |   |
|   | 5          | ** **      |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |   | 25 | ** ** |   |
|   | 6          | ** **      |       | Selected Financial Data                                                                                            |       |   | 26 | ** ** |   |
|   | 7          | ** **      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       |   | 27 | ** ** |   |
|   | 7A         | ** **      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       |   | 44 | ** ** |   |
|   | 8          | ** **      |       | Financial Statements and Supplementary Data                                                                        |       |   | 46 | ** ** |   |
|   | 9          | ** **      |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                              |       |   | 46 | ** ** |   |
|   | 9A         | ** **      |       | Controls and Procedures                                                                                            |       |   | 46 | ** ** |   |
|   | 9B         | ** **      |       | Other  Information                                                                                                 |       |   | 49 | ** ** |   |
|   | ** ** | ** **      |       | **PART III**                                                                                                  | ** ** |   | ** ** | ** ** |   |
|   | 10         | ** **      |       | Directors, Executive Officers and Corporate Governance                                                             |       |   | 49 | ** ** |   |
|   | 11         | ** **      |       | Executive Compensation                                                                                             |       |   | 49 | ** ** |   |
|   | 12         | ** **      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |   | 49 | ** ** |   |
|   | 13         | ** **      |       | Certain Relationships and Related Transactions, and  Director Independence                                         |       |   | 49 | ** ** |   |
|   | 14         | ** **      |       | Principal Accountant Fees and Services                                                                             |       |   | 49 | ** ** |   |
|   | ** ** | ** **      |       | **PART IV**                                                                                                   | ** ** |   | ** ** | ** ** |   |
|   | 15         | ** **      |       | Exhibits and Financial Statement Schedules                                                                         |       |   | 50 | ** ** |   |

 

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**IMPORTANT FACTORSREGARDING FORWARD-LOOKING STATEMENTS**

Throughout this Annual Report on Form 10-K,including documents incorporated by reference herein, we make “forward-looking”statements, which are not historical facts, but are forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be inthe Company’s other reports filed under the Securities Exchange Act of 1934, inits press releases and in other documents. In addition, from time to time, theCompany, through its management, may make oral forward-lookingstatements. These statements relate to analyses and other informationbased on forecasts of future results and estimates of amounts not yetdeterminable. These statements also relate to our future prospects and proposednew products, services, developments or business strategies. Theseforward-looking statements are identified by their use of terms and phrasessuch as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”,“plan”, “predict”, “project”, “will”, “continue”, and other similar terms andphrases, including references to assumptions.

Although we believe thatthe expectations reflected in any of our forward-looking statements arereasonable, actual results could differ materially from those projected orassumed. These forward-looking statements may include, among other things, statements relating to the Company’s expectedresults of operations, the accuracy of data relating to, and anticipated levelsof, future inventory and gross margins, anticipated cash requirements andsources, cost containment efforts, estimated charges, plans regarding storeopenings and closings, plans regarding business growth, plans regardinginternational expansion, e-commerce, business seasonality, industrytrends, consumer demands and preferences, competition and general economicconditions. We do not intend, and undertake no obligation, to update ourforward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties,which may cause actual results to differ materially from those set forth inthese statements. Important factors that could cause or contribute to suchdifference include those discussed under “Item 1A. Risk Factors”contained herein.

**RECENT EVENTS**

On January 18, 2007, the Board of Directors ofGuess?, Inc. (the “Company”) approved a change in the Company’s fiscalyear end from December 31 to the Saturday nearest January 31 of eachyear. The fiscal year change is effective beginning with the Company’s 2008fiscal year, which began February 4, 2007 and will end February 2,2008. As a result of the change, the Company had a January 2007 fiscalmonth transition period which began January 1, 2007 and ended February 3,2007. The results of the transition period are expected to be reported in theCompany’s Form 10-Q to be filed for the new fiscal first quarterending May 5, 2007 and in the Company’s Form 10-K to be filedfor the new fiscal year ending February 2, 2008. Because the fiscal yearchange was not effective until after the completion of the Company’s 2006fiscal year, the financial and other information reported herein continues tobe reported based on the Company’s prior fiscal calendar.

On February 12, 2007, the Board of Directors declareda quarterly cash dividend of $0.12 per share (on a pre-split basis) on theCompany’s common stock and approved a two-for-one stock split of the Company’scommon stock to be effected in the form of a 100% stock dividend. The cashdividend and the 2007 stock split will each be paid on or about March 12,2007 to shareholders of record as of the close of business on February 26,2007. The Company’s common stock is expected to begin trading on the New YorkStock Exchange on a post-split basis on March 13, 2007. All historicalshare and per share amounts in this Annual Report on Form 10-K havebeen adjusted to reflect the 2007 Stock Split.

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**PART I**

**ITEM 1.**                Business.

**General**

Unless the context indicates otherwise, the terms “we,”“us” or the “Company” in this Form 10-K, are referring to Guess?, Inc.(“GUESS?”) and its subsidiaries on a consolidated basis.

We design, market, distribute and license one of theworld’s leading lifestyle collections of contemporary apparel and accessoriesfor men, women and children that reflect the American lifestyle and Europeanfashion sensibilities. Our apparel is marketed under numerous trademarksincluding GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design,Question Mark and Triangle Design, a stylized G, GUESS Kids, Baby GUESS, YES, Gby GUESS, GUESS by MARCIANO and MARCIANO. The lines include full collections ofdenim and cotton clothing, including jeans, pants, overalls, skirts, dresses,shorts, blouses, shirts, jackets and knitwear. We also selectively grantlicenses to manufacture and distribute a broad range of products thatcomplement our apparel lines, including eyewear, watches, handbags, footwear,kids’ and infants’ apparel, leather apparel, swimwear, fragrance, jewelry andother fashion accessories.

Our products are sold through three primarydistribution channels: in our own stores, to a network of wholesale accountsand through the Internet. GUESS? branded products, some of which are producedunder license, are also sold internationally through a series of licensees anddistributors. Our core customer is a style-conscious consumer primarilybetween the ages of 18 and 32. These consumers are part of a highly desirabledemographic group that we believe has significant disposable income. We alsoappeal to customers outside this group through specialty product lines thatinclude MARCIANO, a more sophisticated fashion line targeted to women, andGUESS Kids, targeted to boys and girls ages six to twelve.

We were founded in 1981and currently operate as a Delaware corporation.

**Business Segments**

The business segments of the Company are retail,wholesale, European and licensing. The Company believes this segment reportingreflects how its four business segments are managed and each segment’sperformance is evaluated. The retail segment includes the Company’s retailoperations in North America. The wholesale segment includes the wholesale operationsin North America and internationally, excluding Europe. The European segmentincludes both wholesale and retail operations in Europe. The licensing segmentincludes the worldwide licensing operations of the Company. The businesssegments’ results exclude corporate overhead costs, which consist of sharedcosts of the organization. These costs are presented separately and generallyinclude, among other things, the following corporate costs: informationtechnology, human resources, accounting and finance, executive compensation,facilities and legal. Financial informationabout each segment, together with certain geographical information, for thefiscal years ended December 31, 2006, 2005 and 2004 are included underNote 15 to the Consolidated Financial Statements contained herein.

In 2006, 60.9% of our netrevenue was generated from retail operations, 12.3% from wholesale operations,21.3% from European operations and 5.5% from licensing operations. Our totalnet revenue in 2006 was $1.19 billion and net earnings were $123.2 million.

**Business Strengths**

We believe we have several business strengths whichhelp us to successfully execute our strategies. These business strengthsinclude:

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**Brand Equity.****  **We believe that our brand name is one of the mostfamiliar in fashion and is one of our most valuable assets. We believe theenduring strength of the GUESS? brand name and image is due mainly to ourconsistent emphasis on innovative and distinctive product designs that standfor exceptional styling and quality. Our industry is highly competitive andsubject to rapidly changing consumer preferences and tastes. The success of ourbrand depends on our ability to anticipate the fashion preferences of our customers.We have a team of designers who, under the direction of Maurice Marciano, ourChairman, seeks to identify global fashion trends and interpret them for thestyle-conscious consumer while retaining the distinctive GUESS? image.Through our award-winning advertising, under the creative leadership andvision of Paul Marciano, our Chief Executive Officer, we have achievedworldwide recognition of the GUESS? brand name. By retaining control overadvertising and marketing activities from our headquarters in Los Angeles, wemaintain the integrity, consistency and direction of the GUESS? brand imageworldwide, while realizing substantial cost savings when compared to the use ofoutside advertising agencies.

We have developed the “GUESS?signature image” and “GUESS? lifestyle concept” through the use of our strongand distinctive images, merchandising display themes, logos and trademarkswhich are registered in approximately 170 countries.

**Advertising and Marketing.****  **We control all of our worldwide advertising, marketingactivities and promotional materials from our headquarters in Los Angeles.GUESS Jeans, GUESS U.S.A. and GUESS?, Inc. images have been showcasedglobally in dozens of major publications as well as in outdoor and broadcastmedia.

We communicate the GUESS?image through the use of our signature black and white print advertisements, aswell as color print advertisements, designed by our in-house advertisingdepartment. Led by Paul Marciano, this team has won numerous awards andcontributed to making the GUESS? brand one of the most recognizable fashionbrands in the world. We have maintained a high degree of consistency in ouradvertisements by using similar themes and images. We require our licensees anddistributors to invest a percentage of their net sales of licensed products andnet purchases of GUESS? products in Company-approved advertising,promotion and marketing.

**Retail Distribution.****  **At December 31, 2006, we operated a total of 336stores in the U.S. and Canada, consisting of 192 full-price retailstores, 103 factory outlet stores, 25 MARCIANO stores and 16 Guess Accessoriesstores. At year end, we also operated 24 stores in Europe and three stores inMexico through a majority owned joint venture. Our retail network creates anupscale and inviting shopping environment and enhances our image. Distributionthrough our retail stores allows us to influence the merchandising andpresentation of our products, build brand equity and test market new productdesign concepts. Our retail stores carry a full assortment of men’s and women’smerchandise, including most of the GUESS? licensed products. Our factory outletstores are primarily located in outlet malls generally operating outside theshopping radius of our wholesale customers and our own full-price retailstores.

In 2004, we launched ourMARCIANO product line. This line was previously labeled as GUESS Collection andwas rebranded as MARCIANO in the third quarter of 2004. The new assortmentcommands higher price points and it targets a more upscale, contemporarycustomer. The MARCIANO line is available in approximately half of ourfull-price GUESS? retail stores in the U.S. and Canada. As of December 31,2006, we had 25 MARCIANO stores that feature this line exclusively.

In 2004, we also launcheda new Accessories store concept. We believe we offer unique positioning in theaccessories marketplace with a well-recognized brand name at a more accessibleprice point than the luxury accessories brands. As of December 31, 2006,we had 16 Accessories stores that carry the full GUESS? accessories line. Wecontinue to sell accessories in our full-price retail and factory outletstores, and through our licensees. Our accessories are also available indepartment stores and internationally.

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**Licensee Stores.****  **Our international licensees and distributors operated386 GUESS? stores in approximately 57 countries outside the U.S. andCanada at December 31, 2006. We plan to open approximately 108 new storesin 2007 primarily through our international licensees and distributors. Thesestores carry apparel and accessories that are similar to those sold in theU.S., including some that are tailored for local fashion sensibilities. We workclosely with international licensees and distributors to ensure that theirstore designs and merchandise programs protect the reputation of the GUESS?trademarks. Our international licenses and distribution agreements also allowfor the sale of GUESS? brand products in better department stores and upscalespecialty retail stores.

**Wholesale Distribution.****  **We have both domestic and international wholesaledistribution channels. U.S. wholesale customers consist primarily of betterdepartment stores and select specialty retailers and upscale boutiques, whichhave the image and merchandising expertise that we require for the effectivepresentation of our products. Leading U.S. wholesale customers includeFederated Department Stores, Inc. and Dillard’s, Inc. At December 31,2006, our products were sold directly to consumers from approximately 970 doorsin the U.S. These locations include 398 shop-in-shops, an exclusiveselling area within a department store that offers a wide array of our productsand incorporates GUESS? signage and fixture designs. These shop-in-shopsallow us to reinforce the GUESS? brand image with our customers. Manydepartment stores have more than one shop-in-shop, with each onefeaturing women’s or men’s apparel. Through our foreign subsidiaries and ournetwork of international distributors, our products are also found in majorcities throughout Africa, Asia, Australia, Europe, the Middle East, NorthAmerica and South America.

**Licensing Operations.****  **The desirability of the GUESS? brand name amongconsumers has allowed us to selectively expand our product offerings and globalmarkets through trademark licensing arrangements, with minimal capitalinvestment or on-going operating expenses. We carefully select ourtrademark licensees and approve in advance all product design, advertising andpackaging materials of all licensed products in order to maintain a consistentGUESS? image. We currently have 21 domestic and international licenses thatinclude eyewear, watches, handbags, footwear, kids’ and infants’ apparel,lingerie, leather outerwear, fragrance, jewelry and other fashion accessories.We have granted licenses for the manufacture or sale of GUESS? branded productsin markets which include Africa, Asia, Australia, Europe, the Middle East,North America and South America.

**European Operations.**   Werun our European business with our local European management team who workclosely with our wholesale customers, licensees and distributors and alsomanage our owned stores. Following the acquisition of our European jeanswearlicensee in January 2005, we integrated this business with our existingEuropean accessories business. In addition, effective December 31, 2006, theCompany acquired 75% of the outstanding shares of Focus Europe, S.r.l. (“Focus”),the Company’s existing licensee for the manufacture, distribution and retailsales of “GUESS by MARCIANO” contemporary apparel in Europe, the Middle Eastand Asia. The acquisition is expected to further accelerate the Company’sexpansion in Europe. While the GUESS? brand is well recognized in Europe, webelieve it is under-penetrated and we see significant opportunities to expanddistribution. In 2006, we, along with our licensees and distributors, opened 42stores of all retail concepts combined in Europe. At the end of 2006, Guess andits licensees and distributors operated 102 stores in Europe, 24 of which wereCompany operated. In 2007, we plan to open approximately 35 stores in Europeprimarily through our licensees and distributors.

**Business Growth Strategies**

We regularly evaluate andimplement initiatives that we believe will build brand equity, grow ourbusiness and enhance profitability. Our key growth strategies are as follows:

**Leveraging the GUESS?Brand.****  **Webelieve the GUESS? brand is an integral part of our business, a significantstrategic asset and a primary source of sustainable competitive advantage. Itcommunicates a 

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distinctive imagethat is fun, fashionable and sexy. Brand loyalty, name awareness, perceivedquality, strong brand images, public relations, publicity, promotional eventsand trademarks all contribute to brand integrity. Our design teams visit theworld’s premier fashion locations in order to identify important style trendsand to discover new fabrics. We will continue this practice while promoting ourinnovative designs through stylish advertising campaigns that advance theGUESS? image. Our marketing programs are designed to convey a uniform styleimage for the brand and are aimed at increasing the desire of the target groupto join our GUESS? customer group.

**Retail Store Strategy andExpansion Plans.****  **Ourretail growth strategy is to increase retail sales and profitability byexpanding our network of retail stores and improving the performance ofexisting stores. During 2006, we opened a total of 32 new stores in the U.S.and Canada consisting of eight new full-price retail stores, sevenfactory outlet stores, 11 MARCIANO stores and six GUESS Accessories stores,while closing 11 stores.

Our retail locations buildbrand awareness and contribute to market penetration and growth of the brand inconcert with our wholesale operations. In 2006, we increased our retail averagesquare footage by 5.3% to 1,621,000 square feet in the U.S. and Canada. Wecontinue to be very selective with new store locations and expect to openapproximately 48 new stores in 2007, consisting of 15 full-price retail, fourfactory outlet, 13 MARCIANO, three GUESS Accessories and 13 G by GUESS stores.In addition, we plan to close approximately 18 stores and convert 19 stores toG by GUESS stores in 2007. The Company is also exploring a joint venture arrangementwith its footwear licensee to open a small number of new footwear conceptstores in North America.

In 2006, total sales inthe U.S. and Canada at our stores open for at least one year increased by 12.8%from 2005 levels. We believe this increase is attributable to our commitment toseveral ongoing initiatives, including leadership in new product development, amore fashion-focused product mix, the introduction of new productcategories, improvements in merchandising and visual presentation, theremodeling of select stores to promote a consistent brand image, an improvedretail store inventory allocation system, the continued development of theMARCIANO and Accessories lines and the development of a motivated team of salesprofessionals to service our customers and provide a favorable shoppingexperience.

We are also placingadditional emphasis on our Accessories line and our MARCIANO line. Thisincludes greater focus on these products in our existing stores as well ascontinuing to develop and open additional Accessories and MARCIANO stores whichexclusively feature these products.

During 2006, we opened 11MARCIANO and six Guess Accessories stores in addition to the nine and sixstores that we opened in 2005, respectively. These store concepts leverage ourbrand recognition and the reputation we have for sexy, contemporary styling toextend the appeal of our brand. The MARCIANO brand is attracting a slightlyolder, more sophisticated customer, while the Accessories stores are enablingus to build a more meaningful presence in this high-margin segment. We aretargeting customers who already shop GUESS? stores but are looking for anexpanded accessories presentation, as well as new customers who did not shop atGUESS? in the past.

As part of our retailgrowth strategy, in 2007 we are launching our new mid-tier brand store concept,which we call G by GUESS. G by GUESS is aimed to capture a market demographicthat shops price points between factory and retail. The G by GUESS brand will onlybe distributed in G by GUESS stores and will carry apparel for both men andwomen that is aspirational, timeless and fun. The stores will have a freshfeel, directed toward a full customer experience, with fashion-forward, but notcutting edge fashion. The stores will have a slightly smaller footprint thanGuess? stores. We will be rolling out G by GUESS in early 2007 in North America.We expect to convert some Guess? and factory stores and also open some newstores, resulting in approximately 32 G by GUESS stores by year end.

**International Expansion.****  **International expansion continues to be a key to ourlong term growth strategy. In January 2005, we completed the acquisitionof the remaining 90% of Maco, the Italian licensee 

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of GUESS jeanswearfor men and women in Europe, including the assets and leases of ten retailstores in Europe. In 2006, we, along with our distributors and licensees,opened 125 stores in all concepts combined outside of the U.S. and Canada,bringing the total number of such stores to 413 at year end. In addition,effective December 31, 2006, the Company acquired 75% of the outstandingshares of Focus Europe, S.r.l. (“Focus”), the Company’s existing licensee forthe manufacture, distribution and retail sales of “GUESS by MARCIANO”contemporary apparel in Europe, the Middle East and Asia. The acquisition isexpected to further accelerate the Company’s expansion in Europe.

We believe there aresignificant opportunities to continue our international growth, particularly inEurope, where the GUESS? brand is well recognized but under-penetrated, as wellas in Mexico, India, the Middle and  theFar East. In South Korea, we began selling directly in approximately 45 pointsof sales in 2007 including concessions which are owned and operated by usthrough leasing spaces from major department stores, as well as franchisedstores. We opened a showroom in Hong Kong in 2006 and plan to openapproximately 20 points of sales in China during 2007, with flagship stores inBeijing and Shanghai, as well as free standing stores in Hong Kong and Macau. Inaddition, our new joint venture in Mexico is currently distributing through amajor department store chain, Liverpool, with 22 shop-in-shop locations and hasopened three stand-alone stores.

Our business will alsogrow as our partners open new licensed stores internationally. We plan to openapproximately 108 new retail stores in 2007 outside the U.S. and Canadaprimarily through our international licensees and distributors. We are workingclosely with our international distributors and licensees to develop theseopportunities and to expand the availability of the GUESS? brand throughout theworld.

**Continue to DevelopLicensee Portfolio.****  **Oneof our primary objectives is to maintain the quality and reputation of theGUESS? brand. In order to accomplish this goal, we will continue tostrategically reposition our licensing portfolio by constantly monitoring andevaluating the performance of our licensees worldwide and their strength andcapabilities to appropriately represent our brand. As part of this process, wewill consider bringing in-house apparel licenses, where appropriate, orlicense lines which we produce as we did with our kids business in 2001. If wedetermine that licensees are performing inadequately, we will, from time totime, discontinue the existing relationship and seek out a stronger replacementlicensee.

In 2006, we entered into ajoint venture with Adivina S.A. de. C.V. to oversee the revitalization andexpansion of the GUESS? brand in Mexico; we also signed a new license with a Europeanlicensee to develop and manufacture lingerie and swimwear under the GUESS?trademark in Europe and certain other countries. In 2005, we successfullyrenegotiated license agreements with our existing licensees for watches,handbags and eyewear on terms that were significantly improved over our priorarrangements and began shipping our new fragrance line. In addition, in 2004,we signed a new shoe license with Marc Fisher LLC to develop, manufacture, anddistribute athletic and fashion footwear under the GUESS? trademark in the U.S.and several countries worldwide and began shipping footwear products in 2005.We believe these are important steps in expanding our presence bothdomestically and globally. We will continue to strategically examineopportunities to expand our licensee portfolio by developing new licensees thatcan expand our brand penetration and complement the GUESS? image.

**Acquisition Strategy.****  **We evaluate strategic acquisitions and alliances andpursue those that we believe will support and contribute to our overall growthinitiatives. In December 2006, we acquired 75% of the outstanding sharesof Focus, as well as the leases and assets of four retail stores in Italy. Focus,based in Italy, has served as the licensee, manufacturer, distributor andretailer of GUESS by MARCIANO contemporary apparel for men and women in Europefor the past 10 years. The agreement included the purchase of inventory,certain fixed assets and the transfer of leases for the retail locations.

In January 2005, wecompleted the acquisition of the remaining 90% of Maco Apparel, S.p.A. (“Maco”),the Italian licensee of GUESS jeanswear for men and women in Europe, that theCompany did 

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notalready own from Fingen S.p.A. and Fingen Apparel N.V., as well as theassets and leases of ten retail stores in Europe. The agreement included thepurchase of inventory and receivables, the assumption of certain liabilities,and the transfer of leases for the GUESS retail locations. The stores arelocated in Rome, Milan, Paris, Amsterdam, London, and certain other Europeancities.

With the Focus and Macoacquisitions, we now directly manage our adult apparel businesses in Europe. Webelieve the combination of the manufacture and distribution of all our Europeanapparel lines under the GUESS? umbrella allows us to take advantage ofeconomies of scale and provides an opportunity to further expand our wholesaleand retail operations in this region.

**Improved Product Sourcing.****  **Over the past year, we initiated significant changeswithin our supply chain operations: re-defining calendars, streamliningprocesses and building core competencies within our product areas. These newprocesses are providing calendar alignment and timely delivery to our westernhemisphere retail and wholesale divisions, while also incorporating thedevelopment calendars and market timing of our Asian and European businesses.This globalization of operations will enable us to begin integrating our European,North American and Asian-based supply chains. This, in turn, supports our longterm strategy of developing a global core product assortment, through collaborationbetween our U.S. and Italy based design teams. To better support the designprocess, we formed a new Product Development team responsible for drivingcalendar deadlines, assortment plans and financial goals throughout the designprocess. In addition, this team is responsible for fabric research anddevelopment, working directly with global textile mills and suppliers, in orderto drive innovation, ensure quality and increase value within our productlines. We are currently developing a Product Lifecycle Management (“PLM”)system that will enable global access and centralized management for our newlydefined processes and calendars. Initial roll-out is scheduled for early 2007with enhancement and refinement to continue throughout 2007, providingcomprehensive management of all product related activities from concept todistribution.

In 2006, we significantlyincreased the sourcing volume placed through our own Hong Kong sourcing office.In 2006, we purchased approximately 89% of our North American finished productsfrom third-party international vendors, primarily in Asia and Mexico. In 2007,we plan to build product development and pre-manufacturing capabilities within,in addition to adding depth to, our existing Asian based sourcing staff. Theseinvestments should enable us to shift early stage conceptual development andproduct engineering to Asia, facilitating closer collaboration with our keysuppliers from design inception. Los Angeles will remain the hub of denimdevelopment and production, as well as speed-based development and wholesalereplenishment program management.

**Logistics.****  **The Company’s primary distribution center is based inLouisville, Kentucky. This 506,000 square-foot facility is near UnitedParcel Service’s national transit hub and has contributed to the reduction ofour shipping time to our stores and wholesale accounts that are east of theMississippi River. Depending on processing volumes and productivityimprovements, we expect that we will continue to reduce operating cost per unitby reducing handling costs in the Kentucky facility and will provide better serviceto our customers by faster shipping and reduced response times. As of December 31,2006, this facility was approximately 50% utilized.

We continued to focus onall aspects of our supply chain in 2006. For example, we are planning toimplement a new picking system to be completed in 2007 which should reduce ourpicking costs for merchandise. In the first quarter of 2005, we opened a newwarehouse and distribution facility in Montreal, Quebec to replace our existingfacility there, and we updated our software systems in our Montreal and LosAngeles warehouse and distribution facilities to be consistent with thesoftware systems used in our primary Kentucky facility. In 2004, we installedan automated product sorter machine in the Kentucky distribution center whichhas resulted in operating efficiencies. These systems, along with other actionswe are taking, should result in lower processing and freight costs in thefuture.

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**E-Commerce.****  **Our websites, www.guess.com, www.guessfactory.com,www.marciano.com and www.guess.ca are virtual storefronts that promote ourbrands. Designed as customer shopping centers, these sites showcase ourproducts in an easy-to-navigate format, allowing customers to seeand purchase our collections of casual apparel and accessories. Not only havethese virtual stores become an additional retail distribution channel, but alsothey have improved customer service and are fun and entertaining alternative-shoppingenvironments. These sites also provide fashion information, provide a mechanismfor customer feedback, promote customer loyalty and enhance our brand identitythrough interactive content. In 2006, these combined sites experienced growthand generated net sales in excess of the top retail GUESS? store in the chain.

**GUESS? Products**

We derive net revenue fromfour primary sources: the sale of our men’s and women’s apparel, and the saleof our licensees’ products, through our network of retail and factory outletstores in the U.S. and Canada; the sale of GUESS? men’s and women’s apparel andcertain accessories to wholesale customers and distributors in North Americaand the rest of the world except Europe; the sale of GUESS? men’s and women’sapparel and certain accessories to wholesale customers and through our owned storesin Europe; and royalties from worldwide licensing activities.

Thefollowing table sets forth our net revenue from our business segments:

| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**       | ** ** |
| Net revenue:                   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Retail operations              |       | $                                          | 721,262    |   | 60.9 | % | $ | 612,862 |   | 65.5 | % | $ | 518,855 |   | 71.1 | % |
| Wholesale  operations          |       | 146,320                                    |       | 12.3 |   | 121,103 |   | 12.9 |   | 120,392 |   | 16.5 |   |
| European  operations           |       | 252,363                                    |       | 21.3 |   | 153,817 |   | 16.4 |   | 42,773 |   | 5.9 |   |
| Net revenue from product sales |       | 1,119,945                                  |       | 94.5 |   | 887,782 |   | 94.8 |   | 682,020 |   | 93.5 |   |
| Licensing  operations          |       | 65,239                                     |       | 5.5 |   | 48,310 |   | 5.2 |   | 47,242 |   | 6.5 |   |
| Total net revenue              |       | $                                          | 1,185,184  |   | 100.0 | % | $ | 936,092 |   | 100.0 | % | $ | 729,262 |   | 100.0 | % |

 

**Products.****  **Our product line is organized into two primarycategories: women’s and men’s apparel. To take advantage of contemporarytrends, we complement our core basic styles with more fashion-orienteditems. We add new styles, treatments and finishes to our denim assortment on acontinuous basis.

Our line of women’sapparel also includes the MARCIANO product line, a full collection of betterwomen’s  apparel incorporating asophisticated, high fashion combination of colors and styles. These productscurrently are sold primarily through our GUESS? retail stores, our MARCIANOstores and our www.marciano.com website. We continue to believe this productline has significant potential and will continue to focus on increasingpenetration in the marketplace.

**Licensed Products.****  **The high level of desirability of the GUESS? brandamong consumers has allowed us to selectively expand our product offerings anddistribution channels worldwide through trademark licensing arrangements. Wecurrently have 21 trademark licenses. Worldwide sales of licensed products (asreported to us by our licensees) were approximately $753 million in 2006. Werecorded net royalties of $65.2 million in 2006. Approximately 71% of our netroyalties were derived from our top five licensees in 2006.

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**Design**

Under the direction ofMaurice Marciano, GUESS?, G by GUESS and MARCIANO products are designed by anin-house staff of three design teams (men’s, women’s, G by Guess andMARCIANO) located in Los Angeles, California and an in-house design team basedin Florence, Italy. The U.S. and European teams work closely to share ideas anddevelop products that can sell in both markets. Our design teams travelthroughout the world in order to monitor fashion trends and discover newfabrics. Fabric shows in Europe, Asia and the U.S. provide additionalopportunities to discover and sample new fabrics. These fabrics, together withthe trends observed by our designers, serve as the primary source ofinspiration for our lines and collections. We also maintain a fashion libraryconsisting of antique and contemporary garments as another source of creativeconcepts. In addition, our design teams regularly meet with members of thesales, merchandising and retail operations teams to further refine our productsto meet the particular needs of our markets.

**U.S. and CanadaRetail Operations**

At December 31,2006, our North American retail operations, which includes owned stores in boththe U.S. and Canada, consisted of 192 full-price retail, 103 factoryoutlet, 25 MARCIANO, and 16 Accessories stores which sell GUESS? andMARCIANO-labeled products. Below is a summary of store statistics as of December 31,2006, 2005 and 2004.

| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Retail stores:                        |       |                  |       |   |   |   |   |
| U.S.                                  |       | 149                   |       | 152 |   | 150 |   |
| Canada                                |       | 43                    |       | 39 |   | 36 |   |
|                                  |       | 192                   |       | 191 |   | 186 |   |
| Factory stores:                       |       |                  |       |   |   |   |   |
| U.S.                                  |       | 89                    |       | 85 |   | 75 |   |
| Canada                                |       | 14                    |       | 14 |   | 11 |   |
|                                  |       | 103                   |       | 99 |   | 86 |   |
| MARCIANO:                             |       |                  |       |   |   |   |   |
| U.S.                                  |       | 18                    |       | 9 |   | 4 |   |
| Canada                                |       | 7                     |       | 5 |   | 1 |   |
|                                  |       | 25                    |       | 14 |   | 5 |   |
| Accessories:                          |       |                  |       |   |   |   |   |
| U.S.                                  |       | 12                    |       | 11 |   | 6 |   |
| Canada                                |       | 4                     |       | — |   | — |   |
|                                  |       | 16                    |       | 11 |   | 6 |   |
| Kids stores:                          |       | —                |       | — |   | 4 |   |
| Total                                 |       | 336                   |       | 315 |   | 287 |   |
| Square footage at year end            |       | 1,621,000             |       | 1,563,000 |   | 1,460,000 |   |
| Sales per average  annual square foot |       | $                     | 447        |   | $ | 401 |   | $ | 369 |   |
|                                       |            |                       |            |  |  |  |  |  |  |  |

 

**RetailStores.****  **At December 31,2006, our full price North American retail stores occupied approximately957,000 square feet and ranged in size from approximately 2,000 to 13,500square feet, with most stores between 3,000 and 6,000 square feet. Our retailstores carry a full assortment of men’s and women’s GUESS? merchandise,including most of our licensed products. In addition, approximately half of ourfull-price GUESS? retail stores offer our MARCIANO line that is carried almostexclusively in our company operated stores. In 2006, we opened eight new retailstores and closed seven stores. Sales 

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per square foot forour full price North American retail stores, not including factory outlet ornew concept stores, increased from $395 in 2005 to $432 in 2006.

**FactoryOutlet Stores.****  **At December 31,2006, our North American factory outlet stores occupied approximately 568,000square feet and ranged in size from approximately 3,400 to 10,700 square feet,with most stores between 4,000 and 6,500 square feet. They are primarilylocated in outlet malls generally operating outside the shopping radius of ourwholesale customers and our full-price retail stores. These stores sellselected styles of GUESS? apparel and licensed products at a discount to value-consciouscustomers. We also use the factory outlet stores to liquidate excess inventoryand thereby protect the GUESS? image. In 2006, we opened seven new factorystores and closed three stores. Sales per square foot for our North Americanfactory outlet stores increased from $398 in 2005 to $446 in 2006.

**MARCIANOStores.****  **At December 31,2006, our MARCIANO stores occupied approximately 68,000 square feet and rangedin size from approximately 1,500 to 5,100 square feet, with most stores between2,000 and 3,000 square feet. In 2006, we opened eleven MARCIANO stores. Wecontinue to monitor the performance of this store concept carefully. Thisconcept leverages the name recognition of the MARCIANO brand and the reputationwe have for sexy, contemporary styling to extend the appeal of our brand. TheMARCIANO brand is attracting a slightly older, more sophisticated customer.Sales per square foot for our MARCIANO stores decreased from $721 in 2005 to$704 in 2006 due primarily to new stores opened during the year.

**Accessories Stores.****  **At December 31, 2006, our Accessories conceptstores occupied approximately 28,000 square feet and ranged in size fromapproximately 700 to 3,200 square feet, with most stores between 1,000 and2,500 square feet. In 2006, we opened six Accessories stores and closed oneAccessories store. The Accessories stores are enabling us to build a moremeaningful presence in this high-margin segment. Sales per square foot for ourAccessories stores increased from $432 in 2005 to $602 in 2006.

**InternationalBusiness**

We derive net revenue and earnings outside the U.S.and Canada from three principal sources: (a) sales of GUESS? brand appareldirectly to our international distributors who distribute it to betterdepartment stores, upscale specialty retail stores and GUESS?-licensedretail stores operated by our international distributors, (b) sales ofGUESS? and GUESS by MARCIANO branded apparel by the Company through its ownedand operated retail stores and (c) royalties from licensees whomanufacture and distribute GUESS? branded products outside the U.S. GUESS?products are sold through distributors and licensees throughout Africa, Asia,Australia, Europe, the Middle East, North America and South America.

At December 31, 2006, our licensees anddistributors operated internationally (outside the U.S. and Canada) 386 GUESS?retail and outlet stores. Our retail store license agreements generally providedetailed guidelines for store fixtures and merchandising programs. The appearance,merchandising and service standards of these stores are closely monitored toensure that our image and brand integrity are maintained. We plan to openapproximately 108 new retail stores in 2007 outside the U.S. and Canadaprimarily through our international licensees and distributors. We also ownedand operated 24 GUESS? retail stores in Europe and three GUESS? retail storesthrough a majority owned joint venture in Mexico at December 31, 2006. In2006, our European operations accounted for 21.3% of our total net revenues, upfrom 16.4% in 2005.

While the GUESS? brand iswell recognized in Europe, we believe it is under-penetrated and we seesignificant opportunities to expand distribution. Effective December 31,2006, the Company acquired 75% of the outstanding shares of Focus Europe,S.r.l. (“Focus”), the Company’s existing licensee for the manufacture,distribution and retail sales of “GUESS by MARCIANO” contemporary apparel in Europe,

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theMiddle East and Asia. The acquisition is expected to further accelerate theCompany’s expansion in Europe.

**Domestic WholesaleCustomers**

Our domestic wholesale customers consist primarily ofbetter department stores and select specialty retailers and upscale boutiques,which have the image and merchandising expertise that we require for theeffective presentation of our products. Leading domestic wholesale customersinclude Federated Department Stores, Inc. and Dillard’s, Inc. During2006, our products were sold directly to consumers through approximately 970doors in the U.S. Our wholesale merchandising strategy is to focus ontrend-right products supported by key fashion basics.

We have sales representatives in New York and LosAngeles. They coordinate with customers to determine the inventory level andproduct mix that should be carried in each store to maximize retail sell-throughsand enhance the customers’ profit margins. The inventory level and product mixare then used as the basis for developing sales projections and product needsfor each wholesale customer and for scheduling production. Additionally, we usemerchandise coordinators who work with the stores to ensure that our productsare displayed appropriately.

A few of our domesticwholesale customers, including some under common ownership, have accounted forsignificant portions of our net revenue. During 2006, Bloomingdale’s, Macy’sand other affiliated stores owned by Federated Department Stores, Inc.were our largest domestic wholesale customers and together accounted forapproximately 5.5% of our consolidated net revenue. During 2006, we continuedto see our domestic wholesale operations become a smaller proportion of ouroverall business as our international businesses expanded. In 2006, ourdomestic wholesale operations accounted for 8.5% of our total net revenues,down from 9.0% in 2005.

**License Agreementsand Terms**

Our trademark license agreements customarily providefor a three- to five-year initial term with a possible option to renewprior to expiration for an additional multi-year period. In addition tolicensing trademarks for products which complement our apparel products, wehave granted trademark licenses for the manufacture and sale of GUESS? brandedproducts similar to ours, including men’s and women’s denim and knitwear, inmarkets such as Europe, the Philippines, South Africa and Mexico. Licensesgranted to certain licensees that have produced high-quality products andhave demonstrated solid operating performance, such as for GUESS? watches,GUESS? handbags and GUESS? eyewear, have been renewed and in some casesexpanded to include new products or markets. In other cases, products that wereformerly licensed, such as our women’s knits line, are now being producedin-house. The typical license agreement requires that the licensee pay us thegreater of a royalty based on a percentage of the licensee’s net sales oflicensed products or a guaranteed annual minimum royalty that typicallyincreases over the term of the license agreement. In addition, several of ourkey license agreements provide for specified, fixed cash rights payments overand above our normal, ongoing royalty payments. Generally, licensees arerequired to spend a percentage of the net sales of licensed products foradvertising and promotion of the licensed products and in many cases we placethe ads on behalf of the licensee and are reimbursed. In addition, to protectand increase the value of our trademarks, our license agreements include strictquality control and manufacturing standards.

Our licensing personnel inthe U.S, Italy and Hong Kong meet regularly with licensees to ensureconsistency with our overall merchandising and design strategies, to monitorquality control and to protect the GUESS? trademark and brand. The licensingdepartment approves in advance all GUESS? licensed products, advertising,promotional and packaging materials.

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**Advertising andMarketing**

Our advertising, public relations and marketingstrategy is designed to promote a consistent high impact image which enduresregardless of changing consumer trends. Since our inception, Paul Marciano hashad principal responsibility for the GUESS? brand image and creative vision.All worldwide advertising and promotional material is controlled through ouradvertising department based in Los Angeles. GUESS Jeans, GUESS U.S.A. andGUESS?, Inc. images have been showcased globally in dozens of majorpublications as well as in outdoor and broadcast media.

Our advertising strategy promotes the GUESS? image andproducts, with an emphasis on brand image. Our signature black and white printadvertisements, as well as color print advertisements, have garneredprestigious awards, including Clio, Belding and Mobius awards for creativityand excellence. These awards, which we have received on numerous occasions inour history, are generally given based on the judgment of prominent members ofthe advertising industry. We have maintained a high degree of consistency inour advertisements, using similar themes and images. We require our licenseesand distributors to invest a percentage of their net sales of licensed productsand net purchases of GUESS? products in approved advertising, promotion andmarketing.

Our advertising department is responsible for allworldwide advertising, which includes approval of all advertising strategiesand media placements from our licensees and distributors. We use a variety ofmedia with an emphasis on print and outdoor advertising. We have focusedadvertisement placement in national and international contemporaryfashion/beauty, lifestyle, and celebrity magazines including Vanity Fair, MarieClaire, Elle, W and Vogue. By retaining control over our advertising programs,we are able to maintain the integrity of our brands while realizing substantialcost savings compared to outside agencies.

We further strengthencommunications with customers through our websites (www.guess.com,www.guessfactory.com, www.marciano.com, www.gbyguess.com and www.guess.ca). Theseglobal media enable us to provide timely information in an entertaining fashionto consumers about our history, products and store locations, and allow us toreceive and respond directly to customer feedback.

**Sourcing andProduct Development**

We do not own anyproduction facilities or equipment. We source products through numeroussuppliers, many of whom have established long-term relationships with us.We seek to achieve the most efficient means for timely delivery of our products.To remain competitive, in recent years we have increasingly sourced ourfinished products globally. During 2006, we sourced approximately 89% of ourfinished products from third-party suppliers located outside the U.S. Mostof these finished products are acquired as package purchases where we supplythe design and fabric selection and the vendor delivers the finished product.Although we have long-term relationships with many of our vendors, we donot have long-term written agreements with them.

**Sources andAvailability of Raw Materials**

Our products use a varietyof raw materials, principally consisting of woven denim, woven cotton andknitted fabrics and yarns. Historically, we make commitments for a significantportion of our fabric well in advance of sales.

**Quality Control**

Our quality controlprogram is designed to ensure that products meet our high quality standards. Wemonitor the quality of our fabrics prior to the production of garments andinspect prototypes of each product before production runs commence. We alsoperform random in-line quality control checks during and after productionbefore the garments leave the contractor. Final random inspections occur whenthe 

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garmentsare received in our distribution centers. We believe that our policy ofinspecting our products at our distribution centers and at the vendors’facilities is important to maintain the quality, consistency and reputation ofour products.

**DistributionCenters**

We utilize distribution centers at strategicallylocated sites. Until 1999, distribution of our products in the U.S. wascentralized in our facility in Los Angeles, California, which we operate andlease from a related party. In January 2000, we opened an automateddistribution center in Louisville, Kentucky, to replace the distribution centerin Los Angeles as our primary distribution center. Distribution of our productsin Canada is handled from a distribution center in Montreal, Quebec that wealso lease from a related party. Our European business utilizes an independentdistributor with two separate locations in Italy, which services Europe.Additionally, we utilize a contract warehouse in Hong Kong that services thePacific Rim.

At our distribution centerin Kentucky, we use fully integrated and automated distribution systems. Thebar code scanning of merchandise, picking tickets and distribution cartons,together with radio frequency communications, provide timely, controlled,accurate and instantaneous updates to the distribution information systems. Asof December 31, 2006, this facility was approximately 50% utilized. Wecontinue to monitor our distribution center integration as our business growsand the center matures.

**Competition**

The apparel industry ishighly competitive and fragmented, and is subject to rapidly changing consumerdemands and preferences. We believe that our success depends in large part uponour ability to anticipate, gauge and respond to changing consumer demands andfashion trends in a timely manner and upon the continued appeal to consumers ofthe GUESS? brand. We compete with numerous apparel manufacturers anddistributors, both domestically and internationally, as well as several well-knowndesigners, including some that have recently entered or re-entered thedesigner denim market. Our retail and factory outlet stores face competitionfrom other retailers, including some of our major wholesale customers. Ourlicensed apparel and accessories also compete with a substantial number ofdesigner and non-designer lines and various other well-known brands.Many of our competitors, including The Gap, Abercrombie & Fitch, DKNYand Polo Ralph Lauren, among others, have greater financial resources than wedo. Although the level and nature of competition differ among our productcategories and geographic regions, we believe that we compete on the basis ofour brand image, quality of design, workmanship and product assortment.

**Information Systems**

We believe that highlevels of automation and technology are essential to maintain our competitiveposition and support our strategic objectives and we continue to invest incomputer hardware, system applications and networks. Our computer informationsystems consist of a full range of financial, distribution, merchandising,in-store, supply chain and other systems. During 2006, we implemented newfinancial and operational systems in Europe to accommodate future growth andprovide operating efficiencies. In addition, a new data warehouse and reportingsystem was implemented to provide enhanced merchandise and analytical reporting.We are currently developing a PLM system to integrate our global supply chain.

**Trademarks**

We own numerous trademarks, including GUESS, GUESS?,GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Markand Triangle Design, a stylized G and a 

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stylized M, Baby GUESS,YES, G by GUESS, GUESS by MARCIANO and GUESS Collection. As of December 31,2006, we had approximately 2,300 U.S. and internationally registered trademarksor trademark applications pending with the trademark offices in approximately170 countries around the world, including the U.S. From time to time, we adoptnew trademarks in connection with the marketing of new product lines. Weconsider our trademarks to have significant value in the marketing of our productsand act aggressively to register and protect our trademarks worldwide.

Like many well-knownbrands, our trademarks are subject to infringement. We have staff devoted tothe monitoring and aggressive protection of our trademarks worldwide.

**Wholesale Backlog**

The backlog of wholesale orders at any given time isaffected by various factors, including seasonality, cancellations, thescheduling of market weeks and manufacturing and shipment of products. Accordingly,a comparison of backlogs of wholesale orders from period to period is notnecessarily meaningful and may not be indicative of eventual actual shipments.

**U.S.backlog.****  **TheCompany maintains a model stock program in its basic denim products whichgenerally allows replenishment of a customer’s inventory within 48 hours. TheCompany generally receives orders for fashion apparel 90 to 120 days prior tothe time the products are delivered to stores. Regarding our U.S. wholesalebacklog, the scheduling of market weeks can affect the amount of orders bookedin the backlog compared to the same date in the prior year. This year’s backlogfor product, as an example, reflected a longer shipping period of about threemonths for women’s product and one month of men’s product compared to last year’sbacklog. We estimate that if we were to exclude the additional orders from thisyear’s backlog to make the comparison consistent with the prior year, then thecurrent backlog would be up about 11.1% from the prior year. Not taking intoaccount the impact of this change, our U.S. wholesale backlog as of February 17,2007, consisting primarily of orders for fashion apparel, was approximately $55.5million, compared to $35.3 million for such orders at February 18, 2006,or up 57.2%.

**Europe backlog.****  **Our European business operates with two primarywholesale selling seasons. The Spring/Summer season, which ships mostly inJanuary, February and March and the Fall/Winter season, which shipsmostly in July, August and September. Generally, the other months arerelatively small shipping months. However, customers have the ability torequest early shipment of backlog orders or delay shipment of orders dependingon their needs. Accordingly, a certain amount of orders in the backlog may beshipped outside of the traditional shipping months. As of February 17,2007, the European operations backlog was approximately $143.7 million. Thisincludes backlog related to the Focus acquisition.  The backlog comprises sales orders for boththe Spring/Summer and Fall/Winter seasons. As discussed above, these orders aresubject to cancellation and may not be indicative of eventual actual shipments.

**Employees**

We strongly believe that our employees (“associates”)are our most valuable resources. As of January 19, 2007, we hadapproximately 8,800 associates, including approximately 7,500 associates in ourretail operations, 600 in our wholesale operations and 500 in our Europeanoperations.

Except for approximately21 employees in Italy who are represented by labor unions, none of ourassociates are represented by labor unions and we are not a party to any laboragreements. We consider our relationship with our associates to be good.

**Initiation ofQuarterly Dividend andApproval of Stock Split**

On February 12, 2007,the Board of Directors of the Company declared a quarterly cash dividend of$0.12 per share on the Company’s common stock and approved a two-for-one stocksplit of the Company’s 

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commonstock, each to be paid on or about March 12, 2007 to shareholders ofrecord as of the close of business on February 26, 2007. Because therecord date for the initial cash dividend preceded the March 12, 2007 stocksplit distribution date, the cash dividend will be paid on only pre-splitshares. Assuming the Board of Directors maintains the current level of cashdividends, future quarterly dividends per share will be half the current levelbut will apply to shares on a post split basis. The payment of cash dividendsin the future will be at the discretion of our Board of Directors and will bebased upon a number of business, legal and other considerations, including ourcash flow from operations, capital expenditures, debt service requirements,cash paid for income taxes, earnings and liquidity.

**EnvironmentalMatters**

We are subject to federal,state and local laws, regulations and ordinances that govern activities oroperations that may have adverse environmental effects (such as emissions toair, discharges to water, and the generation, handling, storage and disposal ofsolid and hazardous wastes). We are also subject to laws, regulations andordinances that impose liability for the costs of clean up or other remediationof contaminated property, including damages from spills, disposals or otherreleases of hazardous substances or wastes, in certain circumstances withoutregard to fault. Certain of our operations routinely involve the handling ofchemicals and wastes, some of which are or may become regulated as hazardoussubstances. We have not incurred, and do not expect to incur, any significantexpenditures or liabilities for environmental matters. As a result, we believethat our environmental obligations will not have a material adverse effect onour consolidated financial condition or results of operations.

**FinancialInformation About Geographic Areas**

See Note 15 to theConsolidated Financial Statements for a discussion regarding our domestic andforeign operations.

**Website Access toOur Periodic SEC Reports**

We make available free ofcharge at www.guessinc.com our 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 to the SEC pursuant to Section 13(a) or15(d) of the Exchange Act, as soon as reasonably practicable after weelectronically file them with, or furnish them to, the SEC. In addition, thecharters of our Board of Directors’ Audit, Compensation and Nominating andGovernance Committees as well as the Board of Directors’ Governance Guidelinesand our Code of Conduct are posted on our website. We may from time to timeprovide important disclosures to our investors, including amendments or waiversto our Code of Conduct, by posting them in the “Investor’s Info” section of theGuess?, Inc. portion of the website, as allowed by SEC rules. Printedcopies of these documents may be obtained by writing or telephoning us atGuess?, Inc., 1444 South Alameda Street, Los Angeles,California 90021, Attention: Investor Relations, (213) 765-5578.

**ITEM 1A.**        Risk Factors.

*You should carefully consider the following factorsand other information in this Annual Report or Form 10-K. Additionalrisks which we do not presently consider material, or of which we are not currentlyaware, may also have an adverse impact on us. Please also see “ImportantFactors Regarding Forward-Looking Statements” on page (ii).*

***Demand for ourmerchandise may decrease and the appeal of our brand image may diminish if wefail to identify and rapidly respond to consumers’ fashion tastes.***

The apparel industry issubject to rapidly evolving fashion trends and shifting consumer demands.Accordingly, our brand image and our profitability are heavily dependent uponboth the priority our target 

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customersplace on fashion and on our ability to anticipate, identify and capitalize uponemerging fashion trends. Current fashion tastes place significant emphasis on afashionable look. In the past this emphasis has increased and decreased throughfashion cycles. If we fail to anticipate, identify or react appropriately, orin a timely manner, to fashion trends, we could experience reduced consumeracceptance of our products, a diminished brand image and higher markdowns.These factors could result in lower selling prices and sales volumes for ourproducts and could have a material adverse effect on our results of operationsand financial condition.

***The apparel industry is highly competitive, and we mayface difficulties competing successfully in the future.***

We operate in a highlycompetitive and fragmented industry with low barriers to entry. We compete withmany apparel manufacturers and distributors, both domestically andinternationally, as well as many well-known designers, some of whom havesubstantially greater resources than we do and some of whose products arepriced lower than ours. Our retail and factory outlet stores compete with manyother retailers, including department stores, some of whom are our majorwholesale customers. Our licensed apparel and accessories compete with manydesigner and non-designer lines and well-known brands. Within each of ourgeographic markets, we also face significant competition from global andregional branded apparel companies, as well as retailers that market apparel undertheir own labels. These and other competitors pose significant challenges toour market share in our existing major domestic and foreign markets. Inaddition, our larger competitors may be better able than we to adapt tochanging conditions that affect the competitive market. Also, the industry’slow barriers to entry allows the introduction of new products or newcompetitors at a faster pace. Any of these factors could result in reductionsin sales or prices of our products and could have a material adverse effect onour results of operations and financial condition.

***Changes in theeconomy and trends in consumer confidence may adversely affect the fashionindustry as well as our operating results.***

The industry in which we operate is cyclical.Purchases of apparel and related merchandise tend to decline duringrecessionary periods and also may decline at other times. Reduced levels ofconsumer spending can also result from (i) changes in interest rates, (ii) theavailability of consumer credit, (iii) changes in taxation rates, (iv) consumerconfidence in future economic conditions and (v) reduced levels ofconsumer disposable income. Due to these cyclical factors in the retailindustry, we may not be able to maintain our growth in revenues or earnings, orremain profitable in the future.

Actual or potentialterrorist acts and other conflicts in recent periods have also createdsignificant instability and uncertainty in the world and may have additionaleffects in the future. These may include causing consumers to defer purchasesor preventing our suppliers and service providers from providing requiredservices or materials to us. These or other impacts could materially andadversely affect our operating results.

***We could find thatwe are carrying excess inventories if we fail to anticipate consumer demand, ifour international vendors do not supply quality products on a timely basis, ifour merchandising strategies fail or if we do not open new and remodel existingstores on schedule.***

Even if we correctly anticipateconsumer fashion trends, our vendors could fail to supply the quality productsand materials we require at the time we need them. Moreover, we could fail toeffectively market or merchandise these products once we receive them. Lastly,we could fail to open new or remodeled stores on schedule, and inventorypurchases made in anticipation of such store openings could remain unsold. Anyof the above factors could cause us to experience excess inventories and highermarkdowns, which in turn could have a material adverse effect on our results ofoperations and financial condition.

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***Our success depends on maintaining good workingrelationships with our suppliers and manufacturers.***

We do not own or operate any production facilities equipment,and we depend on independent contractors to supply our fabrics and tomanufacture our products to our specifications. We do not have long-termcontracts with any suppliers or manufacturers, and our business is dependent oncontinued good relations with our vendors. In addition, none of our suppliersor manufacturers supplies or manufactures our products exclusively. As aresult, we compete with other companies for the production capacity ofindependent manufacturers and international import quota capacity. If our vendorsor manufacturers fail to ship our fabrics or products on time or to meet ourquality standards or are unable to fill our orders, we might not be able todeliver products to our retail stores and wholesale customers on time or atall.

Moreover, our manufacturers have at times been unableto deliver finished products in a timely fashion. This has led, from time totime, to an increase in our inventory, creating potential markdowns and aresulting decrease in our profitability. As there are a limited number ofqualified, offshore manufacturers, it could take significant time to findalternative manufacturers, which could result in our missing retailing seasonsor our wholesale customers’ canceling orders, refusing to accept deliveries orrequiring that we lower selling prices. Since we cannot return merchandise toour manufacturers, we could also have a significant amount of unsoldmerchandise. Any of these problems could harm our financial condition andresults of operations.

***Our wholesalebusiness is highly concentrated. The decision by any of our large customers todecrease their purchases of our products or stop carrying our products couldhave a material adverse effect on our results of operations and financialcondition.***

In 2006, 5.5% of ourconsolidated net revenue came from Bloomingdale’s, Macy’s and other affiliatedstores owned by Federated Department Stores, Inc. No other single customeror group of related customers accounted for more than 5% of our net revenue in2006. Continued consolidation in the retail industry could further decrease thenumber of, or concentrate the ownership of, stores that carry our and ourlicensees’ products. Also, as we expand the number of our retail stores, we runthe risk that our wholesale customers will perceive that we are increasinglycompeting directly with them, which may lead them to reduce or terminatepurchases of our products. In addition, in recent years there has been asignificant increase in the number of designer brands seeking placement indepartment stores, which makes any one brand potentially less attractive todepartment stores. If any one of our major customers decides to decreasepurchases from us, to stop carrying GUESS? products or to carry our productsonly on terms less favorable to us, our sales and profitability couldsignificantly decrease. This could have a material adverse effect on ourresults of operations and financial condition.

***Since we do notcontrol our licensees’ actions and we depend on our licensees for a substantialportion of our earnings from operations, their conduct could harm our business.***

We license to others therights to produce and market products that are sold with our trademarks. If thequality, focus, image or distribution of our licensed products diminish,consumer acceptance of and demand for the GUESS? brand and products coulddecline. This could materially and adversely affect our business and results ofoperations. In 2006, approximately 71% of our net royalties were derived fromour top five licensed product lines. A decrease in customer demand for any ofthese product lines could have a material adverse effect on our results ofoperations and financial condition.

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***We depend on our intellectual property, and ourmethods of protecting it may not be adequate.***

Our success andcompetitive position depend significantly upon our trademarks and otherproprietary rights. We take steps to establish and protect our trademarks worldwide.Despite any precautions we may take to protect our intellectual property,policing unauthorized use of our intellectual property is difficult, expensiveand time consuming, and we may be unable to adequately protect our intellectualproperty or to determine the extent of any unauthorized use, particularly inthose foreign countries where the laws do not protect proprietary rights asfully as in the United States. We also place significant value on our tradedress and the overall appearance and image of our products. However, we cannotassure you that we can prevent imitation of our products by others or preventothers from seeking to block sales of GUESS? products for violating theirtrademarks and proprietary rights. We also cannot assure you that others willnot assert rights in, or ownership of, trademarks and other proprietary rightsof GUESS?, that our proprietary rights would be upheld if challenged or that wewould, in that event, not be prevented from using our trademarks, any of whichcould have a material adverse effect on our financial condition and results ofoperations. Further, we could incur substantial costs in legal actions relatingto our use of intellectual property or the use of our intellectual property byothers. Even if we are successful in such actions, the costs we incur couldhave a material adverse effect on us.

***If we fail tosuccessfully execute our growth initiatives, including through acquisitions,our business and results of operations could be harmed.***

As part of our businessgrowth initiatives, we regularly open new stores in the United States andCanada. We also regularly evaluate strategic acquisitions and alliances andpursue those that we believe will support and contribute to our overall growthinitiatives. For instance, we completed the acquisition of our former Europeanjeanswear licensee during 2005 and the acquisition of 75% of the outstandingshares of our former European licensee of the GUESS by MARCIANO contemporaryline of apparel for women and men in December 2006. We have also continuedour international expansion by opening new stores outside the U.S., primarilyin the form of stores owned by our international licensees and distributors. Weplan to continue opening new stores in the U.S. and internationally. Thisexpansion effort places increased demands on our managerial, operational andadministrative resources that could prevent or delay the successful opening ofnew stores, adversely impact the performance of our existing stores andadversely impact our overall results of operations. In addition, acquiredbusinesses may not provide us with increased business opportunities, or resultin the growth that we anticipate. Furthermore, integrating acquired operationsis a complex, time-consuming and expensive process. Failing to acquire andsuccessfully integrate complementary businesses, or failing to achieve thebusiness synergies or other anticipated benefits of acquisitions, couldmaterially adversely affect our business and results of operations.

***We may be unsuccessfulin implementing our planned North America retail expansion, which could harmour business and negatively affect our results of operations.***

To open and operatenew stores successfully, we must:

·                    identifydesirable locations, the availability of which is out of our control;

·                    negotiateacceptable lease terms, including desired tenant improvement allowances;

·                    buildand equip the new stores;

·                    sourcesufficient levels of inventory to meet the needs of the new stores;

·                    hire,train and retain competent store personnel;

·                    successfullyintegrate the new stores into our existing operations; and

·                    satisfythe fashion preferences of customers in the new geographic areas.

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Any of these challengescould delay our store openings, prevent us from completing our store openingplans or hinder the operations of stores we do open. We cannot be sure that wecan successfully complete our planned expansion or that our new stores will beprofitable. Such things as unfavorable economic and business conditions and changingconsumer preferences could also interfere with our plans to expand.

***Failure to successfully develop and manage our newstore concepts could adversely affect our results of operations.***

In addition to our coreGuess retail stores, we continue to develop the MARCIANO and Guess Accessoriesstore concepts and in 2007 we plan to introduce our new G by GUESS and footwearstore concepts. The introduction and growth of several new store concepts aspart of our overall growth strategy could strain our financial and managementresources. If we are unable to successfully develop and manage these multiplestore concepts, or if consumers are not receptive to the products or storeconcepts, our results of operations and financial results could be adverselyaffected.

***Much of our business is international and can bedisrupted by factors beyond our control.***

We have been reducing our reliance on domesticcontractors and expanding our use of direct sourced offshore manufacturers as acost-effective means to produce our products. During 2006, we sourced asignificant amount of our finished products through third-party supplierslocated outside the United States and we continued to purchase fabrics outsidethe United States. As we focus strategically on progressively more directsourcing, we are expanding our Hong Kong office infrastructure to allow us todevelop, engineer and source directly from overseas factories.

In addition, we have been increasing our internationalsales of product outside of the United States primarily through the significantexpansion of our international stores through our licensees and distributorsand through our 2005 acquisition of our former European jeanswear licensee andour 2006 acquisition of 75% of the outstanding shares of our former Europeanlicensee of the GUESS by MARCIANO contemporary line of apparel. In 2006,approximately 37.2% of our consolidated net revenue was generated by sales fromoutside of the United States. We anticipate that these international revenueswill continue to grow as a percentage of our total business.

As a result of ourincreasing international operations, we face the possibility of greater lossesfrom a number of risks inherent in doing business in international markets andfrom a number of factors which are beyond our control. Such factors that couldharm our results of operations and financial condition include, among otherthings:

·                    politicalinstability or acts of terrorism, which disrupt trade with the countries inwhich our contractors, suppliers or customers are located;

·                    difficultiesin managing our foreign operations;

·                    localbusiness practices that do not conform to legal or ethical guidelines;

·                    adoptionof additional or revised quotas, restrictions or regulations relating toimports or exports;

·                    additionalor increased customs duties, tariffs, taxes and other charges on imports;

·                    delaysin receipts due to our distribution centers as a result of increasing securityrequirements at U.S. ports;

·                    significantfluctuations in the value of the dollar against foreign currencies;

·                    increaseddifficulty in protecting our intellectual property rights in foreignjurisdictions;

·                    social,legal or economic instability in the foreign markets in which we do business,which could influence our ability to sell our products in these internationalmarkets;

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·                    restrictionson the transfer of funds between the United States and foreign jurisdictions;and

·                    theability of our international licensees and distributors to locate and continueto open desirable new retail locations.

Our imports are limited bytextile agreements between the United States and some foreign jurisdictions,most notably including China. These agreements impose quotas on the amounts andtypes of merchandise that may be imported into the United States from thesecountries. These agreements also allow the United States to limit theimportation of categories of merchandise that are not now subject to specifiedlimits. The United States and the countries in which our products are producedor sold may also, from time to time, impose new quotas, duties, tariffs orother restrictions, or adversely adjust prevailing quota, duty or tarifflevels. If we are unable to obtain our raw materials and finished apparel fromthe countries where we wish to purchase them, either because of capacityconstraints or visa availability under the required quota category or for anyother reason, or if the cost of doing so should increase, it could have amaterial adverse effect on our results of operations and financial condition.

***Domestic andforeign currency fluctuations could adversely impact our financial conditionand results of operations.***

We generally purchase ourproducts in U.S. dollars. However, we source most of our productsoverseas. As a result, the cost of these products may be affected by changes inthe value of the applicable currencies. Changes in currency exchange rates mayalso affect the U.S. dollar value of the foreign currency denominatedprices at which our international businesses sell products. Furthermore, ourinternational sales and licensing revenue generally is derived from sales inforeign currencies, including the Canadian Dollar and the Euro. This revenuecould be materially affected by currency fluctuations. Although we hedge someexposures to changes in foreign currency exchange rates arising in the ordinarycourse of business, we cannot assure you that foreign currency fluctuationswill not have a material adverse impact on our financial condition and resultsof operations.

***Our two most seniorexecutive officers own a significant percentage of our common stock. Theirinterests may differ from the interests of our other stockholders.***

Maurice and PaulMarciano, our Chairman of the Board and Chief Executive Officer, respectively,collectively beneficially own over 42% of our outstanding shares of commonstock. These individuals may have different interests than our otherstockholders and, accordingly, they may direct the operations of our businessin a manner contrary to the interests of our other stockholders. As long asthese individuals own a significant percentage of our common stock, they mayeffectively be able to:

·                    electour directors;

·                    amendor prevent amendment of our Restated Certificate of Incorporation or Bylaws;

·                    effector prevent a merger, sale of assets or other corporate transaction; and

·                    controlthe outcome of any other matter submitted to our stockholders for vote.

Their stock ownership,together with the anti-takeover effects of certain provisions of applicableDelaware law and our Restated Certificate of Incorporation or Bylaws, may allowthem to delay or prevent a change in control that may be favored by our otherstockholders, which in turn could reduce our stock price or prevent ourstockholders from realizing a premium over our common stock price.

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***Our failure toattract and retain our existing senior management team and other key personnelcould adversely affect our business.***

Our business requiresdisciplined execution at all levels of our organization in order to ensure thetimely delivery of desirable merchandise in appropriate quantities to ourstores and our wholesalers’ stores. This execution requires experienced andtalented management in design, production, merchandising and advertising. Oursuccess depends upon the personal efforts and abilities of our seniormanagement, particularly Maurice Marciano and Paul Marciano, and other keypersonnel. Although we believe we have a strong management team with relevantindustry expertise, the extended loss of the services of one or both of theMarcianos or other key personnel could materially harm our business. Althoughwe are the beneficiary of a $10 million “key man” insurance policy on thelife of Paul Marciano, we do not have any other “key man” insurance withrespect to either of the Marcianos or other key employees, and any of them mayleave us at any time, which could severely disrupt our business and futureoperating results.

***Fluctuations in ourquarterly results of operations, comparable store sales, sales per square foot,wholesale operations or royalty net revenue or other factors could have amaterial adverse effect on our results of operations and financial condition.***

Our quarterly results of operations for our individualstores, our wholesale operations and our royalty net revenue have fluctuated inthe past and can be expected to fluctuate in the future. Further, if our retailstore expansion plans, both domestically and internationally, fail to meet ourexpected results, our overhead and other related expansion costs would increasewithout an offsetting increase in sales and net revenue. This could have amaterial adverse effect on our results of operations and financial condition.

Our net revenue andoperating results have historically been lower in the first half of our fiscalyear due to general seasonal trends in the apparel and retail industries. TheCompany recently changed its fiscal year to the end of January but expects thehistorical trend described above to continue. Our comparable store sales andquarterly results of operations are affected by a variety of factors,including:

·                    shiftsin consumer tastes and fashion trends;

·                    thetiming of new store openings and the relative proportion of new stores tomature stores;

·                    calendarshifts of holiday or seasonal periods;

·                    changesin our merchandise mix;

·                    changesin our mix of revenues by segment;

·                    thetiming of promotional events;

·                    actionsby competitors;

·                    weatherconditions;

·                    changesin style;

·                    changesin the business environment;

·                    populationtrends;

·                    changesin patterns of commerce such as the expansion of electronic commerce; and

·                    thelevel of pre-operating expenses associated with new stores.

An unfavorable change inany of the above factors could have a material adverse effect on our results ofoperations and financial condition.

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***Violation of labor laws and practices by our licenseesor suppliers could harm our business.***

We require our licensingpartners and suppliers to operate in compliance with applicable laws andregulations. While our internal and vendor operating guidelines promote ethicalbusiness practices, we do not control our licensees or suppliers or their laborpractices. The violation of labor or other laws by any of our licensees orsuppliers, or divergence of a licensee’s or supplier’s labor practices fromthose generally accepted as ethical in the United States, could interrupt orotherwise disrupt the shipment of our products, harm the value of ourtrademarks or damage our reputation.

***We rely on third parties and our own personnel forupgrading and maintaining our management information and accounting systems. Ifthese parties do not perform these functions appropriately, our business couldbe disrupted.***

The efficient operation ofour business is very dependent on our information and accounting systems. Inparticular, we rely heavily on the merchandise management systems used to tracksales and inventory. We depend on our vendors to maintain and periodicallyupgrade these systems to support our business as we expand. The softwareprograms supporting the processing of our inventory management information arelicensed to us by independent software developers. The inability of thesedevelopers to continue to maintain and upgrade our software programs couldresult in incorrect information being supplied to management, inefficientordering and replenishment of products and disruption of our operations if weare unable to convert to alternate systems in an efficient and timely manner.

**ITEM 1B.**       Unresolved Staff Comments.

None.

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**ITEM 2.**   Properties.

Certaininformation concerning our principal facilities, all of which are leased at December 31,2006, is set forth below:

| **Location**                                        | ** ** | ** **                                                                                                                                                                                                                       | ** ** | **Use** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|------------|-------------------------------------------------|------------|
| 1444  South Alameda Street  Los Angeles, California |       | Principal executive and administrative offices,  design facilities, sales offices, distribution and warehouse facilities,  production control, and sourcing used by our Wholesale and Retail segments,  and our Corporate groups |       |    | 355,000    |                                            |       |
| 144 S. Beverly Drive  Beverly Hills, California     |       | Administrative offices                                                                                                                                                                                                           |       |    | 1,200      |                                            |       |
| 1610 Freeport Drive  Louisville, Kentucky           |       | Distribution and warehousing facility used by our  Wholesale and Retail segments                                                                                                                                                 |       |    | 506,000    |                                            |       |
| 1385 Broadway  New York, New York                   |       | Administrative offices, public relations, and  showrooms used by our Wholesale and Retail segments                                                                                                                               |       |    | 30,000     |                                            |       |
| Montreal/Toronto, Canada                            |       | Administrative offices, showrooms and warehouse  facilities used by our Wholesale and Retail segments                                                                                                                            |       |    | 110,000    |                                            |       |
| Kowloon, Hong Kong                                  |       | Administrative offices, showrooms, sourcing,  distribution and licensing coordination facilities                                                                                                                                 |       |    | 24,000     |                                            |       |
| Seoul, Korea                                        |       | Administrative offices and showrooms used by our  Wholesale segment                                                                                                                                                              |       |    | 6,400      |                                            |       |
| Shanghai, China                                     |       | Administrative offices                                                                                                                                                                                                           |       |    | 1,400      |                                            |       |
| Florence/Milan/  Crevalcore, Italy                  |       | Administrative  offices and showrooms used by our European segment                                                                                                                                                               |       |    | 174,000    |                                            |       |

 

Our corporate, wholesale and retail headquarters andcertain warehousing facilities are located in Los Angeles, California and inBeverly Hills, California, consisting of five buildings totaling approximately356,200 square feet. All of these properties are leased by us, primarily fromlimited partnerships in which the sole partners are trusts controlled by andfor the benefit of Maurice Marciano and Paul Marciano (the “PrincipalStockholders”), Armand Marciano, their brother and former executive of theCompany, and their families pursuant to leases that expire in February 2008and July 2008. The total lease payments to these limited partnerships areapproximately $0.2 million per month with aggregate minimum lease commitmentsto these partnerships at December 31, 2006, totaling approximately $4.9million.

During the first quarter of 2005, the Company, througha wholly-owned Canadian subsidiary, began leasing warehouse and administrativefacilities in Montreal, Quebec from a partnership affiliated with MauriceMarciano and Paul Marciano. The lease expires in December 2014. Themonthly lease payment is $44,000 Canadian (US $39,000) with aggregate minimumlease commitments through the term of the lease totaling approximately $4.2million Canadian (US $3.7 million) at December 31, 2006.

See Note 11 to the Consolidated Financial Statementsfor further information regarding related party transactions.

Through early 2000, distribution of our products inthe U.S. was centralized in our Los Angeles, California facility. In 2000, weleased an automated distribution center in Louisville, Kentucky, to replace thedistribution center in Los Angeles as our primary distribution center. OurCanadian business operates 

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a distribution facilitylocated in Montreal, Canada. Our European business utilizes an independentdistributor with two separate locations in Italy. Additionally, we utilize acontract warehouse in Hong Kong that services the Pacific Rim.

We lease our showrooms, advertising, licensing, salesand merchandising offices, remote distribution and warehousing facilities andretail and factory outlet store locations under non-cancelable operatinglease agreements expiring on various dates through January 2018. Thesefacilities are located principally in the U.S., with aggregate minimum leasecommitments, at December 31, 2006, totaling approximately $456.4 millionexcluding related party commitments. In addition, in 2005 we started leasing anew headquarters building in Florence, Italy for our Europe operations under acapital lease agreement. We opened the Florence facility in June 2006. Thecapital lease obligation, including build-outs, amounted to $19.5 million as ofDecember 31, 2006.

Thecurrent terms of our store leases, excluding renewal options, expire asfollows:

| ** **                                  | ** ** | **Number of Stores** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| **Years Lease Terms Expire** | ** ** | ** **           | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Mexico** | ** ** |
| 2007-2009                                   |       |                 | 80         |   |   |   | 7 |   |   |   | 2 |   |   |
| 2010-2012                                   |       |                 | 109        |   |   |   | 7 |   |   |   | 1 |   |   |
| 2013-2015                                   |       |                 | 94         |   |   |   | 6 |   |   |   | — |   |   |
| 2016-2017                                   |       |                 | 52         |   |   |   | 4 |   |   |   | — |   |   |
| Thereafter                                  |       |                 | 1          |   |   |   | — |   |   |   | — |   |   |
|                                        |       |                 | 336        |   |   |   | 24 |   |   |   | 3 |   |   |
|                                             |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

We believe our existingfacilities are well maintained, in good operating condition and are adequateto  support our present level ofoperations. See Notes 11 and 12 to the Consolidated Financial Statements forfurther information regarding current lease obligations.

**ITEM 3.**   LegalProceedings.

On February 1, 2005, a complaint was filed byMichele Evets against the Company in the Superior Court of the State ofCalifornia for the County of San Francisco. The complaint purports to be aclass action filed on behalf of current and former Guess store managers inCalifornia. Plaintiffs seek overtime wages and a preliminary and permanentinjunction. The Company answered the complaint on April 28, 2005. Theparties participated in a voluntary mediation on August 16, 2006 and arein the process of finalizing a settlement agreement. The Company has accrued$1.0 million related to net charges in connection with the proposed settlementarrangement.

In 2006, the Officers of the Florence CustomsAuthorities (“Customs Authorities”) began an import customs audit with respectto the Company’s Italian Maco subsidiary in Florence, Italy, acquired in January 2005.As part of the audit, the Customs Authorities considered whether the Italiansubsidiary should have included the royalty expense payable to Guess?, Inc.,the parent company, as part of the cost of the product subject to customsduties. The Customs Authorities have subsequently reviewed specifictransactions which occurred in 2003, 2004 and 2005 and provided a preliminaryassessment that the royalty expenses are subject to customs duties and relatedpenalties. The Company is disputing the Customs Authorities assessment andintends to vigorously defend its position. In addition, under the terms of theMaco purchase agreement, the seller is required to indemnify the Company for90% of any loss with respect to Maco for periods prior to the acquisition. TheCompany has recently concluded that the amount of any possible loss would notbe material to our consolidated financial statements and that the likelihood ofincurring a loss is less than probable. Accordingly, no liability related tothis matter has been accrued.

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The Company is alsoinvolved in various other employment-related claims and other mattersincidental to the Company’s business, the resolution of which is not expectedto have a material adverse effect on the Company’s consolidated results ofoperations or financial position. With the exception of the class actionaccrual discussed above, no material amounts were accrued as of December 31,2006 or December 31, 2005, related to any of the Company’s other legalproceedings.

**ITEM 4.**   Submissionof Matters to a Vote of Security Holders.

No matters were submitted to a vote of ourshareholders during the fourth quarter of fiscal year 2006.

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**PART II**

**ITEM5.**   Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.

Since August 8,1996, the Company’s common stock has been listed on the New York Stock Exchangeunder the symbol ‘GES.’ The following table sets forth, for the periodsindicated, the high and low sales prices of the Company’s Common Stock, asreported on the New York Stock Exchange Composite Tape, as adjusted to reflectthe two-for-one stock split announced February 14, 2007 and expected to beeffective March 13, 2007:

| ** **                            | ** ** | **High**   | ** ** | **Low**    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| **Year ended December 31, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter 2005                    |       | $          | 7.89       |       | $          | 5.99 |   |
| Second Quarter 2005                   |       | 8.78       |       | 6.50       |       |
| Third Quarter 2005                    |       | 12.50      |       | 8.59       |       |
| Fourth Quarter 2005                   |       | 18.45      |       | 10.38      |       |
| **Year ended December 31, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter 2006                    |       | $          | 23.10      |       | $          | 17.18 |   |
| Second Quarter 2006                   |       | 23.35      |       | 19.56      |       |
| Third Quarter 2006                    |       | 24.92      |       | 20.18      |       |
| Fourth Quarter 2006                   |       | 32.55      |       | 24.15      |       |

 

On February 20, 2007, theclosing sales price per share of the Company’s common stock, as reported on theNew York Stock Exchange Composite Tape, was $42.93. On February 20, 2007, therewere 303 holders of record of the Company’s common stock.

**Performance Graph**

The Stock PricePerformance Graph below compares the most recent five-year cumulativeshareholder return of the Company with the S&P 500 Index (a broad equitymarket index) and the S&P 1500 Apparel Retail Index (a published industryindex). The return on investment is calculated based on an investment of $100on December 31, 2001, with dividends, if any, reinvested.

****

| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2001**         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Guess?, Inc..                 |       | 100.00           |       | 55.87 |   | 160.93 |   | 167.33 |   | 474.67 |   | 845.73 |   |
| S&P 1500  Apparel Retail Index |       | 100.00           |       | 99.41 |   | 136.25 |   | 160.32 |   | 174.90 |   | 191.64 |   |
| S&P 500 Index                  |       | 100.00           |       | 77.90 |   | 100.25 |   | 111.15 |   | 116.61 |   | 135.03 |   |

 

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**Stock Split**

On February 12, 2007,our Board of Directors approved a two-for-one stock split of the Company’scommon stock to be effected in the form of a 100% stock dividend. Eachshareholder of record at the close of business on February 26, 2007 willbe issued one additional share of common stock for every share of common stockowned as of that time. The additional shares will be distributed on or about March 12,2007 and the Company’s common stock is expected to begin trading on the NewYork Stock Exchange on a post-split basis on March 13, 2007. All share andper share amounts in this Annual Report on Form 10-K have beenadjusted to reflect the 2007 stock split.

**Dividend Policy**

On February 12, 2007,the Board of Directors of the Company declared a quarterly cash dividend of$0.12 per share on the Company’s common stock and approved a two-for-one stocksplit of the Company’s common stock, each to be paid on or about March 12,2007 to shareholders of record as of the close of business on February 26,2007. Because the record date for the initial cash dividend preceded the March 12,2007 stock split distribution date, the cash dividend will be paid on onlypre-split shares. Assuming the Board of Directors maintains the current levelof cash dividends, future quarterly dividends per share will be half thecurrent level but will apply to shares on a post-split basis. The payment ofcash dividends in the future will be at the discretion of our Board ofDirectors and will be based upon a number of business, legal and otherconsiderations, including our cash flow from operations, capital expenditures,debt service requirements, cash paid for income taxes, earnings and liquidity. Priorto the initiation of a quarterly dividend on February 12, 2007, we had notdeclared any dividends on our common stock since our initial public offering in1996. The agreement governing our Credit Facility limits our ability to paydividends unless immediately after giving effect thereto the aggregate amountof unrestricted cash and cash equivalents held by Guess?, Inc. and itsCanadian subsidiary is at least $50 million. At December 31, 2006, Guess?, Inc.and its Canadian subsidiary had approximately $193 million in unrestricted cashand cash equivalents.

**Sale ofUnregistered Securities**

Effective December 31, 2006, Guess?, Inc.,through its wholly-owned subsidiary, Guess? Europe, B.V., completed theacquisition of 75% of the outstanding shares of Focus Europe S.r.l. from FocusPull S.p.A. (“Seller”). The total purchase price, which is expected to be €18.4million ($24.2 million) subject to certain purchase price adjustments, alsoincluded 86,624 shares on a post-split basis of unregistered common stock ofGuess?, Inc valued at approximately €2.0 million ($2.6 million)based on the Company’s stock price at the time of closing.

The offer and sale of thecommon stock in the Focus acquisition complied with Section 4(2) ofthe Securities Act and Rules 501, 502 and 506 promulgated thereunder. TheSeller represented as of the date of the purchase of the common stock that (a) itacquired the shares for its own account and not with a view to or for sale inconnection with any distribution thereof in any transaction that would violatethe securities laws of the United States or any state thereof, (b) it hadno present plan or intention to effect any distribution thereof and (c) itwas an “accredited investor” within the meaning of Rule 501 promulgatedunder the Securities Act.

**ITEM 6.**   SelectedFinancial Data.

Theselected financial data set forth below have been derived from the auditedconsolidated financial statements of the Company and the related notes thereto.All share and per share amounts included in the following consolidatedfinancial data have been adjusted to reflect the two-for-one stock splitannounced February 14, 2007. The following selected financial data shouldbe read in conjunction with the Company’s 

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Consolidated Financial Statements and the relatedNotes contained herein and with “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” for information regardingaccounting changes, acquisitions and other items affecting comparability.

| ** **                                          | ** ** | **Year Ended December 31,**               | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of operations data:**                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                         |       | $                                         | 1,185,184  |   | $ | 936,092 |   | $ | 729,262 |   | $ | 636,585 |   | $ | 583,139 |   |
| Earnings (loss) from operations                     |       | 193,023                                   |       | 101,810 |   | 55,482 |   | 20,600 |   | (8,526 | ) |
| Income taxes (benefit)                              |       | 72,715                                    |       | 38,882 |   | 21,147 |   | 5,500 |   | (5,550 | ) |
| Net earnings (loss)                                 |       | 123,168                                   |       | 58,813 |   | 29,566 |   | 7,286 |   | (11,282 | ) |
| **Earnings  (loss) per share:**                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                               |       | $                                         | 1.36       |   | $ | 0.66 |   | $ | 0.34 |   | $ | 0.08 |   | $ | (0.13 | ) |
| Diluted                                             |       | $                                         | 1.34       |   | $ | 0.65 |   | $ | 0.33 |   | $ | 0.08 |   | $ | (0.13 | ) |
| Weighted number  of shares outstanding—basic   |       | 90,618                                    |       | 88,774 |   | 88,020 |   | 86,558 |   | 86,784 |   |
| Weighted number of  shares outstanding—diluted |       | 92,074                                    |       | 90,118 |   | 89,088 |   | 87,116 |   | 86,784 |   |

 

| ** **                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **2006**         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance sheet data:**                                                          | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital(1)                                                               |       | $                | 274,996    |   | $ | 190,792 |   | $ | 134,564 |   | $ | 95,260 |   | $ | 21,426 |   |
| Total assets                                                                     |       | 836,925          |       | 633,374 |   | 424,304 |   | 362,765 |   | 349,532 |   |
| Notes payable,  long-term debt and capital lease, excluding current installments |       | 18,018           |       | 53,199 |   | 41,396 |   | 54,161 |   | 1,480 |   |
| Stockholders’ equity                                                        |       | 431,060          |       | 288,293 |   | 220,577 |   | 182,782 |   | 166,280 |   |
|                                                                                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Workingcapital at December 31, 2002, reflects the $79.6 million of 91¤2% SeniorSubordinated Notes due 2003 as current debt and therefore a reduction inworking capital.

**ITEM 7.**   Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

**Summary**

We derive our net revenue from the sale of GUESS? men’sand women’s apparel, MARCIANO women’s apparel and our licensees’ productsthrough our network of retail and factory outlet stores primarily in the UnitedStates and Canada, from the sale of GUESS? men’s and women’s apparel worldwideto wholesale customers and distributors, from net royalties from worldwidelicensing activities, from the sale of GUESS? apparel and certain of ourlicensees’ products through the wholesale channels of our 100% owned Canadiansubsidiary, GUESS? Canada Corporation (“GUESS Canada”), our 100% owned Italiansubsidiary, GUESS? Italia, S.r.l. (effective June 1, 2006, merged withMaco Apparel, S.p.A., the 100% owned entity acquired in 2005), and from thesale of GUESS? and MARCIANO apparel and our licensee products through ouron-line stores at www.guess.com, www.guessfactory.com,  www.marciano.com and www.guess.ca.

The business segments of the Company are retail,wholesale, European and licensing. Information relating to these segments issummarized in Note 15 to the Consolidated Financial Statements. The Companybelieves this segment reporting reflects how its four business segments are managedand each segment’s performance is evaluated. The retail segment includes theCompany’s retail operations in North America. The wholesale segment includesthe wholesale operations in North America and internationally, 

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excluding Europe. TheEuropean segment includes both wholesale and retail operations in Europe. Thelicensing segment includes the worldwide licensing operations of the Company.The business segments results exclude corporate overhead costs, which consistof shared costs of the organization. These costs are presented separately andgenerally include, among other things, the following unallocated corporatecosts: information technology, human resources, accounting and finance,executive compensation, facilities and legal.

The Company reports comparable store sales for itsfull-price retail and factory outlet stores in the U.S. and Canada. A store isconsidered comparable after it has been open for 13 full months. If a storeremodel or relocation results in a square footage change of more than 15%, thestore is removed from the comparable store base until it has been opened at itsnew size or in its new location for 13 full months. Effective January 2007, thecompany discontinued its practice of reporting comparable store sales on a monthlybasis.

All share and per shareamounts in this Annual Report on Form 10-K have been adjusted toreflect the two-for-one stock split announced February 14, 2007.

**Executive Summary**

***The Company***

The Company continued to see improvement in all of itsbusiness segments, resulting in a record financial performance in the 2006fiscal year regarding revenues and earnings. The Company reported record netearnings of $123.2 million, or diluted earnings of $1.34 per share, in the yearended December 31, 2006, more than double the net earnings of $58.8million, or diluted earnings of $0.65 per share, reported in the year ended December 31,2005. These results reflect the impact of the significant growth in our Europeanoperations bolstered by the success of our licensee acquisition in 2005;comparable store sales growth and retail store expansion in the U.S. andCanada; the worldwide growth of our accessories business; and stronger productperformance driving our wholesale business.

Overall, the Company achieved an operating margin of16.3% in 2006, up 540 basis points from 10.9% in 2005. This improvement wasdriven by the combination of increased revenues, improved gross margin andbetter SG&A leverage. Revenues grew 26.6% to $1,185.2 million in 2006 from$936.1 million in 2005 with all segments contributing to this improvement. Grossmargin improved 310 basis points to 43.8% in 2006 from 40.7% in 2005. Thisimprovement was driven by a higher mix of the European and licensingbusinesses, which generated higher gross margins than the retail and wholesalesegments, increased European gross margin, improved gross margin in our retailbusiness due to more full-priced selling and occupancy cost leverage andimproved wholesale gross margin due to stronger sell through performanceresulting in lower markdown allowances relative to sales. As a percentage ofrevenues, SG&A expense was down 230 basis points to 27.5% compared to theprior year, driven by better leveraging of fixed costs in all segments. Thesefactors, plus the reduction in the effective tax rate to 37.1% for the fullyear compared to 39.8% in the prior year and the sales of certain non-operatingassets all contributed positively to the improvement in diluted earnings pershare.

The Company ended 2006with $220.3 million in cash and cash equivalents compared to $171.5 million atthe end of 2005. Total debt including capital lease obligations at the end of2006 was $52.4 million, down $35.9 million from $88.3 million at the end of2005. Receivables increased by $51.6 million or 63.2% to $133.4 million at December 31,2006 compared to $81.8 million at December 31, 2005. The increase wasdriven by significant revenue growth in our European operations in the secondhalf of 2006. Inventory increased by $43.2 million or 35.4% to $165.2 millionat December 31, 2006 compared to $122.0 million at December 31, 2005.The increase was due to the acquisition of our European GUESS by MARCIANOlicensee, Focus Europe S.r.l. (“Focus”), effective December 31, 2006 andhigher European and retail segment inventories to support anticipated salesgrowth in 2007.

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***Retail***

Our retail segment, including full-priced retail,factory outlet, Canada, and E-commerce, generated net sales of $721.3 millionin the year ended December 31, 2006, an increase of 17.7%, from $612.9million in the prior year. This growth was driven by sales for stores open morethan one year which grew 12.8% and a larger store base, which represented a5.3% increase in average square footage compared to the 2005 year. The increasein net revenue was due to growth in our women’s, accessories and men’s lines ofbusiness. Retail earnings from operations increased by $35.1 million to $100.4million in 2006 compared to $65.3 million in 2005. This increase was primarilydriven by both higher sales volumes and higher average selling prices alongwith better gross margin performance.

We have continued to develop MARCIANO and GuessAccessories concept stores, and we believe that over time these concepts cangrow to become significant chains in North America. The MARCIANO brand, acontemporary line that commands higher price points, is available inapproximately half of our full-price GUESS? retail stores in the U.S. andCanada. We have opened stores in key markets in the U.S. and Canada with afocus on superior locations with highly attractive return opportunities. Weopened eleven MARCIANO stores and six Guess Accessories stores in 2006. Inaddition, in 2007 the Company is introducing our new G by GUESS store concept. TheCompany expects to open approximately 32 G by GUESS stores, including storeconversions from other concepts, in 2007.

We ended 2006 with a totalof 336 stores in the U.S. and Canada, of which 192 were full-priced retail, 103were factory outlet stores, 25 were MARCIANO stores and 16 were GuessAccessories stores. This compares to 315 stores at the end of 2005.

***Wholesale***

Wholesale segment revenuesin 2006 increased 20.8% to $146.3 million from $121.1 million in 2005. Ourproducts were sold in the U.S. in approximately 970 and 965 doors at the end of2006 and 2005, respectively. Earnings from operations for the wholesale segmentimproved by $16.7 million, or 227.1%, to $24.0 million in 2006 from $7.3million in 2005, driven by increased sales unit volume and higher gross marginas a result of lower markdown allowances relative to sales and reduced SG&Aexpenses.

***Europe***

In Europe, revenues grewby $98.6 million, or 64.1%, to $252.4 million in 2006 compared to $153.8million in 2005. The majority of the revenue growth was generated by theEuropean wholesale business. This growth was driven primarily by ouraccessories and apparel wholesale lines and additional sales in our ownedretail stores. We ended 2006 with 24 owned stores which included the fourstores acquired in the Focus acquisition versus 16 in the prior year. Earningsfrom operations from our European segment increased by 128.5% to $64.2 millionin 2006 from $28.1 million in 2005 due to higher sales volume, better gross marginand improved SG&A expense leverage.

***Licensing***

Our licensing business generated net revenues of $65.2million in 2006, up 35.0%, from $48.3 million in 2005. This increase was drivenby growth of several product categories, especially handbags, watches andfootwear. Licensing segment earnings from operations increased $19.4 million,or 51.3%, to $57.2 million in 2006 from $37.8 million in 2005 due to revenuegrowth and a reduction in expenses of $2.5 million. Results for 2005 included aspecial performance-based compensation expense of $4.6 million, which did notreoccur in 2006.

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Outside of North America,we ended 2006 with 413 stores, of which 329 were Guess and GUESS by MARCIANOstores and 84 were Guess Accessories stores. Of the 413 stores, 27 were ownedand operated by Guess and 386 were operated by licensees or distributors.

***Corporate Overhead***

Corporate overheadincreased by $16.1 million in 2006, or 43.8%, to $52.8 million from $36.7million in 2005. This increase was primarily due to increased compensationcosts, including $3.8 million related to higher stock compensation expenseresulting from the adoption in 2006 of FAS 123R, “Share-Based Payment” (revised2004) (“SFAS123R”), other performance-based compensation and pension costs.

**Initiation ofQuarterly Dividend**

On February 12, 2007,the Board of Directors of the Company declared a quarterly cash dividend of$0.12 per share on the Company’s common stock and approved a two-for-one stocksplit of the Company’s common stock, each to be paid on or about March 12,2007 to shareholders of record as of the close of business on February 26,2007. Because the record date for the initial cash dividend preceded the March 12,2007 stock split distribution date, the cash dividend will be paid on onlypre-split shares. Assuming the Board of Directors maintains the current levelof cash dividends, future quarterly dividends per share will be half thecurrent level but will apply to shares on a post-split basis. The payment ofcash dividends in the future will be at the discretion of our Board ofDirectors and will be based upon a number of business, legal and otherconsiderations, including our cash flow from operations, capital expenditures,debt service requirements, cash paid for income taxes, earnings and liquidity.

**Application ofCritical Accounting Policies**

The Consolidated Financial Statements are prepared inconformity with accounting principles generally accepted in the U.S., whichrequire management to make estimates and assumptions that affect the reportedamounts of the assets and liabilities and disclosures of contingent assets andliabilities as of the date of the financial statements and the reported amountsof revenue and expenses during the reporting period. Management bases itsestimates and judgments on its historical experience and other relevantfactors, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Management evaluates its estimates and judgments on an ongoingbasis including those related to the valuation of inventories, accountsreceivable allowances, sales return allowances, the useful life of assets fordepreciation, restructuring expense and accruals, evaluation of impairment,recoverability of deferred taxes, workers compensation accruals, litigationaccruals, pension obligations and stock-based compensation.

The Company believes thatthe following significant accounting policies involve a higher degree ofjudgment and complexity. In addition to the accounting policies mentionedbelow, see Note 1 to the Consolidated Financial Statements for othersignificant accounting policies.

*Accounts receivablereserves:*

In the normal course of business, the Company grantscredit directly to certain wholesale customers after a credit analysis based onfinancial and other criteria is performed. Accounts receivable are recorded netof an allowance for accounts receivable. The Company maintains allowances fordoubtful accounts for estimated losses that result from the inability of itswholesale customers to make their required payments. The Company bases itsallowances through analysis of the aging of accounts receivable at the date ofthe financial statements, assessments of historical collection trends and anevaluation of the impact of current economic conditions.

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Costs associated withcustomer markdowns are recorded as a reduction to net revenues, and areincluded in the allowance for accounts receivable. These costs result fromseasonal negotiations with the Company’s wholesale customers, as well ashistorical trends and the evaluation of the impact of current economicconditions.

*Sales returnsreserves:*

The Company accrues forestimated sales returns in the period in which the related revenue isrecognized. To recognize the financial impact of sales returns, the Companyestimates the amount of goods that will be returned based on historicalexperience and reduces sales and cost of sales accordingly based on historicalreturn experience. The Company’s policy allows retail customers a 30 day periodto return merchandise following the date of sale. Substantially all of thesereturns are considered to be resalable at a price that exceeds the cost of themerchandise.

*Inventory reserves:*

Inventories are valued atthe lower of cost (first-in, first-out and weighted average method) or market. TheCompany continually evaluates its inventories by assessing slow moving productas well as prior seasons’ inventory. Market value of aged inventory isestimated based on historical sales trends for this category of inventory ofthe Company’s individual product lines, the impact of market trends, anevaluation of economic conditions and the value of current orders relating tothe future sales of this type of inventory. The Company closely monitors itsoff-price sales to ensure the actual results closely match initial estimates. Estimatesare regularly updated based upon this continuing review.

*Valuation of goodwill,intangible and other long-lived assets:*

The Company assesses theimpairment of its long-lived assets (i.e., goodwill, intangible assets andproperty and equipment), which requires the Company to make assumptions andjudgments regarding the carrying value of these assets on an annual basis, ormore frequently if events or changes in circumstances indicate that the assetsmight be impaired. An asset is considered to be impaired if the Companydetermines that the carrying value may not be recoverable based upon itsassessment of the asset’s ability to continue to generate income fromoperations and positive cash flow in future periods or if significant changesin the Company’s strategic business objectives and utilization of the assetsoccurred. If the assets (other than goodwill) are assessed to be recoverable,they are depreciated or amortized over the periods benefited. If the assets areconsidered to be impaired, the impairment recognized is the amount by which thecarrying value of the assets exceeds the fair value of those assets. Fair valueis determined based upon the discounted cash flows derived from the underlyingasset. See Note 1 of the Consolidated Financial Statements for furtherdiscussion.

*Pension benefitplan actuarial assumptions:*

The Company’s pensionobligations and related costs are calculated using actuarial concepts, withinthe framework of Statement of Financial Accounting Standards No. 87 “Employer’sAccounting for Pensions.”  The discountrate is an important element of expense and/or liability measurement. Weevaluate this critical assumption annually which enables us to state expectedfuture payments for benefits as a present value on the measurement date. Referto Note 10 for Supplemental Executive Retirement Plan related information.

*Litigationreserves:*

Estimated amounts forclaims that are probable and can be reasonably estimated are recorded asliabilities in our consolidated balance sheet. The likelihood of a materialchange in these estimated 

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reserveswould be dependent on new claims as they may arise and the favorable orunfavorable outcome of the particular litigation. Both the amount and range ofloss on any remaining pending litigation is uncertain. As additionalinformation becomes available, the Company will assess the potential liabilityrelated to pending litigation and will revise estimates as appropriate. Suchrevisions in estimates of the potential liability could materially impact theresults of operations and financial position.

*Stock-basedcompensation:*

Effective January 1,2006, the Company adopted the fair value recognition provisions of SFAS 123Rusing the modified prospective transition method. Under this method,compensation cost recognized for the year ended December 31, 2006included: (a) compensation expense for all stock-based payments grantedprior to, but not yet vested as of, December 31, 2005, based on the grantdate fair value estimated in accordance with the original provisions of SFAS123, “Accounting for Stock-Based Compensation,” (“FAS123”) and (b) compensationexpense for all stock-based payments granted on or after January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123R. The fair value of each stock option was estimated on the grantdate using the Black-Scholes option-pricing model with the followingweighted-average assumptions used for new grants. The risk-free interest rateis based on the U.S. Treasury yield curve in effect for the expected term ofthe option at the time of grant. The expected volatility is determined based onan average of both historical volatility and implied volatility. Impliedvolatility is derived from exchange traded options on the Company’s commonstock. The expected life is based on the “simplified” method described in theSEC Staff Accounting Bulletin No. 107. The dividend yield for 2006 andprior years was assumed to be zero since the Company had not historicallydeclared and did not have a current plan to declare dividends on an ongoingbasis until the Board of Directors authorized and approved the initiation of aquarterly dividend in February, 2007 (see Note 19). The expected forfeiturerate is determined based on historical data. Compensation expense for new stockoptions and nonvested stock awards is recognized on a straight-line basis overthe vesting period. In accordance with the modified prospective transitionmethod, results for prior periods have not been restated.

**Results ofOperations**

Thefollowing table sets forth actual operating results for the 2006, 2005 and 2004fiscal years as a percentage of net revenue:

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product sales                                 |       | 94.5                        | %          | 94.8 | % | 93.5 | % |
| Net royalties                                 |       | 5.5                         |       | 5.2 |   | 6.5 |   |
| Total net revenue                             |       | 100.0                       |       | 100.0 |   | 100.0 |   |
| Cost of product  sales                        |       | 56.2                        |       | 59.3 |   | 62.4 |   |
| Gross profit                                  |       | 43.8                        |       | 40.7 |   | 37.6 |   |
| Selling, general  and administrative expenses |       | 27.5                        |       | 29.8 |   | 30.0 |   |
| Earnings from operations                      |       | 16.3                        |       | 10.9 |   | 7.6 |   |
| Interest expense                              |       | 0.6                         |       | 0.7 |   | 0.7 |   |
| Interest income                               |       | (0.4                        | )          | (0.2 | ) | (0.1 | ) |
| Other, net                                    |       | (0.4                        | )          | — |   | — |   |
| Earnings before income taxes                  |       | 16.5                        |       | 10.4 |   | 7.0 |   |
| Income taxes                                  |       | 6.1                         |       | 4.1 |   | 2.9 |   |
| Net earnings                                  |       | 10.4                        | %          | 6.3 | % | 4.1 | % |

 

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

*Netrevenue.**  *Netrevenue increased $249.1 million or 26.6% to $1,185.2 million for the yearended December 31, 2006, from $936.1 million for the year ended December 31,2005. All segments contributed to this growth, with the largest contributionsfrom our retail and European segments.

Net revenue from retail operations increased $108.4million, or 17.7%, to $721.3 million for the year ended December 31, 2006,from $612.9 million for the year ended December 31, 2005. The increase wasdriven by sales for stores that were open for more than one year which grew12.8% and accounted for $67.9 million of the increase and a $40.5 millionincrease due to an average of 24 net new stores during 2006 with a 5.3%increase in average square footage compared to last year. While the majority ofthis $67.9 million increase was generated in our U.S. stores, the mostsignificant store sales rate increases were in our Canadian retail stores.Currency fluctuations accounted for $7.5 million of the increase in net revenuerelating to our Canadian retail stores.

Net revenue from wholesale operations increased $25.2million, or 20.8%, to $146.3 million for the year ended December 31, 2006,from $121.1 million for the year ended December 31, 2005. U.S. wholesalenet revenue increased $16.4 million, or 19.4%, to $101.1 million in 2006 from$84.7 million in 2005. The increase in U.S. wholesale revenue was primarilyattributable to strong product performance which drove higher sales volume andlower markdown allowances as a percentage of revenue. Our products were solddomestically in approximately 970 and 965 doors at the end of 2006 and 2005,respectively. International wholesale net revenues, excluding Europe, increased$8.8 million, or 24.2%, to $45.2 million in 2006 from $36.4 million in 2005primarily due to higher revenues in both Canada and Asia. Currency fluctuationsaccounted for $1.5 million of the increase in net revenue relating to ourCanadian wholesale business.

Net revenue from European operations increased $98.6million, or 64.1%, to $252.4 million for the year ended December 31, 2006,from $153.8 million for the year ended December 31, 2005. The increase wasdue to growth in our accessories and footwear businesses, higher sales in ourapparel wholesale business, and additional sales in our owned retail stores.Currency fluctuations accounted for $1.1 million of the increase in net revenuerelating to our European operations.

Net royalties from licensing operations increased by$16.9 million, or 35.0%, to $65.2 million for the year ended December 31,2006, from $48.3 million for the year ended December 31, 2005. Theincrease was the result of the strength of the accessories business,particularly handbags, watches, and the impact of incremental sales from ournew footwear and fragrance licensees. The number of licensees remainedconsistent in 2006 as compared to 2005.

*Grossprofit.**  *Grossprofit increased $138.5 million or 36.4% to $519.4 million for the year endedDecember 31, 2006, from $380.9 million for the year endedDecember 31, 2005. The increase in gross profit primarily resulted fromincreased sales in all segments and improved gross margin in the European,wholesale and retail segments. Gross profit for the retail segment increased$55.5 million, or 26.0%, to $269.4 million primarily due to higher retail salesvolumes and higher margins due to increases in average selling price partiallyoffset by the additional occupancy cost of operating an incremental average 24net new stores. Gross profit for the wholesale segment increased $12.8 million,or 32.4%, to $52.4 million as a result of increased sales volume and lowermarkdown allowances. Gross profit for our European operations increased $53.2million to $132.4 million primarily attributable to the increase in sales.Higher licensing revenue increased overall gross profit by $17.0 million.

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Gross margin (gross profit as a percentage of totalnet revenues) increased 310 basis points to 43.8% for the year ended December 31,2006, from 40.7% for the year ended December 31, 2005. The improvement inthe overall gross margin was attributable to a higher mix of European andlicensing segment revenues, both of which generate higher gross margin than ourretail and wholesale segments. Gross margin improved in both Europe and retaildue to better product margins and improved occupancy leverage. Gross marginimproved in our wholesale business, due mainly to lower markdown allowances. Grossmargin from product sales increased 310 basis points to 40.6% for the yearended December 31, 2006, from 37.5% for the year ended December 31,2005.

The Company’s gross margins may not be comparable toother entities since some entities include all of the costs related to theirdistribution in cost of product sales and others, like the Company, exclude thewholesale related distribution costs from gross margin, including them insteadin selling, general and administrative expenses.

*Selling,general and administrative expenses.**  *Selling, general and administrative (“SG&A”)expenses increased $47.3 million, or 16.9%, to $326.4 million for the yearended December 31, 2006, from $279.1 million, for the year ended December 31,2005. The increase was primarily attributable to a $17.1 million increase inour European operations driven by selling and distribution costs, an $8.7million increase representing the cost of operating an average of 24 net newstores in North America, a $2.2 million increase in North American sellingexpenses for stores open for more than one year, a $5.6 million increase instock compensation expense, a $4.8 million increase in performance-based compensation,a $3.1 million increase in pension costs, a $1.4 million increase inprofessional fees, a $1.0 million accrual for the proposed settlement of aclass action lawsuit and a $1.7 million increase in advertising costs. As apercentage of net revenue, SG&A expenses decreased 230 basis points to27.5% in 2006 from 29.8% in 2005 reflecting lower expenses in the wholesale andlicensing segments and improved leverage in both our European and retailsegments. *The licensingsegment included a special performance bonus in 2005 of $4.6 million which didnot reoccur in 2006.*

*Earningsfrom operations.**  *Earningsfrom operations increased $91.2 million, or 89.6%, to $193.0 million for theyear ended December 31, 2006 from $101.8 million for the year ended December 31,2005 as a result of improved profitability in all of our segments. The retailsegment generated earnings from operations of $100.4 million in 2006 versusearnings from operations of $65.3 million in 2005. The increase in earningsfrom operations for the retail segment was due to higher sales, improved grossmargin and better expense leverage. Earnings from operations for the wholesalesegment were $24.0 million in 2006 compared to $7.3 million in 2005. Thisincrease was principally due to higher U.S. wholesale sales and gross margin,and lower operating expenses. The European segment increased its earnings fromoperations to $64.2 million in 2006 from $28.1 million in 2005 primarily due toincreased sales, improved gross margin and better expense leverage. Earningsfrom operations for the licensing segment increased to $57.2 million in 2006from $37.8 million in 2005 due primarily to higher revenues generated by ouraccessories and footwear licensees and lower SG&A costs. The cost ofunallocated corporate overhead increased to $52.8 million in 2006 from $36.7million in 2005 mainly due to higher compensation related costs includingstock-based compensation expense. The combination of higher sales, increasedgross margin and lower SG&A expense rate resulted in an increase inoperating margin of 540 basis points from 10.9% to 16.3%.

*Interestexpense and interest income.**  *Interestexpense increased 10.5% to $7.5 million for the year ended December 31,2006 from $6.7 million for the year ended December 31, 2005. Total debt atDecember 31, 2006 was $52.4 million which comprised approximately $32.9million and $19.5 million of bank debt and capital lease obligations in ourEuropean operations, respectively, compared to total debt of $88.3 million at December 31,2005 which included $45.9 million of European borrowings and $40.7 millionof the Company’s 6.75% Secured Notes. The Secured Notes were redeemed inDecember 2006 resulting in a $1.4 million write-off of debt issuance costsand a $0.5 million redemption premium which are included in interestexpense. On a comparable basis, the average debt balance for the 

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year ended December 31,2006 was $86.5 million, with an average effective interest rate of 6.2%(excluding the effect of the write-off of the debt issuance costs andredemption premium), versus an average debt balance of $91.1 million, with anaverage effective interest rate of 7.3%, for the year ended December 31,2005. The comparable interest rate is lower primarily due to European debtcomprising a larger proportion of the total debt in 2006 (which carries a loweraverage interest rate.) Interest income increased to $5.9 million in 2006 from$2.6 million in 2005 due to higher average invested cash balances andhigher interest rates on this invested cash.

*Otherincome, net.**  *Otherincome was $4.5 million for the year ended December 31, 2006 due to a $2.8million gain on the sale of long-term investments, a $0.8 million gain on thesale of land, a $0.5 million increase in cash surrender value of long-terminvestments and a $0.4 million unrealized gain from interest rate swapcontracts. There was no other income in the year ended December 31, 2005.

*Incometaxes.**  *Incometax for the year ended December 31, 2006 was $72.7 million, or a 37.1%effective tax rate, compared to income tax of $38.9 million, or a 39.8%effective tax rate, for the year ended December 31, 2005. The change inthe effective tax rate compared to the prior year was due to the lower impactof permanent tax differences as a result of increased earnings, the generationof capital gains which allowed the Company to realize capital losscarryforwards and favorable tax audit settlements.

*Net earnings.**  *Net earnings increased by $64.4 million, or 109.4%,to $123.2 million for the year ended December 31, 2006, from earnings of$58.8 million for the year ended December 31, 2005.

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

*Netrevenue.**  *Netrevenue increased $206.8 million or 28.4% to $936.1 million for the year ended December 31,2005, from $729.3 million for the year ended December 31, 2004. Theincrease was driven by improvements in all of our segments, but was primarilyattributable to sales growth in the retail and European segments which includedthe impact of the acquisition of our European jeanswear licensee in 2005.

Net revenue from retail operations increased $94.0million, or 18.1%, to $612.9 million for the year ended December 31, 2005,from $518.9 million for the year ended December 31, 2004. The increase wasdriven by a  comparable store salesincrease of 9.2% which accounted for $39.4 million of the increase and a $54.6million increase due to an average of 30 net new stores during 2005 with an8.2% increase in average square footage as compared to 2004. The mostsignificant comparable store sales percentage increases were in our Canadianretail stores. Currency fluctuations had a positive impact on our overallCanadian results, accounting for $7.7 million of the increase in net revenue.

Net revenue from wholesale operations increased $0.7million to $121.1 million for the year ended December 31, 2005, from$120.4 million for the year ended December 31, 2004. The increase wasdriven by growth in non-European, international wholesale sales, offset by adecline in U.S. wholesale sales. U.S. wholesale net revenue decreased $4.7million, or 5.3%, to $84.7 million in 2005 from $89.4 million in 2004,primarily due to reduced off-price sales in 2005, partially offset by increasesin regular-priced sales. Our products were sold domestically in approximately965 doors at the end of 2005 compared with approximately 930 doors at the endof 2004. Non-European, international wholesale net revenues increased $5.4million, or 17.4%, to $36.4 million in 2005 from $31.0 million in 2004primarily as a result of improved sales in Asia and Canada.

Net revenue from European operations increased $111.0million to $153.8 million for the year ended December 31, 2005, from $42.8million for the year ended December 31, 2004. The increase reflected theimpact of the acquired jeanswear licensee and significant growth from theaccessories business in Europe. Revenues from our acquired European jeanswear business,including the acquired retail stores, totaled $84.4 million. Currencyfluctuations accounted for $1.2 million of the increase in net revenue.

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Net royalties fromlicensing operations increased by $1.1 million, or 2.3%, to $48.3 million forthe year ended December 31, 2005, from $47.2 million for the year ended December 31,2004. This growth was driven primarily by the strength of our eyewear, handbagand watch lines of business, partially offset by the acquisition of ourEuropean jeanswear licensee in January 2005, since the revenues of theacquired business are now classified as revenues for the European segment.Licensing income included in the licensing operations segment from our acquiredEuropean jeanswear licensee for the year ended December 31, 2004 totaled$5.9 million. The number of licensees remained consistent in 2005 as comparedto 2004.

*Gross profit.**  *Gross profit increased $106.9 million or 39.0% to$380.9 million for the year ended December 31, 2005, from $274.0 millionfor the year ended December 31, 2004. The increase in gross profitprimarily resulted from growth in our European operations driven by theacquisition of the European jeanswear licensee and increased sales and improvedmargins in our retail segment. Gross profit for our European operationsincreased $57.3 million to $79.2 million primarily due to higher sales. TheEuropean acquisition accounted for approximately $40.6 million of the increase.Gross profit for the retail segment increased $45.1 million, or 26.8%, to$213.8 million primarily due to higher sales. Gross profit for the wholesalesegment increased $3.3 million, or 9.2%, to $39.6 million as a result of alower proportion of off-price product sales in the U.S. and increased sales inCanada and Asia.

Gross margin improved to40.7% for the year ended December 31, 2005, from 37.6% for the year ended December 31,2004. Gross margin from product sales increased to 37.5% for the year ended December 31,2005, from 33.2% for the year ended December 31, 2004. The growth in theoverall gross margin was due to the increased volume of sales in the highmargin European business for the year ended December 31, 2005, improvedleverage of store occupancy and higher product profitability, partially offsetby a lower proportion of licensing revenue as a percentage of the overallrevenue.

The Company’s grossmargins may not be comparable to other entities since some entities include allof the costs related to their distribution in cost of product sales and others,like the Company, exclude a portion of them related to the wholesale segment’sdistribution costs from gross margin, including them instead in selling,general and administrative expenses.

*Selling, general andadministrative expenses.**  *Selling,general and administrative expenses increased $60.6 million, or 27.7%, to$279.1 million for the year ended December 31, 2005, from $218.5 million,for the year ended December 31, 2004. SG&A expenses in our Europeanoperations increased by $37.0 million for the year ended December 31, 2005to $51.1 million from $14.1 million for the year ended December 31, 2004,primarily due to our acquisition. The remaining increase of $23.6 million wasprimarily due to a $10.6 million increase representing the cost of operating anaverage of 30 net new stores, a $4.1 million increase in store selling expensesresulting from higher sales and an $8.5 million increase in accrued bonus,including $4.6 million of performance-based compensation related to ourlicensing segment. As a percentage of net revenue, SG&A expenses decreasedto 29.8% in 2005 from 30.0% in 2004. This lower rate reflects lower expenses inthe wholesale business and lower advertising costs, partially offset byincreased costs incurred to develop our infrastructure in Europe anddomestically in the retail segment, and a higher performance-based compensationbonus expense in the licensing segment.

*Earnings from operations.**  *Earnings from operations increased $46.3 million to$101.8 million for the year ended December 31, 2005 from $55.5 million forthe year ended December 31, 2004. The retail segment generated earningsfrom operations of $65.3 million in 2005 versus earnings from operations of$47.8 million in 2004 with higher sales and gross profit partially offset by anincrease in store selling and other costs. The wholesale segment improved itsearnings from operations to $7.3 million in 2005 from a loss of$5.6 million in 2004. The improvement in earnings from operations for thewholesale segment is principally due to lower operating expenses in thatsegment and improved gross margin performance in our domestic wholesalebusiness based on reduced sales of excess product in the off-price channel. TheEuropean segment increased its earnings from operations to $28.1 million in2005 from $7.7 million in 

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2004 primarily dueto our recent European acquisition and improved performance of our accessoriesbusiness in Europe. Earnings from our newly acquired jeanswear business totaled$11.9 million for the year ended December 31, 2005. Earnings fromoperations for the licensing segment remained flat at $37.8 million in 2005from $37.7 million in 2004 due to increased royalty income and loweradvertising and design costs, offset by both the loss of licensing revenue fromour acquired European operations and a $4.6 million performance basedcompensation expense related to the performance and contributions of the licensingbusiness to the Company’s operations. There was no corresponding performancebased expense in the comparable prior year period. The cost of unallocatedcorporate overhead increased to $36.7 million in 2005 from $32.2 million in2004 mainly due to higher compensation costs.

*Interest expense andinterest income.**  *Interestexpense increased 19.2% to $6.7 million for the year ended December 31,2005 from $5.7 million for the year ended December 31, 2004. Total debt atDecember 31, 2005 was $88.3 million, which included $40.7 million ofthe Company’s 6.75% Secured Notes due 2012, approximately $33.6 million of bankdebt, primarily from our European operations, and a new capital obligation of$14.0 million relating to our new building in Europe. On a comparable basis,the average debt balance for the year ended December 31, 2005 was $91.1million, with an average effective interest rate of 7.3%, versus an averagedebt balance of $63.5 million, with an average effective interest rate of 8.9%,for the year ended December 31, 2004. Interest income increased to $2.6million in 2005 from $0.6 million in 2004 due to higher average investedcash balances and higher interest rates on this invested cash.

*Income taxes.**  *Income tax for the year ended December 31, 2005was $38.9 million, or a 39.8% effective tax rate, compared to the income tax of$21.1 million, or a 41.7% effective tax rate, for the year ended December 31,2004. The change in the effective tax rate was due to the lower impact ofpermanent tax differences as a result of increased earnings in 2005 and otheradjustments compared to the prior year.

*Net earnings.**  *Net earnings increased by $29.2 million to $58.8million for the year ended December 31, 2005, from earnings of $29.6million for the year ended December 31, 2004.

**Liquidity and Capital Resources**

Thefollowing table summarizes the Company’s contractual obligations at December 31,2006 and the effects such obligations are expected to have on liquidity andcash flow in future periods (dollars in thousands):

| ** **                        | ** ** | **Payments due by period** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| **Contractual Obligations:** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt Obligations(1)               |       | $                          | 32,870     |   | $ | 32,870 |   | $ | — |   | $ | — |   | $ | — |   |
| Capital Lease  Obligations(1)     |       | 24,242                     |       | 2,263 |   | 4,365 |   | 4,295 |   | 13,319 |   |
| Operating Lease  Obligations(2)   |       | 464,969                    |       | 81,046 |   | 141,734 |   | 103,862 |   | 138,327 |   |
| Purchase Obligations              |       | 127,218                    |       | 127,218 |   | — |   | — |   | — |   |
| Aircraft Purchase                 |       | 10,919                     |       | 10,919 |   | — |   | — |   | — |   |
| Other Long-Term  Liabilities      |       | 4,584                      |       | 1,981 |   | 2,603 |   | — |   | — |   |
| Total                             |       | $                          | 664,802    |   | $ | 256,297 |   | $ | 148,702 |   | $ | 108,157 |   | $ | 151,646 |   |
| Other Commercial Commitments(3)   |       | $                          | 12,442     |   | $ | 12,442 |   | $ | — |   | $ | — |   | $ | — |   |

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(1)          Includesinterest on long-term debt and capital lease obligations.

(2)          Doesnot include insurance, taxes and common area maintenance charges. In 2006,these variable charges totaled $30.4 million.

(3)          Consistsof standby letters of credit for guarantee of foreign subsidiary’s borrowings,workers’ compensation and general liability insurance.

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On February 12, 2007,the Board of Directors of the Company declared a quarterly cash dividend of$0.12 per share on the Company’s common stock and approved a two-for-one stocksplit of the Company’s common stock, each to be paid on or about March 12,2007 to shareholders of record as of the close of business on February 26,2007. Because the record date for the initial cash dividend preceded the March 12,2007 stock split distribution date, the cash dividend will be paid on onlypre-split shares. Assuming the Board of Directors maintains the current levelof cash dividends, future quarterly dividends per share will be half thecurrent level but will apply to shares on a post-split basis. The payment ofcash dividends in the future will be at the discretion of our Board ofDirectors and will be based upon a number of business, legal and other considerations,including our cash flow from operations, capital expenditures, debt servicerequirements, cash paid for income taxes, earnings and liquidity.

At the current quarterlycash dividend rate, the Company’s annual cash dividend payments for 2007 areexpected to total approximately $22.4 million. While we believe that the amountof our dividends will allow for adequate cash flow for other purposes, areduction in cash generated by operations and any increase in capitalexpenditures, acquisition costs or cash paid for incomes taxes would reduce theamount of cash generated in excess of dividends, potentially reducing ouroperational and financial flexibility.

Our need for liquiditywill primarily arise from the funding of expansion and remodeling of our retailstores, shop-in-shop programs, systems, infrastructure, operations, principalpayments and payment of dividends. We have historically financed our operationsprimarily from internally generated funds and borrowings under our CreditFacility (defined below) and the European Revolvers (defined below). Please see“Item 1A. Risk Factors” for a discussion of risk factors which could reasonablybe likely to result in a decrease of internally generated funds available tofinance capital expenditures and working capital requirements.

On September 19,2006, the Company and certain of its affiliates entered into a credit facilityled by Bank of America, N.A., as administrative agent for the lenders (the “CreditFacility”). The Credit Facility provides for an $85 million revolvingmulticurrency line of credit and is available for direct borrowings and theissuance of letters of credit, subject to certain letters of credit sublimits. TheCredit Facility is scheduled to mature on September 30, 2011.

The obligations under theCredit Facility are guaranteed by certain of the Company’s existing and futuredomestic subsidiaries, and such obligations, including the guaranties, aresecured by (a) substantially all present and future property and assets ofthe Company and each guarantor and (b) the equity interests of certain ofthe Company’s direct and indirect U.S. subsidiaries and 65% of the equityinterests of the Company’s first tier foreign subsidiaries.

Direct borrowings underthe Credit Facility will be made, at the Company’s option, as (a) EurodollarRate Loans, which shall bear interest at the published LIBOR rate for therespective interest period plus an applicable margin (which was 0.75% at December 31,2006) based on Guess’ leverage ratio at the time, or (b) Base Rate Loans,which shall bear interest at the higher of (i) for domestic loans, 0.50%in excess of the federal funds rate, and for Canadian loans, 0.50% in excess ofthe average rate for 30 day Canada dollar bankers’ acceptances, or (ii) therate of interest as announced by Bank of America as its “prime rate,” in eachcase as in effect from time to time, plus an applicable margin (which was 0.0%at December 31, 2006) based on the Company’s leverage ratio at the time. TheCompany is also obligated to pay certain commitment, letter of credit and otherfees customary for a credit facility of this size and type. At December 31,2006 the Company had $12.4 million in outstanding standby letters of credit,$19.4 million in outstanding documentary letters of credit and no outstandingborrowings under the Credit Facility.

The Credit Facilityrequires the Company to comply with a leverage ratio and a fixed chargecoverage ratio. In addition, the Credit Facility contains customary covenants,including covenants that limit or restrict the Company and its subsidiaries’ability to: incur liens, incur indebtedness, make investments, 

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disposeof assets, make certain restricted payments, merge or consolidate, and enterinto certain transactions with affiliates. Upon the occurrence of an event ofdefault under the Credit Facility, the lenders may cease making loans,terminate the Credit Facility and declare all amounts outstanding to beimmediately due and payable. The Credit Facility specifies a number of eventsof default (some of which are subject to applicable grace or cure periods),including, among other things, non-payment defaults, covenant defaults,cross-defaults to other material indebtedness, bankruptcy and insolvencydefaults and material judgment defaults.

The Credit Facilityreplaces the (a) Amended and Restated Loan and Security Agreement by andamong Wachovia Capital Finance Corporation (Western) (formerly known asCongress Financial Corporation (Western)) and Guess, Guess? Retail, Inc.and Guess.com, Inc., dated as of December 20, 2002, as amended, and (b) CanadianLoan and Security Agreement by and among Wachovia Capital Finance Corporation(Canada) (formerly known as Congress Financial Corporation (Canada)) and GuessCanada, dated as of December 20, 2002, as amended (together, the “PriorCredit Facility”).

On December 20, 2006the Company, through its wholly-owned subsidiary, Guess? Royalty Finance LLC(the “Issuer”), completed the optional redemption of all of its outstanding6.75% asset-backed notes due June 2012 (“Secured Notes”). The finalaggregate cash consideration paid to the holders of the Secured Notes for theredemption totaled $32.8 million, which included a redemption premium of $0.5million. The Company also wrote-off debt issuance costs of $1.4 million inconnection with the redemption. These amounts are included in interest expensein the accompanying consolidated statement of operations. The Secured Notes,originally issued on April 28, 2003, were secured by rights and interestsin receivables generated from specific license agreements of specified GUESS?trademarks and all royalty monies payable or becoming payable under suchlicense agreements, and a security interest in specified assets consistingprimarily of such GUESS? trademarks and the specified license agreements.

The Company, through itsEuropean subsidiaries, maintains short-term borrowing agreements, primarily forworking capital purposes, with various banks in Italy, (the “EuropeanRevolvers”). Under these agreements, the Company can borrow up to $93.4 millionwith annual interest rates ranging from 3.8% to 5.0%. However, the Company’sability to borrow through foreign subsidiaries is limited to $85 million underthe terms of our Credit Facility. At December 31, 2006, the Company had$32.5 million of outstanding borrowings with a weighted average annual interestrate of 3.9% and $6.4 million in outstanding documentary letters of creditunder these agreements. These agreements are denominated in Euros, have nofinancial ratio covenants and are secured by accounts receivable, except forone borrowing agreement which is secured by a $5.3 million standby letter ofcredit issued under the Credit Facility. None of the agreements have statedmaturities. In addition, as part of the acquisition of Focus, effectiveDecember 31, 2006, the Company acquired $0.3 million of bank debt with aninterest rate of Euribor six-month rate plus 1%. The Company intends to paythis debt down in the short-term.

The Company entered into acapital lease of approximately $16.0 million in December 2005 for a newbuilding in Florence, Italy, with subsequent build-outs which were completed in2006. The building is the new headquarters for the Company’s Italian operation.This transaction resulted in a capital lease obligation of $19.5 million,including build-outs completed in 2006. The Company subsequently entered intoseparate interest rate swap agreements designated as non-hedging instrumentsresulting in a fixed rate of 3.55%. These interest rate swap agreements maturethrough 2016 and convert the nature of the capital lease obligation fromEuribor floating rate debt to fixed rate debt. The fair value of the interestrate swap asset as of December 31, 2006 was approximately $0.5 million.

At December 31, 2006, theCompany had working capital of $275.0 million compared to $190.8 millionat December 31, 2005. The Company’s primary working capital needs are forinventory and accounts receivable. Accounts receivable at December 31, 2006were $133.4 million, up $51.6 million, compared to $81.8 million at December31, 2005. Approximately $37.0 million of the increase is attributed to thereceivables related to our European business which totaled $76.4 million atDecember 31, 2006, 

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versus$39.4 million a year ago. Approximately $37.0 million, or 48.4%, of ourEuropean segment’s accounts receivable was insured for collection purposes atDecember 31, 2006. The Company’s inventory levels increased $43.2 million to$165.2 million at December 31, 2006 from $122.0 million at December 31, 2005. Thechange versus the year ago period was primarily due to the acquisition of Focuswhich included approximately $18.0 million of inventory at December 31, 2006,an increase of $15.3 million in inventories in our existing business in Europeand $6.4 million of increased inventories to support our North America businessgrowth.

We believe that ouroperating cash flows, existing cash balances and credit facilities will beadequate to finance our working capital requirements, fund capitalexpenditures, provide for required debt payments, pay dividends to ourshareholders in accordance with our dividend policy and support existing short-and long-term operating strategies. However, our operating cash flow and accessto, or cash requirements of, credit facilities can be impacted by macroeconomicfactors beyond our control that could reduce or delay consumer spending orprevent suppliers and service providers from providing required services ormaterials to us.

During 2006, the Companyrelied on trade credit along with available cash and borrowings under the PriorCredit Facility, European Revolvers, real estate leases, and internallygenerated funds to finance its operations and expansion. Net cash provided byoperating activities was $138.3 million for the year ended December 31,2006, compared to $149.3 million for the year ended December 31, 2005, ora decrease of $11.0 million. The decrease in cash provided by operatingactivities over the prior year was driven by growth in receivables of $52.1 millionin 2006, primarily due to the revenue growth in Europe in the second half ofthe year combined with the longer customary payment terms experienced in thatregion. In addition, 2006 did not include approximately $42.7 million relatedto certain fixed, cash rights payments from renegotiated license agreementsreceived in 2005 which were over-and-above the Company’s ongoing royaltypayments. These items were partially offset by growth in net income of $64.4million and a relative reduction in deferred taxes of $20.3 million.

Gross capital expenditurestotaled $50.3 million, before deducting lease incentives of $5.2 million, forthe year ended December 31, 2006. This amount excludes $4.6 million innon-cash build-out costs for the new headquarters building in Florence, Italy,that we are leasing. These build-out costs are accounted for as a capital leaseand accordingly, are treated as a non-cash item in the consolidated statementof cash flows. This compares to gross capital expenditures of $48.8 million,before deducting lease incentives of $5.7 million, for 2005. The Company’scapital expenditures for 2007 are planned at approximately $93.0 million,before deducting estimated lease incentives of approximately $8.0 million,primarily for retail store expansion of approximately 48 stores, significantstore remodeling programs, investments in information systems and enhancementsin other infrastructure. In addition, in May 2006, the Company enteredinto an agreement to acquire a new corporate aircraft with a scheduled deliverydate in December 2007 and has made down payments of approximately $8.1million with additional progress payments totaling $10.9 million to be madethrough the expected delivery date. The down payments are accounted for withinpurchases of long-term investments and deposits on property and equipment incash flows from investing activities. The acquisition will replace a currentaircraft fractional ownership arrangement. The Company is currently negotiatingwith a lender and may fund the full purchase price of the aircraft and isconsidering entering into a sale and leaseback arrangement on completion ofconstruction of the aircraft.

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The Company evaluates strategic acquisitions andalliances and pursues those that we believe will support and contribute to ouroverall growth initiatives. During the first quarter of 2005, the Companypurchased for $21.4 million, including cash acquired of $1.0 million, theremaining 90% of the shares of its European jeanswear licensee, Maco Apparel,S.r.l. (“Maco”), which it did not already own as well as certain retail storesin Europe. In 2005, the Company paid $16.9 million of the purchase price and refinanced$44.9 million of the outstanding debt of Maco. The remaining amount of thepurchase price is included in liabilities and is payable in $0.5 millioninstallments on each January 30 and June 30 through June 30,2009.

Effective December 31, 2006, the Companypurchased for approximately $22.8 million (net of $1.5 million of cashacquired), subject to certain purchase price adjustments primarily pertainingto inventory valuations and other closing conditions expected to be completedby June 2007, 75% of the outstanding shares of Focus Europe S.r.l. (“Focus”),the Company’s licensee for “GUESS by MARCIANO” contemporary apparel for womenand men in Europe, the Middle East and Asia. In 2006, the Company paid $14.3million of the purchase price ($11.7 million in cash and $2.6 million inCompany common stock), net of $1.5 million of cash acquired. The Companyexpects to pay the seller approximately $8.4 million for acquired inventoryafter the seller pays its suppliers. The remainder of the purchase price is expectedto be paid upon completion of the purchase price adjustments described above.

Cash used in financing activities increased $5.9million to $19.2 million for the year ended December 31, 2006 compared to$13.3 million for the year ended December 31, 2005. The increase wasdriven primarily by the redemption of the Company’s 6.75% secured notes thatamounted to $40.7 million at December 31, 2005. Net debt repayments were$19.7 million in 2005. Cash proceeds and tax benefits from the issuance ofCompany common stock upon stock award exercises were $21.1 million in 2006compared to $6.4 million in 2005.

On August 23, 2005, the Board of Directors of theCompany adopted a Supplemental Executive Retirement Plan (“SERP”) which becameeffective January 1, 2006. The SERP provides select employees who satisfycertain eligibility requirements with certain benefits upon retirement,termination of employment, death, disability or a change in control of theCompany, in certain prescribed circumstances. The initial participants in theSERP are Maurice Marciano, Chairman of the Board, Paul Marciano, ChiefExecutive Officer, and Carlos Alberini, President and Chief Operating Officer. Asa non-qualified pension plan, no funding of the SERP is required. However, theCompany expects to make annual payments into an insurance policy held in arabbi trust to fund the expected obligations arising under the SERP. As of December 31,2006, two payments had been made and the cash surrender value of the insurancepolicy was $7.5 million. The amount of future payments may increase, dependingon the future years of service and future annual compensation of theparticipants and investment performance of the trust.

In January 2002, the Company established aqualified employee stock purchase plan (“ESPP”), the terms of which allow forqualified employees to participate in the purchase of designated shares of theCompany’s common stock at a price equal to 85% of the lower of the closingprice at the beginning or end of each quarterly stock purchase period. On January 23,2002, the Company filed with the SEC a Registration Statement on Form S-8registering 4,000,000 shares of common stock for the ESPP. During the yearended December 31, 2006, 54,846 shares of the Company’s common stock wereissued out of its treasury shares pursuant to the ESPP at an average price of$16.55 per share for a total of $0.9 million.

In May 2001, theCompany’s Board of Directors authorized the Company to repurchase shares of itsown stock in an amount of up to $15 million from time to time in open markettransactions. No share repurchases were made during the years ended December 31,2006, 2005 and 2004. Since the inception of the share repurchase program in May 2001,the Company has purchased 2,274,000 shares at an aggregated cost of $7.1million, or an average of $3.13 per share.

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**Seasonality**

The Company’s business isimpacted by the general seasonal trends characteristic of the apparel andretail industries. U.S. retail operations are generally stronger from July throughDecember, and U.S. wholesale operations generally experience strongerperformance in July, August and September. The European operations arelargely wholesale and operate with two primary selling seasons. Spring/Summer primarilyships in January, February and March and Fall/Winter ships in July, August andSeptember. The remaining months of the year are relatively small shippingmonths. As the timing of the shipment of products may vary from year to year,the results for any particular quarter may not be indicative of results for thefull year.

**Inflation**

The Company does notbelieve that the relatively moderate rates of inflation experienced in the U.S.over the last three years have had a significant effect on net revenue orprofitability. Although higher rates of inflation have been experienced in anumber of foreign countries in which the Company’s products are manufacturedand sold, management does not believe that foreign rates of inflation have hada material adverse effect on its net revenue or profitability.

**Impact of RecentAccounting Pronouncements**

In December 2004, the FASB issued FASB Statement No. 123(revised 2004) (“SFAS 123R”), “Share-Based Payments,” which requires thatcompanies recognize the grant-date fair value of stock options and otherequity-based compensation issued to employees as an expense in the incomestatement. SFAS 123R generally requires that companies account for thosetransactions using the fair-value-based method, and eliminates using theintrinsic value method of accounting in APB 25. SFAS 123R is effective for theCompany beginning with the first quarter of 2006. In March 2005, the SECissued Staff Accounting Bulletin No. 107, which provides the staff’s viewsregarding the interaction between SFAS 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofstock-based payments arrangements for public companies. The Company adoptedSFAS 123R during the first quarter of fiscal 2006 using the modifiedprospective transition method. This method requires that compensation cost isrecognized on or after the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS 123pro-forma disclosures. The impact of SFAS 123R on the Company’s statement ofoperations in 2006 and beyond will depend upon various factors, including theamount of awards granted and the fair value of those awards at the time ofgrant. The Company incurred an incremental expense of $5.6 million, or $0.04per diluted share for fiscal 2006 as a result of the adoption of SFAS 123R. SeeNote 16 for further information regarding stock-based compensation.

In October 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 13-1 (“FSP13-1”), “Accounting forRental Costs Incurred during the Construction Period,” which requires thatrental costs associated with ground or building operating leases that areincurred during a construction period be recognized as rental expense. Theserental costs shall be included in income from continuing operations. Theeffective date of this FSP guidance was the first reporting period beginningafter December 15, 2005. The Company’s policy prior to the adoption of FSP13-1 was to capitalize pre-opening rental costs and amortize them overthe remaining lease term. The Company incurred an incremental pre-openingrental expense of approximately $1.3 million during fiscal 2006 for new storesopened during 2006 with a subsequent reduction in amortization expense over theremaining lease term.

In March 2006, the Emerging Issues Task Force (“EITF”)issued EITF Issue 06-3, “How Taxes Collected from Customers and Remittedto Governmental Authorities Should Be Presented in the Income Statement (ThatIs, Gross versus Net Presentation).”  TheEITF reached a consensus that (a) the scope of 

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this issue includes anytax assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and (b) thatthe presentation of taxes within the scope on either a gross or a net basis isan accounting policy decision that should be disclosed under APB Opinion 22. Furthermore,for taxes reported on a gross basis, a company should disclose the amounts ofthose taxes in interim and annual financial statements for each period forwhich an income statement is presented. The consensus is effective, throughretrospective application, for periods beginning after December 15, 2006. TheFASB ratified the consensus on June 28, 2006. Earlier application ispermitted. The Company records taxes collected from customers for revenueproducing transactions on a net basis. The Company does not expect to changethis policy upon adoption of the EITF, and hence, does not expect the adoptionof this consensus to have a material impact on the Company’s consolidatedfinancial statements.

In June 2006, the FASB issued FASB InterpretationNo. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which isan interpretation of SFAS No. 109 (“SFAS 109”), “Accounting for IncomeTaxes.” FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with SFAS 109and prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company is currently evaluating theeffect that the adoption of FIN 48 may have on its financial position andresults of operations.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of PriorYear Misstatements when Qualifying Misstatements in Current Year FinancialStatements,” which provides interpretive guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of a materiality assessment. SAB 108 is effective for companieswith fiscal years ending after November 15, 2006 and is required to beadopted by the Company in its fiscal year ending December 31, 2006. At December 31,2006, the Company has adopted the provisions of SAB 108 and determined noadjustments to current and prior reported periods are necessary.

In September 2006, the FASB issued SFAS No. 157(“SFAS 157”), “Fair Value Measurement.” SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.This Statement does not require any new fair value measurements. SFAS 157 iseffective for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. The Company is currently assessing theimpact of SFAS No. 157 on its financial statements.

In September 2006,the FASB issued SFAS No. 158 (“SFAS 158”), “Employer’s Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R).” SFAS 158 requires an employer torecognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status, measure aplan’s assets and its obligations that determine its funded status as of theend of the employer’s fiscal year, and recognize changes in the funded statusof a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income and as a separatecomponent of stockholders’ equity. Additional footnote disclosures are alsorequired. SFAS No. 158 is effective as of the end of the fiscal yearending after December 15, 2006. As a result of adopting SFAS 158, theCompany reduced other assets by $14.7 million, increased deferred tax assets by$10.3 million, recorded an incremental liability of $12.2 million, and recordedincremental charges to accumulated other comprehensive income (loss) of $16.6million, net of taxes.

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**ITEM 7A.**   Quantitativeand Qualitative Disclosures About Market Risk.

*Exchange Rate Risk*

Approximately 65% of product sales and licensingrevenue recorded in the year ended December 31, 2006, were denominated inUnited States dollars (“USD”). Inventory purchases from offshore contractmanufacturers are primarily denominated in USD; however, purchase prices forproducts may be impacted by fluctuations in the exchange rate between the USDand the local currencies of the contract manufacturers, which may have the effectof increasing the cost of goods in the future. In addition, royalties receivedfrom international licensees are subject to foreign currency translationfluctuations as a result of the net sales of the licensee being denominated inlocal currency and royalties being paid to the Company in USD. During the lastthree fiscal years, exchange rate fluctuations have not had a material impacton inventory costs. Due to the increase in foreign currency transactions andthe fact that not all foreign currencies react in the same manner as the USD,the Company cannot quantify in any meaningful way the effect of currencyfluctuations on future income.

The Company’s primary exchange rate risk relates tooperations in Canada and Europe. The Company may enter into derivativefinancial instruments, including forward exchange contracts and currency swaps,to manage exchange risk on foreign currency transactions. These financialinstruments can be used to protect the Company from the risk that the eventualnet cash inflows from the foreign currency transactions will be adverselyaffected by changes in exchange rates. Changes in the fair value of derivativefinancial instruments are either recognized periodically through the incomestatement or through stockholders’ equity as a component of comprehensiveincome or loss. The classification depends on whether the derivative financialinstrument qualifies for hedge accounting, and if so, whether it qualifies as afair value hedge or cash flow hedge. Generally, changes in fair values ofderivatives designated as fair value hedges are matched in the income statementagainst the respective gain or loss relating to the hedged items. Changes infair values of derivatives accounted for as cash flow hedges, to the extentthey are effective as hedges, are recorded in other comprehensive income orloss net of deferred taxes. Changes in fair values of derivatives notqualifying as hedges are reported in net earnings. The Company’s foreigncurrency contracts are not designated as hedges for accounting purposes. Thus,changes in fair value of the derivative instruments are included in netearnings.

44

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Thefollowing table sets forth information about the Company’s outstanding foreigncurrency contracts as of December 31, 2006:

| **Currency Exchange  Contracts** | ** ** | **Contract Type**  | ** ** | **USD  Equivalent** | ** ** | **Maturity Date**                     | ** **                               | **Current Value  in USD  at  Dec. 31, 2006** | ** ** |
|---------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------------------------|------------------------------------------|------------------------------------------------------------------|------------|
| Canadian dollars                      |       | Forward                 |       | $                   | 1,000,000  |                                       | January 4  to January 31, 2007 |                                                             | $          | 958,205 |   |
| Canadian dollars                      |       | Forward                 |       | 1,000,000           |       | February 1  to February 28, 2007 |                                     | 957,432                                                          |       |
| Canadian dollars                      |       | Forward                 |       | 1,000,000           |       | March 1  to March 30, 2007       |                                     | 956,660                                                          |       |
|                                  |       |                    |       | $                   | 3,000,000  |                                       |                                     |                                                             | $          | 2,872,297 |   |
| Euros                                 |       | Domestic  Currency Swap |       | 1,000,000           |       | January 5,  2007                      |                                     | 1,022,785                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 1,000,000           |       | February 7,  2007                     |                                     | 1,021,361                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 2,000,000           |       | March 7,  2007                        |                                     | 2,040,425                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 1,000,000           |       | March 16,  2007                       |                                     | 1,019,680                                                        |       |
| Euros                                 |       | Forward                 |       | 2,000,000           |       | January 10,  2007                     |                                     | 2,063,966                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | January 10,  2007                     |                                     | 1,032,225                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | January 18,  2007                     |                                     | 1,031,499                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | January 18,  2007                     |                                     | 1,031,499                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | January 18,  2007                     |                                     | 1,021,786                                                        |       |
| Euros                                 |       | Forward                 |       | 2,000,000           |       | February 8,  2007                     |                                     | 2,061,387                                                        |       |
| Euros                                 |       | Forward                 |       | 2,000,000           |       | February 8,  2007                     |                                     | 2,061,065                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | February 16,  2007                    |                                     | 1,030,211                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | February 16,  2007                    |                                     | 1,020,463                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | March 9,  2007                        |                                     | 1,029,327                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | March 16,  2007                       |                                     | 1,019,296                                                        |       |
| Euros                                 |       | Forward                 |       | 1,000,000           |       | April 6,  2007                        |                                     | 1,018,490                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 10,000,000          |       | November 8,  2006 to 2007             |                                     | 10,362,779                                                       |       |
| Euros                                 |       | Domestic  Currency Swap |       | 4,800,000           |       | November 8,  2006 to 2007             |                                     | 4,948,875                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 4,900,000           |       | November 8,  2006 to 2007             |                                     | 5,051,976                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 5,100,000           |       | November 8,  2006 to 2007             |                                     | 5,258,180                                                        |       |
| Euros                                 |       | Domestic  Currency Swap |       | 5,200,000           |       | November 8,  2006 to 2007             |                                     | 5,361,281                                                        |       |
|                                  |       |                    |       | $                   | 50,000,000 |                                       |                                     |                                                             | $          | 51,508,556 |   |
|                                  |       |                    |       | $                   | 53,000,000 |                                       |                                     |                                                             | $          | 54,380,853 |   |

 

At December 31, 2005,the Company had Canadian dollar currency exchange contracts to purchase $5.0million USD and the current value of those contracts at that date was $5.1million USD.

*Interest Rate Risk*

At December 31, 2006, approximately 37% of theCompany’s indebtedness related to a capital lease obligation which is coveredby interest rate swap agreements resulting in a fixed interest rate of 3.55%over the life of the lease obligation. Changes in the related interest ratewill result in an unrealized gain or loss on the fair value of the swap and arereported in other income or expenses. The change in the unrealized fair valueof the interest swap had an immaterial impact during 2006. Substantially all ofthe Company’s remaining indebtedness, principally consisting of short-termborrowings under the European Revolvers, is at variable rates of interest.Accordingly, changes in interest rates would impact the Company’s results ofoperations in future periods. A 100 basis point increase in interest rateswould have increased interest expense for the year ended December 31, 2006by approximately $0.9 million.

The fair value of theCompany’s debt instruments are based on the amount of future cash flowsassociated with each instrument discounted using the Company’s borrowing rate.At December 31, 2006, 

45

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thecarrying value of all financial instruments was not materially different fromfair value, as the interest rate on the Company’s debt approximates ratescurrently available to the Company.

**ITEM 8.**   FinancialStatements and Supplementary Data.

The information requiredby this Item is incorporated herein by reference to the Consolidated FinancialStatements and Supplementary Data listed in Item 15 of Part IV of thisreport.

**ITEM 9.**   Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

**ITEM 9A.**   Controlsand Procedures.

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”). Based on this evaluation, our principal executiveofficer and our principal financial officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis annual report.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f). Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control—IntegratedFramework* issued bythe Committee of Sponsoring Organizations of the Treadway Commission. Based onour evaluation under the framework in *Internal Control—IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2006.

Effective December 31, 2006, we completed theacquisition of 75% of Focus Europe S.r.l. Consistent with published guidance ofthe SEC, our management excluded the acquired company from its assessment ofthe effectiveness of our internal control over financial reporting as of December 31,2006. Total assets from the Focus acquisition represented 4.5% of the relatedconsolidated total assets of GUESS?, Inc. as of December 31, 2006.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by KPMG LLP, anindependent registered public accounting firm, as stated in their report whichis included herein.

**Changes in InternalControl Over Financial Reporting**

There has been no change in our internal control overfinancial reporting during the fourth quarter of 2006 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

46

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersGuess?, Inc.:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Guess?, Inc.maintained effective internal control over financial reporting as of December 31,2006, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Guess?, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that Guess?, Inc.maintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Also, in our opinion, Guess?Inc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission**(COSO)*.*

On December 31, 2006, Guess?, Inc. acquired75% of the outstanding shares of Focus Europe S.r.l. (Focus). Consistent withpublished guidance of the Securities and Exchange Commission, managementexcluded the acquired company from its assessment of the effectiveness ofGuess?, Inc.’s internal control over financial reporting as of December 31,2006. Total assets from the Focus acquisition represented 4.5% of the relatedconsolidated total assets of Guess?, Inc. as of December 31, 2006. Ouraudit of internal 

47

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control over financialreporting of Guess?, Inc. also excluded an evaluation of the internalcontrol over financial reporting of Focus.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofGuess?, Inc. and subsidiaries as of December 31, 2006 and 2005, andthe related consolidated statements of operations, stockholders’ equity andcomprehensive income and cash flows for each of the years in the three-yearperiod ended December 31, 2006, and the related financial statementschedule, and our report dated February 28, 2007, expressed an unqualified opinion on those consolidatedfinancial statements and financial statement schedule.

/s/ KPMG LLP

Los Angeles, CaliforniaFebruary 28, 2007

 

48

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**ITEM 9B.**             Other Information.

None.

**PART III**

**ITEM 10.**               Directors,Executive Officers and Corporate Governance.

The information required by this item can be foundunder the captions “Directors, Executive Officers,” “Corporate Governance andBoard Matters,” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the Company’s Proxy Statement (the “Proxy Statement”) to befiled with the Securities and Exchange Commission not later than 120 days afterthe end of our fiscal year and is incorporated herein by reference.

With respect to Item 406of Regulation S-K, our Code of Conduct is incorporated herein by reference as Exhibit 14.1.

**ITEM 11.**               ExecutiveCompensation.

The information in theProxy Statement set forth under the captions “Executive Compensation,” “CompensationCommittee Interlocks and Insider Participation,” and “Compensation CommitteeReport” is incorporated herein by reference.

**ITEM 12.**               Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forthunder the captions “Equity Compensation Plan Information” and “SecurityOwnership of Certain Beneficial Owners and Management” in the Proxy Statementis incorporated herein by reference.

**ITEM 13.**               CertainRelationships and Related Transactions, and Director Independence.

The information set forthunder the caption “Certain Relationships and Related Transactions”  and “Board Independence, Structure andCommittee Composition” in the Proxy Statement is incorporated herein byreference.

**ITEM 14.**               PrincipalAccountant Fees and Services.

The information set forthunder the caption “Relationship with Independent Auditors” in the ProxyStatement is incorporated herein by reference.

49

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**PART IV**

**ITEM 15.**   Exhibitsand Financial Statement Schedules.

**Documents Filedwith Report**

(1)         Consolidated FinancialStatements

The Report of Independent Registered Public AccountingFirm and financial statements listed on the accompanying Index to ConsolidatedFinancial Statements and Financial Statement Schedule are filed as part of thisreport.

(2)         Consolidated FinancialStatement Schedule

The financial statement schedule listed on theaccompanying Index to Consolidated Financial Statements and Financial StatementSchedule is filed as part of this report.

(3)         Exhibits

The exhibits listed on the accompanying Exhibit Indexare filed as part of this report.

50

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**Guess?, Inc.Form 10-K**

**Index toConsolidated Financial Statements and Financial Statement Schedule**

| 1      |   | Report of Independent Registered Public Accounting  Firm                                                                                     |   | F-2    |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| 2      |   | Consolidated Financial Statements                                                                                                            |   |   |   |
|   |   | Consolidated Balance Sheets at December 31, 2006  and 2005                                                                              |   | F-3    |   |
|   |   | Consolidated Statements of Operations for the Years  Ended December 31, 2006, 2005 and 2004                                             |   | F-4    |   |
|   |   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income for the Years Ended December 31, 2006, 2005 and  2004    |   | F-5    |   |
|   |   | Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004                                             |   | F-6    |   |
|   |   | Notes to Consolidated Financial Statements                                                                                                   |   | F-7    |   |
| 3      |   | Consolidated Financial Statement Schedule—Valuation  and Qualifying Accounts for the Years Ended December 31, 2006, 2005 and  2004 |   | F-38   |   |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersGuess?, Inc.:

We have audited the consolidated financial statementsof Guess?, Inc. and subsidiaries, as listed in the accompanying index. Inconnection with our audits of the consolidated financial statements, we alsohave audited the financial statement schedule, as listed in the accompanyingindex. These consolidated financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements and financialstatement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Guess?, Inc. and subsidiaries as of December 31, 2006 and2005, and the results of their operations and their cash flows for each of theyears in the three-year period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

As discussed in Note 1 and 16 to the consolidatedfinancial statements, Guess?, Inc. adopted Statement  of Financial Accounting Standards No. 123(R),“Share-Based Payment” effective January 1, 2006. As discussed in Note 1and 10 to the consolidated financial statements, Guess?, Inc. adopted Statementof Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment to FASBStatements No. 87, 88, 106 and 132(R),” as of December 31, 2006.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Guess?, Inc.’s internal control over financial reportingas of December 31, 2006, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated February 28, 2007 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

/s/ KPMG LLP

Los Angeles, CaliforniaFebruary 28, 2007

 

F-2

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**GUESS?, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, 2006 and 2005**

| ** **                                                                                                                                                                                               | ** ** | **2006**                               | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(in thousands, except  share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                               | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                          |       |                                   |       |       |       |
| Cash and cash  equivalents                                                                                                                                                                               |       | $                                      | 220,344    |       | $          | 171,549 |   |
| Receivables, net                                                                                                                                                                                         |       | 133,406                                |       | 81,762     |       |
| Inventories                                                                                                                                                                                              |       | 165,232                                |       | 122,037    |       |
| Prepaid expenses and  other current assets                                                                                                                                                               |       | 21,741                                 |       | 16,231     |       |
| Deferred tax assets                                                                                                                                                                                      |       | 18,169                                 |       | 16,439     |       |
| Total current assets                                                                                                                                                                                     |       | 558,892                                |       | 408,018    |       |
| Property and equipment,  net                                                                                                                                                                             |       | 164,262                                |       | 144,007    |       |
| Goodwill                                                                                                                                                                                                 |       | 28,004                                 |       | 20,623     |       |
| Other intangible assets,  net                                                                                                                                                                            |       | 18,532                                 |       | 11,282     |       |
| Long-term deferred tax  assets                                                                                                                                                                           |       | 43,084                                 |       | 37,226     |       |
| Other assets                                                                                                                                                                                             |       | 24,151                                 |       | 12,218     |       |
|                                                                                                                                                                                                     |       | $                                      | 836,925    |       | $          | 633,374 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                     |       |                                   |       |       |       |
| Current installments of  notes payable, long-term debt and capital lease obligations                                                                                                                     |       | $                                      | 34,357     |       | $          | 35,051 |   |
| Accounts payable                                                                                                                                                                                         |       | 117,339                                |       | 87,711     |       |
| Accrued expenses                                                                                                                                                                                         |       | 132,200                                |       | 94,464     |       |
| Total current  liabilities                                                                                                                                                                               |       | 283,896                                |       | 217,226    |       |
| Notes payable, long-term  debt and capital lease obligations, excluding current installments                                                                                                             |       | 18,018                                 |       | 53,199     |       |
| Long-term deferred rent  and lease incentives                                                                                                                                                            |       | 31,236                                 |       | 28,688     |       |
| Long-term deferred  royalties                                                                                                                                                                            |       | 35,008                                 |       | 43,423     |       |
| Other long-term  liabilities                                                                                                                                                                             |       | 32,955                                 |       | 2,545      |       |
|                                                                                                                                                                                                     |       | 401,113                                |       | 345,081    |       |
| Minority interest.                                                                                                                                                                                       |       | 4,752                                  |       | —     |       |
| Commitments and contingencies (Note 12)                                                                                                                                                                  |       |                                   |       |       |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                                   |       |       |       |
| Preferred stock, $0.01  par value. Authorized 10,000,000 shares; no shares issued and outstanding                                                                                                        |       | —                                 |       | —     |       |
| Common stock, $0.01 par  value. Authorized 150,000,000 shares; issued 133,896,240 and 131,887,050  shares at 2006 and 2005, outstanding 92,088,880 and 89,938,220 shares at 2006  and 2005, respectively |       | 921                                    |       | 900        |       |
| Paid-in capital                                                                                                                                                                                          |       | 220,812                                |       | 189,153    |       |
| Deferred compensation                                                                                                                                                                                    |       | —                                 |       | (1,389     | )          |
| Retained earnings                                                                                                                                                                                        |       | 374,729                                |       | 251,561    |       |
| Accumulated other  comprehensive income (loss)                                                                                                                                                           |       | (9,483                                 | )          | 4,515      |       |
| Treasury stock,  41,807,360 and 41,948,830 shares repurchased at 2006 and 2005, respectively                                                                                                             |       | (155,919                               | )          | (156,447   | )          |
| Stockholders’ equity                                                                                                                                                                                |       | 431,060                                |       | 288,293    |       |
|                                                                                                                                                                                                     |       | $                                      | 836,925    |       | $          | 633,374 |   |

 

See accompanying notes to consolidated financial statements

F-3

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**GUESS?,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYears ended December 31, 2006, 2005 and 2004**

| ** **                                                | ** ** | **2006**                                  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **(in thousands, except per share data)** | ** ** |
| Net revenue:                                              |       |                                      |       |       |       |       |       |
| Product sales                                             |       | $                                         | 1,119,945  |       | $          | 887,782    |       | $ | 682,020 |   |
| Net royalties                                             |       | 65,239                                    |       | 48,310     |       | 47,242     |       |
|                                                      |       | 1,185,184                                 |       | 936,092    |       | 729,262    |       |
| Cost of product  sales                                    |       | 665,805                                   |       | 555,223    |       | 455,278    |       |
| Gross profit                                              |       | 519,379                                   |       | 380,869    |       | 273,984    |       |
| Selling, general  and administrative expenses             |       | 326,356                                   |       | 279,059    |       | 218,502    |       |
| Earnings from  operations                                 |       | 193,023                                   |       | 101,810    |       | 55,482     |       |
| Other expense (income):                                   |       |                                      |       |       |       |       |       |
| Interest expense                                          |       | 7,450                                     |       | 6,741      |       | 5,653      |       |
| Interest income                                           |       | (5,947                                    | )          | (2,626     | )          | (619       | )          |
| Other, net                                                |       | (4,477                                    | )          | —     |       | (265       | )          |
|                                                      |       | (2,974                                    | )          | 4,115      |       | 4,769      |       |
| Earnings before  income tax expense and minority interest |       | 195,997                                   |       | 97,695     |       | 50,713     |       |
| Income tax  expense                                       |       | 72,715                                    |       | 38,882     |       | 21,147     |       |
| Minority interest                                         |       | 114                                       |       | —     |       | —     |       |
| Net earnings                                              |       | $                                         | 123,168    |       | $          | 58,813     |       | $ | 29,566 |   |
| **Earnings per share (Note 19)**                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                     |       | $                                         | 1.36       |       | $          | 0.66       |       | $ | 0.34 |   |
| Diluted                                                   |       | $                                         | 1.34       |       | $          | 0.65       |       | $ | 0.33 |   |
| **Weighted average shares  outstanding (Note 19)**        | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                     |       | 90,618                                    |       | 88,774     |       | 88,020     |       |
| Diluted                                                   |       | 92,074                                    |       | 90,118     |       | 89,088     |       |

 

See accompanying notes to consolidated financial statements

F-4

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**GUESS?, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYAND COMPREHENSIVE INCOME Years ended December 31, 2006, 2005 and 2004**

| ** **                                                                    | ** ** | **Compre-  hensive  Income** | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Deferred  Compensation** | ** ** | **RetainedEarnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Treasury   Stock** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                                                    | ** ** | **(in thousands)**      | ** ** |
| Balance at  December 31, 2003                                            |       |                         |       |              |       |                 | $          | 876                        |       |                 | $          | 172,917                                                   |       |                      | $          | (509      | )          |   |   | $ | 163,182 |   |   |   | $ | 3,300 |   |   | $ | (156,984 | ) | $ | 182,782 |   |
| Comprehensive income:                                                         |       |                         |       |              |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                  |       |                         | $          | 29,566            |       |                 |       | —                     |       |                 | —     |                                                      |       | —                    |       |      |       | 29,566 |   |   |   | — |   |   | — |   | 29,566 |   |
| Foreign currency  translation adjustment                                      |       |                         | 3,635      |              |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | 3,635 |   |   | — |   | 3,635 |   |
| Unrealized gain on  investments, net of tax effect                            |       |                         | 141        |              |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | 141 |   |   | — |   | 141 |   |
| Total comprehensive  income                                                   |       |                         | $          | 33,342            |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common  stock under stock compensation plans including tax effect |       |                         |       |              |       |                 | 10         |                       |       | 3,447                |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | — |   | 3,457 |   |
| Issuance of stock  under Employee Stock Purchase Plan                         |       |                         |       |              |       |                 | —     |                       |       | 188                  |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | 264 |   | 452 |   |
| Deferred  compensation                                                        |       |                         |       |              |       |                 | —     |                       |       | 1,128                |       |                                                      | (584       | )                         |       |      | —     |   |   |   | — |   |   | — |   | 544 |   |
| Balance at  December 31, 2004                                            |       |                         |       |              |       |                 | $          | 886                        |       |                 | $          | 177,680                                                   |       |                      | $          | (1,093    | )          |   |   | $ | 192,748 |   |   |   | $ | 7,076 |   |   | $ | (156,720 | ) | $ | 220,577 |   |
| Comprehensive income:                                                         |       |                         |       |              |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                  |       |                         | $          | 58,813            |       |                 |       | —                     |       |                 | —     |                                                      |       | —                    |       |      |       | 58,813 |   |   |   | — |   |   | — |   | 58,813 |   |
| Foreign currency  translation adjustment                                      |       |                         | (2,588     | )                 |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | (2,588 | ) |   | — |   | (2,588 | ) |
| Unrealized gain on  investments, net of tax effect                            |       |                         | 27         |              |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | 27 |   |   | — |   | 27 |   |
| Total comprehensive  income                                                   |       |                         | $          | 56,252            |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common  stock under stock compensation plans including tax effect |       |                         |       |              |       |                 | 14         |                       |       | 10,187               |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | — |   | 10,201 |   |
| Issuance of stock  under Employee Stock Purchase Plan                         |       |                         |       |              |       |                 | —     |                       |       | 252                  |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | 273 |   | 525 |   |
| Deferred  compensation                                                        |       |                         |       |              |       |                 | —     |                       |       | 1,034                |       |                                                      | (296       | )                         |       |      | —     |   |   |   | — |   |   | — |   | 738 |   |
| Balance at  December 31, 2005                                            |       |                         |       |              |       |                 | $          | 900                        |       |                 | $          | 189,153                                                   |       |                      | $          | (1,389    | )          |   |   | $ | 251,561 |   |   |   | $ | 4,515 |   |   | $ | (156,447 | ) | $ | 288,293 |   |
| Comprehensive income:                                                         |       |                         |       |              |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                  |       |                         | $          | 123,168           |       |                 |       | —                     |       |                 | —     |                                                      |       | —                    |       |      |       | 123,168 |   |   |   | — |   |   | — |   | 123,168 |   |
| Foreign currency  translation adjustment                                      |       |                         | 2,874      |              |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | 2,874 |   |   | — |   | 2,874 |   |
| Unrealized loss on  investments, net of tax effect                            |       |                         | (263       | )                 |       |                 | —     |                       |       | —               |       |                                                      | —     |                      |       |      | —     |   |   |   | (263 | ) |   | — |   | (263 | ) |
| Supplemental  Executive Retirement Plan, net of tax effect                    |       |                         | (16,609    | )                 |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   | (16,609 | ) |   |   |   | (16,609 | ) |
| Total  comprehensive income                                                   |       |                         | $          | 109,170           |       |                 |       |                       |       |                 |       |                                                      |       |                      |       |      |       |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common  stock under stock compensation plans including tax effect |       |                         |       |              |       |                 | 21         |                       |       | 23,290               |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | — |   | 23,311 |   |
| Issuance of stock  under Employee Stock Purchase Plan                         |       |                         |       |              |       |                 | —     |                       |       | 703                  |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | 205 |   | 908 |   |
| Stock-based  compensation                                                     |       |                         |       |              |       |                 | —     |                       |       | 6,739                |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | — |   | 6,739 |   |
| Deferred  compensation                                                        |       |                         |       |              |       |                 | —     |                       |       | (1,389               | )          |                                                      | 1,389      |                      |       |      | —     |   |   |   | — |   |   | — |   | — |   |
| Issuance of common  stock for Focus acquisition                               |       |                         |       |              |       |                 | —     |                       |       | 2,316                |       |                                                      | —     |                      |       |      | —     |   |   |   | — |   |   | 323 |   | 2,639 |   |
| Balance at  December 31, 2006                                            |       |                         |       |              |       |                 | $          | 921                        |       |                 | $          | 220,812                                                   |       |                      | $          | —    |       |   |   | $ | 374,729 |   |   |   | $ | (9,483 | ) |   | $ | (155,919 | ) | $ | 431,060 |   |

 

See accompanying notes toconsolidated financial statements

 

F-5

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**GUESS?,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears ended December 31, 2006, 2005 and 2004**

| ** **                                                                           | ** ** | **2006**           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                                           | ** ** | **(in thousands)** | ** ** |
| Cash flows from operating activities:                                                |       |               |       |     |       |     |       |
| Net earnings                                                                         |       | $                  | 123,168    |     | $          | 58,813   |       | $ | 29,566 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |               |       |     |       |     |       |
| Depreciation and  amortization of property and equipment                             |       | 35,309             |       | 32,364   |       | 34,975   |       |
| Amortization of  intangible assets                                                   |       | 2,745              |       | 2,275    |       | 467      |       |
| Stock-based compensation  expense                                                    |       | 6,739              |       | 1,175    |       | 968      |       |
| Deferred income taxes                                                                |       | (5,441             | )          | (25,658  | )          | (1,244   | )          |
| Net (gain) loss on  disposition of long-term assets and property and equipment       |       | (970               | )          | 1,195    |       | 136      |       |
| Other items, net                                                                     |       | (369               | )          | (2,729   | )          | 2,665    |       |
| Minority interest                                                                    |       | 114                |       |     |       |     |       |
| Changes in operating assets and liabilities:                                         |       |               |       |     |       |     |       |
| Receivables                                                                          |       | (52,073            | )          | 18,145   |       | (21,313  | )          |
| Inventories                                                                          |       | (25,177            | )          | (25,009  | )          | 1,201    |       |
| Prepaid expenses and  other assets                                                   |       | (4,128             | )          | 3,505    |       | (1,871   | )          |
| Accounts payable and  accrued expenses                                               |       | 53,983             |       | 40,116   |       | 23,624   |       |
| Long-term deferred rent  and lease incentives                                        |       | 2,548              |       | 3,406    |       | 10,335   |       |
| Long-term deferred  royalties                                                        |       | (1,418             | )          | 39,174   |       | 4,250    |       |
| Other long-term  liabilities                                                         |       | 3,223              |       | 2,544    |       | —   |       |
| Net cash provided by  operating activities                                           |       | 138,253            |       | 149,316  |       | 83,759   |       |
| Cash flows from investing activities:                                                |       |               |       |     |       |     |       |
| Purchases of property  and equipment                                                 |       | (50,281            | )          | (48,794  | )          | (34,779  | )          |
| Proceeds from dispositions  of long-term assets and property and equipment           |       | 4,946              |       | 2,553    |       | 1,020    |       |
| Acquisition of Maco, net  of cash acquired                                           |       | —             |       | (20,427  | )          | —   |       |
| Acquisition of Focus,  net of cash acquired                                          |       | (11,721            | )          | —   |       | —   |       |
| Purchases of long-term  investments and deposits on property and equipment           |       | (14,481            | )          | (3,646   | )          | (327     | )          |
| Net cash used in  investing activities                                               |       | (71,537            | )          | (70,314  | )          | (34,086  | )          |
| Cash flows from financing activities:                                                |       |               |       |     |       |     |       |
| Proceeds from notes  payable and long-term debt                                      |       | 118,190            |       | 119,576  |       | 214,066  |       |
| Repayment of notes  payable and long-term debt                                       |       | (158,948           | )          | (139,259 | )          | (227,332 | )          |
| Minority interest capital  contributions                                             |       | 490                |       | —   |       | —   |       |
| Issuance of common stock                                                             |       | 11,237             |       | 6,359    |       | 2,286    |       |
| Excess tax benefits from  stock-based compensation                                   |       | 9,842              |       | —   |       | —   |       |
| Net cash used in  financing activities                                               |       | (19,189            | )          | (13,324  | )          | (10,980  | )          |
| Effect of exchange rates  on cash and cash equivalents                               |       | 1,268              |       | (132     | )          | 147      |       |
| Net increase in cash and  cash equivalents                                           |       | 48,795             |       | 65,546   |       | 38,840   |       |
| Cash and cash  equivalents at beginning of year                                      |       | 171,549            |       | 106,003  |       | 67,163   |       |
| Cash and cash  equivalents at end of year                                            |       | $                  | 220,344    |     | $          | 171,549  |       | $ | 106,003 |   |
| Supplemental disclosures about non-cash investing  and financing activities:         |       |               |       |     |       |     |       |
| Capital lease obligation  incurred                                                   |       | $                  | 4,619      |     | $          | 13,964   |       | $ | — |   |
| Shares issued for Focus  acquisition                                                 |       | 2,639              |       | —   |       | —   |       |
| Supplemental cash flow data:                                                         |       |               |       |     |       |     |       |
| Interest paid                                                                        |       | 5,433              |       | 5,707    |       | 4,832    |       |
| Income taxes paid                                                                    |       | 56,280             |       | 54,131   |       | 15,089   |       |

 

See accompanying notes to consolidated financial statements

F-6

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(1) Summaryof Significant Accounting Policies and Practices**

*Description of theBusiness*

Guess?, Inc. (the “Company”or “GUESS?”) designs, markets, distributes and licenses a leading lifestylecollection of casual apparel and accessories for men and women that reflect theAmerican lifestyle and European fashion sensibilities. The Company’s designsare sold in GUESS owned stores, to a network of wholesale accounts thatincludes primarily better department stores, selected specialty retailers andupscale boutiques and through the Internet. GUESS branded products, some ofwhich are produced under license, are also sold internationally through aseries of licensees and distributors.

*Classification ofCertain Costs and Expenses*

The Company includes inbound freight charges,purchasing costs, retail store occupancy costs and a portion of the Company’sdistribution costs related to its retail business in costs of product sales.Distribution costs related to the wholesale business are included in selling,general and administrative expenses and amounted to $15.4 million, $7.8 millionand $8.2 million for the years ended December 31, 2006, 2005 and 2004,respectively. The Company includes store selling, selling and merchandising,advertising, wholesale distribution costs, design and other corporate overheadcosts as a component of selling, general and administrative expenses.

The Company classifiesamounts billed to customers for shipping fees as revenues, and classifies costsrelated to shipping as cost of product sales in the accompanying consolidatedstatements of operations.

*Principles ofConsolidation*

The consolidated financialstatements include the accounts of Guess?, Inc., its wholly-owneddirect and indirect subsidiaries and its majority-owned subsidiaries.Accordingly, all references herein to “Guess?, Inc.” include theconsolidated results of the Company and its subsidiaries. All intercompanyaccounts and transactions are eliminated during the consolidation process.

*Stock Split*

On February 12, 2007,our Board of Directors approved a two-for-one stock split of the Company’scommon stock to be effected in the form of a 100% stock dividend. Eachshareholder of record at the close of business on February 26, 2007 willbe issued one additional share of common stock for every share of common stockowned as of that time. The additional shares will be distributed on or about March 12,2007. All share and per share amounts in this Annual Report on Form 10-Khave been adjusted to reflect the 2007 stock split.

*Use of Estimates*

The preparation of the financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and disclosed in theaccompanying notes. Significant areas requiring the use of management estimatesrelate to the valuation of inventories, accounts receivable allowances, salesreturn allowances, pension obligations, the useful life of assets fordepreciation, evaluation of asset impairment, litigation accruals,recoverability of deferred taxes, workers compensation and medicalself-insurance expense and accruals, stock-based compensation, and evaluation 

F-7

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

of netrecoverable amounts and accruals for the sublet of certain lease obligations.Actual results could differ from those estimates.

*Litigation reserves*

Estimated amounts forclaims that are probable and can be reasonably estimated are recorded asliabilities in the consolidated balance sheets. The likelihood of a materialchange in these estimated reserves would be dependent on new claims as they mayarise and the favorable or unfavorable outcome of the particular litigation. Asadditional information becomes available, the Company assesses the potentialliability related to pending litigation and revises estimates as appropriate.Such revisions in estimates of the potential liability could materially impactthe results of operations and financial position.

*Cash and CashEquivalents*

Cash and cash equivalentsconsist of cash on hand and marketable securities with original maturities ofthree months or less.

*InvestmentSecurities*

The Company accounts forits investment securities in accordance with Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“SFAS 115”). SFAS 115requires investments to be classified into one of three categories based onmanagement’s intent: held-to-maturity securities, available-for-salesecurities and trading securities. Held-to-maturity securities arerecorded at their amortized cost. Available-for-sale securities arerecorded at fair value with unrealized gains and losses reported as a separatecomponent of stockholders’ equity. Trading securities are recorded at marketvalue with unrealized gains and losses reported in operations. The Companyaccounts for its long-term investment securities as available-for-sale.

*Earnings per Share*

Basic earnings per share represents net earningsdivided by the weighted-average number of shares of common stockoutstanding for the period. Diluted earnings per share represents net earningsdivided by the weighted-average number of shares outstanding, inclusiveof the dilutive impact of common stock equivalents such as stock options,calculated using the treasury stock method.

Thereconciliation of basic to diluted weighted average shares is as follows (inthousands): 

| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  shares used in basic computations   |       | 90,618                                     |       | 88,774 |   | 88,020 |   |
| Dilutive equity  awards                               |       | 1,456                                      |       | 1,344 |   | 1,068 |   |
| Weighted average  shares used in diluted computations |       | 92,074                                     |       | 90,118 |   | 89,088 |   |

 

For the fiscal years 2006, 2005 and 2004, thedifference between basic and diluted earnings per share was due to thepotential dilutive impact of options to purchase common stock. Options for473,220, 

F-8

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

145,094and 1,964,598, of the Company’s shares, respectively, were outstanding during2006, 2005 and 2004 but were excluded from the computation of diluted weightedaverage common shares and common share equivalents outstanding because theireffect would have been anti-dilutive.

*Accounts Receivableand Concentration of Credit Risk*

The Company’s financialinstruments that are exposed to concentrations of credit risk consist primarilyof accounts receivable. In addition, the Company maintains cash with variousmajor financial institutions and performs evaluations of the relative creditstanding of these financial institutions in order to limit the amount of creditexposure with any institution. The Company extends credit to corporatecustomers based upon an evaluation of the customer’s financial condition andcredit history and generally requires no collateral. The Company maintainsallowances for doubtful accounts for estimated losses that result from theinability of its wholesale customers to make their required payments. TheCompany bases its allowances on analysis of the aging of accounts receivable atthe date of the financial statements, assessments of historical collectionstrends and an evaluation of the impact of current economic conditions. TheCompany’s corporate customers are principally located throughout North Americaand in Europe, and their ability to pay amounts due to the Company may bedependent on the prevailing economic conditions of their geographic region.However, such credit risk is considered limited due to the Company’s largecustomer base. Management performs regular evaluations concerning the abilityof its customers to satisfy their obligations and records a provision for doubtfulaccounts based on these evaluations. The Company’s credit losses for theperiods presented are insignificant and have not significantly exceededmanagement’s estimates. A few of the Company’s domestic wholesale customers,including some under common ownership, have accounted for significant portionsof its total net revenue. Bloomingdale’s, Macy’s and other affiliated storesowned by Federated Department Stores, Inc. together accounted forapproximately 5.5%, 5.8%, and 5.1% of the Company’s consolidated net revenue in2006, 2005 and 2004, respectively. The Company does not have significant creditexposure to any one European customer.

*Inventories*

Inventories are valued atthe lower of cost (first-in, first-out and weighted average method) or market. TheCompany continually evaluates its inventories by assessing slow moving productas well as prior seasons’ inventory. Market value of aged inventory isestimated based on historical sales trends for this category of inventory ofthe Company’s individual product lines, the impact of market trends, anevaluation of economic conditions and the value of current orders relating tothe future sales of this type of inventory.

*Revenue Recognition*

*General*

The Company recognizes retail operations revenue atthe point of sale and wholesale operations revenue from the sale of merchandisewhen products are shipped and the customer takes title and assumes risk ofloss, collection of relevant receivable is reasonably assured, pervasiveevidence of an arrangement exists, and the sales price is fixed ordeterminable. The Company accrues for estimated sales returns and otherallowances in the period in which the related revenue is recognized. Torecognize the financial 

F-9

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

impact of sales returns,the Company estimates the amount of goods that will be returned based onhistorical experience and reduces sales and cost of sales accordingly based onhistorical return experience. The change in sales returns accruals decreasedgross profit by $3.3 million and $2.1 million for the years ended December 31,2006 and 2005, respectively. The sales returns accruals were $6.5 million and$2.7 million at December 31, 2006 and 2005, respectively. The Companyrecorded retail sales returns accruals which resulted in a reduction of grossprofit of $3.2 million in 2006. Management evaluated the effects of notaccruing for retail sales returns in prior periods and determined the impact tobe immaterial.

*Net Royalty Revenue*

Royalty revenue is basedupon a percentage, as defined in the underlying agreement, of the licensee’sactual net sales or minimum net sales, whichever is greater. The Company mayreceive special payments in consideration of the grant of license rights. Thesepayments are recognized ratably as revenue over the term of the licenseagreement. The unrecognized portion of upfront payments is included in deferredroyalties and accrued expenses depending on the long or short-term nature ofthe payments to be recognized. During 2005 we successfully renegotiated licenseagreements for certain significant product categories comprising watches,handbags and eyewear. The renewal terms call for certain fixed, cash rightspayments which are over-and-above our normal, ongoing royalty payments. During2005 we received $42.7 million in cash for these significant renewals andrecorded the same amount as deferred royalties, of which we have recognized$1.5 million as revenues in each of 2006 and 2005, respectively. In 2004, werenegotiated a new footwear license and received $5.0 million in cash andrecorded the same amount as deferred royalties. The Company commencedrecognizing revenue once the footwear contract became effective in 2005, totaling$1.4 million and $0.7 million for 2006 and 2005, respectively.

*Gift Certificatesand Store Credits*

The Company defers allrevenues related to gift certificates and store credits until they are redeemedfor merchandise. Based on prior redemption experience, the Company does notrecognize unredeemed balances prior to two years from the date of issuance. Thebreakage income is subsequently recognized ratably into operating income over afour-year period.

*Depreciation andAmortization*

Depreciationand amortization of property and equipment are provided using the straight-linemethod over the following useful lives:

| Building and  building improvements including properties under capital lease |   | 10 to 33 years |   |
|------------------------------------------------------------------------------|--------|----------------|--------|
| Land improvements                                                            |   | 5 years        |   |
| Machinery and  equipment                                                     |   | 5 years        |   |
| Corporate  aircraft                                                          |   | 10 years       |   |
| Corporate  vehicles                                                          |   | 5 years        |   |
| Shop fixtures                                                                |   | 5 years        |   |

 

F-10

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

Leasehold improvements areamortized over the lesser of the estimated useful life of the asset or the termof the lease. Construction in progress is not depreciated until the relatedasset is completed and placed in service.

*Foreign Currency*

The local currency is the functional currency for allof our significant international operations. In accordance with SFAS No. 52,“Foreign Currency Translation,” assets and liabilities of the Company’s foreignoperations are translated from foreign currencies into U.S. dollars at year-endrates, while income and expenses are translated at the weighted-averageexchange rates for the year. The related translation adjustments are reflectedas a foreign currency translation adjustment in accumulated other comprehensiveincome (loss) as a separate component of stockholders’ equity. Transactiongains and losses that arise from exchange rate fluctuations on transactionsdenominated in a currency other than the local functional currency, includinggains and losses on foreign currency contracts, are included in the results ofoperations. Net foreign currency transaction losses included in thedetermination of net earnings were $800,000, $661,000 and $864,000 for theyears ended December 31, 2006, 2005 and 2004, respectively.

The Company may enter intoforward foreign exchange contracts in the ordinary course of business tomitigate the risk associated with foreign exchange rate fluctuations related toCanadian purchases of U.S. dollar denominated inventory and Italianpurchases of U.S. dollar denominated inventory. The Company’s foreign currencycontracts are not designated as hedges for accounting purposes and changes infair value of the derivative instruments are included in net earnings. At December 31,2006, the Company had currency exchange contracts to purchase $53.0 millionU.S. dollars for approximately $3.3 million Canadian dollars and approximately39.0 million Euros. At December 31, 2005, the Company had currencyexchange contracts to purchase $5.0 million U.S. dollars for approximately $5.9million Canadian dollars. Unrealized losses were $1,381,000, $51,000 and$1,086,000 for the years ended December 31, 2006, 2005 and 2004,respectively.

*Deferred Rent andLease Incentives*

When a lease includeslease incentives (such as a rent holiday or reimbursement of certain lesseeconstruction costs) or requires fixed escalations of the minimum leasepayments, rental expense is recognized on a straight-line basis over the termof the lease and the difference between the average rental amount charged toexpense and amounts payable under the lease is included in deferred rent andlease incentives in the accompanying consolidated balance sheets.

*Income Taxes*

The Company uses the assetand liability method of accounting for income taxes. Under this method,deferred income taxes are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to beapplied to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred taxes of a changein tax rates is recognized in income in the period that includes the enactmentdate.

F-11

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

*ComprehensiveIncome*

Comprehensive incomeconsists of net earnings, unrealized gains or losses on investments, foreigncurrency translation adjustments and the unfunded portion of the Company’s supplementalexecutive retirement plan (“SERP”), net of taxes. Comprehensive income ispresented in the consolidated statements of stockholders’ equity andcomprehensive income.

*Business SegmentReporting*

The Company reportsinformation about business segments and related disclosures about products andservices, geographic areas and major customers. The business segments of theCompany are retail, wholesale, European and licensing. Information regardingthese segments is summarized in Note 15 to the Consolidated FinancialStatements. In the first quarter of 2005, the Company revised its segmentreporting to include its aggregate European operations as a separate segment.The change was made as a result of the significant European acquisition made in2005. The Company believes this segment reporting better reflects how its fourbusiness segments are managed and each segment’s performance is evaluated. Theretail segment includes the Company’s retail operations in North America. Thewholesale segment includes the wholesale operations in North America andinternationally, excluding Europe. The European segment includes both wholesaleand retail operations in Europe. The licensing segment includes the worldwidelicensing operations of the Company. All amounts for 2004 have been revised toconform to the 2005 and 2006 presentation.

*Fair Value ofFinancial Instruments*

The carrying amount of the Company’s financialinstruments, which principally include cash, trade receivables, accountspayable and accrued expenses, approximates fair value due to the relativelyshort maturity of such instruments. Investments are recorded at fair value.

The fair values of theCompany’s debt instruments (See Note 8) are based on the amount of future cashflows associated with each instrument discounted using the Company’s borrowingrate. At December 31, 2006 and 2005, the carrying value of all financialinstruments was not materially different from fair value, as the interest rateson variable rate debt including the capital lease obligation approximated ratescurrently available to the Company.

*Long-LivedAssets*

In accordance with Statement of Financial AccountingStandards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposalof Long-Lived Assets,” long-lived assets, such as property, plant, andequipment, and purchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the estimated undiscounted future cash flows expected to be generated by theasset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized in the amount by which the carryingamount of the asset exceeds the fair value of the asset. Assets to be disposedof would be separately presented in the balance sheet and reported at the lowerof the carrying amount or fair value less costs to sell, and are no longerdepreciated. The Company recorded charges related to store 

F-12

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)Summary of Significant Accounting Policies and Practices (Continued)**

impairmentof $2.4 million and $0.6 million, respectively, for the fiscal years endedDecember 31, 2006 and 2005.

*Goodwill and OtherIntangible Assets, net*

Goodwill and otherintangibles not subject to amortization are tested annually for impairment, andare tested for impairment more frequently if events and circumstances indicatethat the asset might be impaired. An impairment loss is recognized to theextent that the carrying amount exceeds the asset’s fair value. Thisdetermination is made at the reporting unit level and consists of two steps.First, the Company determines the fair value of a reporting unit and comparesit to its carrying amount. Second, if the carrying amount of a reporting unitexceeds its fair value, an impairment loss is recognized for any excess of thecarrying amount of the reporting unit’s goodwill and other intangibles over theimplied fair value. The implied fair value is determined by allocating the fairvalue of the reporting unit in a manner similar to a purchase price allocation,in accordance with SFAS No. 141, BusinessCombinations. As of December 31, 2006, we had goodwill ofapproximately $28.0 million. No goodwill impairments have been recognized forthe years ended December 31, 2006, 2005 and 2004. Other intangible assetsas of December 31, 2006 primarily consisted of lease and licenseacquisition costs related to the two recent European acquisitions. See Note 18for further information regarding intangible assets acquired from the Focusacquisition. Gross intangible assets were $24.8 million and $13.7 millionat December 31, 2006 and 2005, respectively. The accumulated amortizationof intangible assets with definitive useful lives was $6.3 million and $2.4million at December 31, 2006 and 2005, respectively.

*Advertising Costs*

The Company expenses thecost of advertising as incurred. Advertising expenses charged to operations forthe years ended December 31, 2006, 2005 and 2004 were $22.4 million, $19.8million and $22.7 million, respectively.

*Reclassifications*

Certain reclassifications have been made to the December 31,2005 condensed consolidated balance sheet to conform to classifications used inthe current year. As of December 31, 2005, we reclassified long-termrestricted cash of $2.8 million from prepaid expenses and other current assetsto other assets; and reclassified the current portion of capital leaseobligations amounting to $0.8 million from accrued expenses to currentinstallments of notes payable, long-term debt and capital lease obligations andreclassified the long-term portion of capital lease obligations amounting to$13.1 million from other long-term liabilities to notes payable, long-term debtand capital lease obligations, excluding current installments.

The Company has made certain other reclassificationsto prior years’ consolidated financial statements to conform to classificationsused in the current year. These reclassifications, including the above, had noimpact on previously reported results of operations.

F-13

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1) Summary ofSignificant Accounting Policies and Practices (Continued)**

*Stock-basedCompensation*

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of SFAS 123R, “Share-Based Payments,”using the modified prospective transition method. Under this method,compensation cost recognized in 2006 included: (a) compensation expensefor all stock-based payments granted prior to, but not yet vested as of, December 31,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and(b) compensation expense for all stock-based awards granted to employeeson or after January 1, 2006, based on the grant date fair value estimatedin accordance with the provisions of SFAS 123R. The fair value of each stockoption was estimated on the grant date using the Black-Scholes option-pricingmodel with the following weighted-average assumptions used for new grants. Therisk-free interest rate is based on the U.S. Treasury yield curve in effect forthe expected term of the option at the time of grant. The expected volatilityis determined based on an average of both historical volatility and impliedvolatility. Implied volatility is derived from exchange traded options on theCompany’s common stock. The expected life is based on the “simplified” methoddescribed in the SEC Staff Accounting Bulletin No. 107. The dividend yieldfor 2006 and prior years was assumed to be zero since the Company had nothistorically declared and did not have a plan to declare dividends on anongoing basis until the Board of Directors authorized and approved theinitiation of quarterly dividends in February 2007 (see Note 19). Theexpected forfeiture rate is determined based on historical data. Compensationexpense for new stock options and nonvested stock awards is recognized on astraight-line basis over the vesting period. In accordance with the modifiedprospective transition method, results for prior periods have not been restated.The Company incurred an incremental expense of $5.6 million, or $0.04 perdiluted share, for 2006 as a result of the adoption of SFAS123R.

See Note 16 to theConsolidated Financial Statements for further information regarding stock-basedcompensation.

*SupplementalExecutive Retirement Plan*

Effective December 31, 2006, the Company adoptedStatement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). UnderSFAS 158, an asset for a plan’s overfunded status or a liability for a plan’sunderfunded status is recognized in the consolidated balance sheet, plan assetsand obligations that determine the plan’s funded status are measured as of theend of the Company’s fiscal year, and changes in the funded status of definedbenefit postretirement plans are recognized in the year in which they occur. Suchchanges are reported in other comprehensive income and as a separate componentof stockholders’ equity.

As a result of adoptingSFAS 158, the Company reduced other assets by $14.7 million, increased deferredtax assets by $10.3 million, recorded an incremental liability of $12.2million, and recorded incremental charges to accumulated other comprehensiveincome (loss) of $16.6 million, net of taxes.

**(2) New AccountingStandards**

In October 2005, the FASB issued FASB Staff Position(“FSP”) No. FAS 13-1 (“FSP13-1”), “Accounting for Rental Costs Incurred duringthe Construction Period,” which requires that rental costs associated withground or building operating leases that are incurred during a constructionperiod be 

F-14

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(2) NewAccounting Standards (Continued)**

recognized as rentalexpense. These rental costs shall be included in income from continuingoperations. The effective date of this FSP guidance was the first reportingperiod beginning after December 15, 2005. The Company’s policy prior to theadoption of FSP 13-1 was to capitalize pre-opening rental costs and amortizethem over the remaining lease term. The Company incurred an incrementalpre-opening rental expense of approximately $1.3 million during fiscal 2006 fornew stores opened during 2006 with a subsequent reduction in amortizationexpense over the remaining lease term.

In March 2006, the Emerging Issues Task Force (“EITF”)issued EITF Issue 06-3, “How Taxes Collected from Customers and Remittedto Governmental Authorities Should Be Presented in the Income Statement (ThatIs, Gross versus Net Presentation).”  TheEITF reached a consensus that (a) the scope of this issue includes any taxassessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and (b) thatthe presentation of taxes within the scope on either a gross or a net basis isan accounting policy decision that should be disclosed under APB Opinion 22. Furthermore,for taxes reported on a gross basis, a company should disclose the amounts ofthose taxes in interim and annual financial statements for each period forwhich an income statement is presented. The consensus is effective, throughretrospective application, for periods beginning after December 15, 2006. TheFASB ratified the consensus on June 28, 2006. Earlier application ispermitted. The Company records taxes collected from customers for revenueproducing transactions on a net basis. The Company does not expect to changethis policy upon adoption of the EITF, and hence, does not expect the adoptionof this consensus to have a material impact on the Company’s consolidatedfinancial statements.

In June 2006, the FASB issued FASB InterpretationNo. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which isan interpretation of SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes.”FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with SFAS 109 and prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. The Company is currently evaluating the effect that the adoption of FIN48 may have on its financial position and results of operations.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of PriorYear Misstatements when Qualifying Misstatements in Current Year FinancialStatements,” which provides interpretive guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of a materiality assessment. SAB 108 is effective for companieswith fiscal years ending after November 15, 2006 and is required to beadopted by the Company in its fiscal year ending December 31, 2006. At December 31,2006, the Company has adopted the provisions of SAB 108 and determined noadjustments to current and prior reported periods are necessary.

In September 2006, the FASB issued SFAS No. 157(“SFAS 157”), “Fair Value Measurement.” SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.This Statement does not require any new fair value measurements. SFAS 157 iseffective for fiscal years beginning after 

F-15

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(2) NewAccounting Standards (Continued)**

November 15,2007 and interim periods within those fiscal years. The Company is currentlyassessing the impact of SFAS No. 157 on its financial statements.

**(3) Investments**

Long-terminvestments consist of certain marketable equity securities and otherinvestments aggregating $10.5 million and $3.7 million at December 31,2006 and 2005, respectively, and are included in other assets in theaccompanying consolidated balance sheets. Unrealized gains (losses), net ofdeferred tax liabilities (assets) are included as a component of stockholders’equity and comprehensive income (loss). Unrealized gains (losses) related tomarketable equity securities at December 31, 2006 and 2005 werenegligible.

**(4)  Receivables, net**

Accounts receivableconsists of trade receivables primarily relating to its wholesale businesses inEurope and North America. The Company provided for valuation allowancesrelating to these receivables of $14.8 million and $11.9 million, at December 31,2006 and 2005, respectively. In addition, accounts receivable includes royaltyreceivables relating to its licensing operations, for which, the Companyrecorded an allowance for doubtful accounts of $0.3 million and $0.7 million atDecember 31, 2006 and 2005, respectively. The accounts receivablevaluation allowance includes allowances for wholesale markdowns and salesreturns. Retail sales returns allowances are included in accrued expenses.

**(5) Inventories**

Inventoriesare summarized as follows (in thousands):

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials                  |       | $                     | 3,837      |   | $ | 8,046 |   |
| Work in process                |       | 2,830                 |       | 4,439 |   |
| Finished  goods—Europe    |       | 67,582                |       | 34,168 |   |
| Finished  goods—Retail    |       | 71,102                |       | 63,790 |   |
| Finished  goods—Wholesale |       | 19,881                |       | 11,594 |   |
|                           |       | $                     | 165,232    |   | $ | 122,037 |   |

 

At December 31, 2006and 2005, reserves to write-down inventories to the lower of cost or markettotaled $14.8 million and $9.1 million, respectively.

F-16

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(6) Property andEquipment**

Propertyand equipment is summarized as follows (in thousands): 

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land and land  improvements                     |       | $                     | 3,057      |   | $ | 3,237 |   |
| Building and  building improvements             |       | 3,822                 |       | 1,837 |   |
| Leasehold  improvements                         |       | 160,584               |       | 152,006 |   |
| Machinery and  equipment                        |       | 182,488               |       | 174,213 |   |
| Corporate  aircraft                             |       | 803                   |       | 1,347 |   |
| Shop fixtures                                   |       | 36,646                |       | 35,379 |   |
| Construction in  progress                       |       | 5,962                 |       | 6,106 |   |
| Properties under  capital lease                 |       | 22,435                |       | 15,976 |   |
|                                            |       | 415,797               |       | 390,101 |   |
| Less accumulated  depreciation and amortization |       | 251,535               |       | 246,094 |   |
|                                            |       | $                     | 164,262    |   | $ | 144,007 |   |

 

Construction in progress at December 31, 2006 and2005 represents the costs associated with the construction in progress ofbuildings and leasehold improvements to be used in the Company’s operations,primarily for new and remodeled stores in retail operations. During the yearsended December 31, 2006, 2005 and 2004, interest costs capitalized inconstruction in progress amounted to $145,000, $172,000 and $109,000,respectively.

See Note 12 to the ConsolidatedFinancial Statements for further information regarding capital leaseobligations.

**(7) Accrued Expenses**

Accruedexpenses are summarized as follows (in thousands):

| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued  compensation and benefits                    |       | $                     | 40,555     |   | $ | 29,427 |   |
| Income taxes                                          |       | 23,365                |       | 16,980 |   |
| Deferred  royalties                                   |       | 12,488                |       | 4,906 |   |
| Store credits and  gift certificates                  |       | 10,705                |       | 8,460 |   |
| Sales and use  taxes, property taxes, and other taxes |       | 10,706                |       | 9,450 |   |
| Focus acquisition  remaining payment                  |       | 8,421                 |       | — |   |
| Deferred rent and  lease incentives                   |       | 5,976                 |       | 5,345 |   |
| Professional fees                                     |       | 3,840                 |       | 2,876 |   |
| Construction  costs                                   |       | 3,499                 |       | 3,250 |   |
| Retail sales  returns                                 |       | 3,168                 |       | — |   |
| Other                                                 |       | 9,477                 |       | 13,770 |   |
|                                                  |       | $                     | 132,200    |   | $ | 94,464 |   |

 

F-17

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(8) Notes Payable,Long-Term Debt and Capital Lease Obligations**

Notespayable, long-term debt and capital lease obligations are summarized asfollows (in thousands):

| ** **                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| $85 million  revolving Prior Credit Facility                                                 |       | $                     | 78         |   | $ | 1,652 |   |
| 6.75% Secured  Notes redeemed in December 2006                                          |       | —                |       | 40,748 |   |
| Loans with  European banks, no stated maturities                                             |       | 32,792                |       | 31,886 |   |
| European capital  lease, maturing quarterly through 2016                                     |       | 19,505                |       | 13,964 |   |
|                                                                                         |       | 52,375                |       | 88,250 |   |
| Less current  installments                                                                   |       | 34,357                |       | 35,051 |   |
| Notes payable, long-term  debt and capital lease obligations, excluding current installments |       | $                     | 18,018     |   | $ | 53,199 |   |

 

On September 19, 2006, the Company and certain ofits affiliates entered into a credit facility led by Bank of America, N.A., asadministrative agent for the lenders (the “Credit Facility”). The CreditFacility provides for an $85 million revolving multicurrency line of credit andis available for direct borrowings and the issuance of letters of credit,subject to certain letters of credit sublimits. The Credit Facility is scheduledto mature on September 30, 2011.

The obligations under the Credit Facility areguaranteed by certain of the Company’s existing and future domesticsubsidiaries, and such obligations, including the guaranties, are secured by (a) substantiallyall present and future property and assets of the Company and each guarantorand (b) the equity interests of certain of the Company’s direct andindirect U.S. subsidiaries and 65% of the equity interests of the Company’sfirst tier foreign subsidiaries.

Direct borrowings under the Credit Facility will bemade, at the Company’s option, as (a) Eurodollar Rate Loans, which shallbear interest at the published LIBOR rate for the respective interest periodplus an applicable margin (which was 0.75% at December 31, 2006) based onGuess’ leverage ratio at the time, or (b) Base Rate Loans, which shallbear interest at the higher of (i) for domestic loans, 0.50% in excess ofthe federal funds rate, and for Canadian loans, 0.50% in excess of the averagerate for 30 day Canada dollar bankers’ acceptances, or (ii) the rate ofinterest as announced by Bank of America as its “prime rate,” in each case asin effect from time to time, plus an applicable margin (which was 0.0% at December 31,2006) based on the Company’s leverage ratio at the time. The Company is alsoobligated to pay certain commitment, letter of credit and other fees customaryfor a credit facility of this size and type. At December 31, 2006 theCompany had $12.4 million in outstanding standby letters of credit, $19.4million in outstanding documentary letters of credit and no outstandingborrowings under the Credit Facility.

The Credit Facility requires the Company to complywith a leverage ratio and a fixed charge coverage ratio. In addition, theCredit Facility contains customary covenants, including covenants that limit orrestrict the Company and its subsidiaries’ ability to: incur liens, incurindebtedness, make investments, dispose of assets, make certain restrictedpayments, merge or consolidate, and enter into certain transactions withaffiliates. Upon the occurrence of an event of default under the CreditFacility, the lenders may cease making loans, terminate the Credit Facility anddeclare all amounts outstanding to be immediately due and payable. The CreditFacility specifies a number of events of default (some of which are subject toapplicable grace or cure periods), including, among other things, non-paymentdefaults, 

F-18

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(8) NotesPayable, Long-Term Debt and Capital Lease Obligations (Continued)**

covenant defaults,cross-defaults to other material indebtedness, bankruptcy and insolvencydefaults and material judgment defaults.

The Credit Facility replaces the (a) Amended andRestated Loan and Security Agreement by and among Wachovia Capital FinanceCorporation (Western) (formerly known as Congress Financial Corporation(Western)) and Guess, Guess? Retail, Inc. and Guess.com, Inc., datedas of December 20, 2002, as amended, and (b) Canadian Loan andSecurity Agreement by and among Wachovia Capital Finance Corporation (Canada)(formerly known as Congress Financial Corporation (Canada)) and Guess Canada,dated as of December 20, 2002, as amended (together, the “Prior CreditFacility”).

On December 20, 2006 the Company, through itswholly-owned subsidiary, Guess? Royalty Finance LLC (the “Issuer”), completedthe optional redemption of all of its outstanding 6.75% asset-backed notes due June 2012(“Secured Notes”). The final aggregate cash consideration paid to the holdersof the Secured Notes for the redemption totaled $32.8 million, which included aredemption premium of $0.5 million. The Company also wrote-off debt issuancecosts of $1.4 million in connection with the redemption. These amounts areincluded in interest expense in the accompanying consolidated statements ofoperations. The Secured Notes, originally issued on April 28, 2003, weresecured by rights and interests in receivables generated from specific licenseagreements of specified GUESS? trademarks and all royalty monies payable orbecoming payable under such license agreements, and a security interest inspecified assets consisting primarily of such GUESS? trademarks and thespecified license agreements.

The Company, through its European subsidiaries,maintains short-term borrowing agreements, primarily for working capitalpurposes, with various banks in Italy. Under these agreements, the Company canborrow up to $93.4 million with annual interest rates ranging from 3.8% to5.0%. However, the Company’s ability to borrow through foreign subsidiaries islimited to $85 million under the terms of our Credit Facility. At December 31,2006, the Company had $32.5 million of outstanding borrowings with a weightedaverage annual interest rate of 3.9% and 6.4 million in outstanding documentaryletters of credit under these agreements. These agreements are denominated inEuros, have no financial ratio covenants and are secured by accounts receivable,except for one borrowing agreement which is secured by a $5.3 million standbyletter of credit issued under the Credit Facility. None of the agreements havestated maturities. In addition, as part of the acquisition of Focus, effectiveDecember 31, 2006, the Company acquired $0.3 million of bank debt with aninterest rate of Euribor six-month rate plus 1%. The Company has classifiedthis debt as current as it intends to pay this debt down in the short-term.

The Company entered into a capital lease ofapproximately $16.0 million in December 2005 for a new building inFlorence, Italy, with subsequent build-outs which were completed in 2006. Thebuilding is the new headquarters for the Company’s Italian operation. Thistransaction resulted in a capital lease obligation of $19.5 million,including build-outs completed in 2006. The Company entered into separate interestrate swap agreements designated as non-hedging instruments resulting in a fixedrate of 3.55%. These interest rate swap agreements mature through 2016 andconvert the nature of the capital lease obligation from Euribor floating ratedebt to fixed rate debt. The fair value of the interest rate swap asset as of December 31,2006 was approximately $0.5 million.

F-19

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(8) Notes Payable, Long-Term Debt andCapital Lease Obligations (Continued)**

Maturities of debt and capital lease obligations at December 31,2006 are as follows (in thousands): 

| ** ** | ** ** | **Capital Lease** | ** ** | **Debt** | ** ** | **Total** | ** ** |
|------------|------------|------------------------|------------|----------|------------|-----------|------------|
| 2007       |       |                   | $          | 1,487    |       |      | $          | 32,870 |   | $ | 34,357 |   |
| 2008       |       |                   | 1,475      |     |       | —    |       | 1,475 |   |
| 2009       |       |                   | 1,519      |     |       | —    |       | 1,519 |   |
| 2010       |       |                   | 1,565      |     |       | —    |       | 1,565 |   |
| Thereafter |       |                   | 13,459     |     |       | —    |       | 13,459 |   |
|       |       |                   | $          | 19,505   |       |      | $          | 32,870 |   | $ | 52,375 |   |

 

**(9) Income Taxes**

Income tax expense(benefit) is summarized as follows (in thousands):

| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal:          |       |                                       |       |   |   |   |   |
| Current           |       | $44,101                                    |       | $ | 45,039 |   | $ | 13,775 |   |
| Deferred          |       | (686                                       | )          | (20,944 | ) | (457 | ) |
| State:            |       |                                       |       |   |   |   |   |
| Current           |       | 4,811                                      |       | 7,012 |   | 4,143 |   |
| Deferred          |       | (1,142                                     | )          | (3,655 | ) | (644 | ) |
| Foreign:          |       |                                       |       |   |   |   |   |
| Current           |       | 29,201                                     |       | 12,489 |   | 4,473 |   |
| Deferred          |       | (3,613                                     | )          | (1,059 | ) | (143 | ) |
| Minority Interest |       | 43                                         |       | — |   | — |   |
| Total             |       | $                                          | 72,715     |   | $ | 38,882 |   | $ | 21,147 |   |
|                   |            |                                            |            |  |  |  |  |  |  |  |

 

Actual income taxexpense differs from expected income tax expense obtained by applying thestatutory Federal income tax rate to earnings before income taxes as follows(in thousands):

| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Computed “expected” tax  expense                      |       | $                                          | 68,599     |   | $ | 34,193 |   | $ | 17,750 |   |
| State taxes, net of  Federal expense                            |       | 2,701                                      |       | 2,182 |   | 2,274 |   |
| Incremental foreign  taxes in excess of Federal statutory rates |       | 4,024                                      |       | 2,343 |   | 670 |   |
| Exempt Interest                                                 |       | (1,491                                     | )          | (271 | ) | — |   |
| Other                                                           |       | (1,161                                     | )          | 435 |   | 453 |   |
| Minority Interest                                               |       | 43                                         |       | — |   | — |   |
| Total                                                           |       | $                                          | 72,715     |   | $ | 38,882 |   | $ | 21,147 |   |

 

Total income tax expense(benefit) was allocated as follows (in thousands):

| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operations                |       | $                                          | 72,715     |   | $ | 38,882 |   | $ | 21,147 |   |
| Stockholders’ equity |       | (23,557                                    | )          | (3,914 | ) | (918 | ) |
| Total income taxes        |       | $                                          | 49,158     |   | $ | 34,968 |   | $ | 20,229 |   |

 

F-20

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(9) Income Taxes(Continued)**

Thetax effects of the components of other comprehensive income were allocated asfollows (in thousands):

| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Foreign currency  translation adjustment |       | $                                          | 307        |   | $ | 98 |   | $ | (57 | ) |
| Unrealized loss  on investment           |       | (163                                       | )          | 16 |   | 107 |   |
| SERP                                     |       | (10,306                                    | )          | — |   | — |   |
| Total income tax expense                 |       | $                                          | (10,162    | ) | $ | 114 |   | $ | 50 |   |

 

Totalpretax income was comprised of the following (in thousands):

| ** **           | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic  operations |       | $                                          | 134,263    |   | $ | 71,733 |   | $ | 40,237 |   |
| Foreign  operations  |       | 61,578                                     |       | 25,962 |   | 10,476 |   |
| Minority Interest    |       | 156                                        |       | — |   | — |   |
| Total pretax income  |       | $                                          | 195,997    |   | $ | 97,695 |   | $ | 50,713 |   |

 

Thetax effects of temporary differences that give rise to significant portions ofcurrent and non-current deferred tax assets and deferred tax liabilitiesat December 31, 2006 and 2005 are presented below (in thousands): 

| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets:                                      |       |                  |       |   |   |
| Fixed assets basis difference                              |       | $                     | 12,912     |   | $ | 10,451 |   |
| Deferred compensation                                      |       | 3,399                 |       | (924 | ) |
| Bad debt reserve                                           |       | 3,569                 |       | 4,253 |   |
| Deferred lease incentives                                  |       | 1,526                 |       | 2,952 |   |
| Uniform capitalization                                     |       | 1,743                 |       | 2,042 |   |
| Rent expense                                               |       | 5,908                 |       | 4,637 |   |
| Net operating loss                                         |       | 1,517                 |       | — |   |
| Inventory valuation                                        |       | 3,640                 |       | 3,717 |   |
| Facility closure reserve                                   |       | 79                    |       | 236 |   |
| Unrealized loss on investment                              |       | 922                   |       | 1,525 |   |
| Deferred income                                            |       | 17,944                |       | 19,594 |   |
| SERP                                                       |       | 11,586                |       | — |   |
| Other                                                      |       | 5,673                 |       | 7,516 |   |
| Total deferred assets                                      |       | 70,418                |       | 55,999 |   |
| Deferred tax  liabilities, primarily goodwill amortization |       | (8,236                | )          | (2,334 | ) |
| Valuation  allowance                                       |       | (929                  | )          | — |   |
| Net deferred tax assets                                    |       | $                     | 61,253     |   | $ | 53,665 |   |

 

F-21

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(9)Income Taxes (Continued)**

Included above at December 31, 2006 and 2005, are$18.2 million and $16.4 million for current net deferred tax assets,respectively, and $43.1 million and $37.2 million in non-current net deferredtax assets at December 31, 2006 and 2005, respectively. At December 31,2006, the company’s U.S. and European retail operations had net operating losscarryforwards of $1.5 million. Based on the projections of the future income,management believes that it is more likely than not that the earnings fromoperations will not generate sufficient income to utilize all of the netoperating loss. Therefore the Company recorded a valuation allowance of $0.9million.

Based on the historicalearnings of the Company and projections of future taxable income, managementbelieves it is more likely than not that the results of operations willgenerate sufficient taxable earnings to realize net deferred tax assets.

**(10) SupplementalExecutive Retirement Plan**

On August 23, 2005, the Board of Directors of theCompany adopted a Supplemental Executive Retirement Plan (“SERP”) which becameeffective January 1, 2006. The SERP provides select employees who satisfycertain eligibility requirements with certain benefits upon retirement,termination of employment, death, disability or a change in control of theCompany, in certain prescribed circumstances. The initial participants in theSERP are Maurice Marciano, Chairman of the Board, Paul Marciano, Chief ExecutiveOfficer and Vice Chairman of the Board, and Carlos Alberini, President andChief Operating Officer. As a non-qualified pension plan, no funding of the SERPis required; however, the Company expects to make annual payments into aninsurance policy held in a rabbi trust to fund the expected obligations arisingunder the non-qualified SERP. The Company has made two payments into the policyas of December 31, 2006. The cash surrender value of the insurance policywas $7.5 million as of December 31, 2006 and is included in other assets.The amount of future payments may vary, depending on the future years ofservice, future annual compensation of the participants and investmentperformance of the trust.

Effective December 31, 2006, the Company adoptedStatement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”).Under SFAS 158, an asset for a plan’s overfunded status or a liability for aplan’s underfunded status is recognized in the consolidated balance sheet, planassets and obligations that determine the plan’s funded status are measured asof the end of the Company’s fiscal year, and changes in the funded status ofdefined benefit postretirement plans are recognized in the year in which theyoccur. Such changes are reported in comprehensive income and as a separatecomponent of stockholders’ equity.

F-22

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(10) SupplementalExecutive Retirement Plan (Continued)**

The components of netperiodic pension cost and other charges to comprehensive income for the yearended December 31, 2006 are (in thousands):

| ** **                                                       | ** ** | **Year Ended**             | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **December 31, 2006** | ** ** |
| Service cost                                                     |       |                            | $          | 139 |   |   |
| Interest cost                                                    |       |                            | 1,181      |   |   |
| Net amortization  of unrecognized prior service cost             |       |                            | 1,743      |   |   |
| Net periodic  defined benefit pension cost                       |       |                            | 3,063      |   |   |
| Unrecognized prior service cost charged to  comprehensive income |       |                            | 17,949     |   |   |
| Unrecognized net  actuarial loss charged to comprehensive income |       |                            | 8,966      |   |   |
| Related tax  impact                                              |       |                            | (10,306    | ) |   |
| Total periodic costs and  other charges to comprehensive income  |       |                            | $          | 16,609 |   |   |

 

Thefollowing chart summarizes the SERP’s funded status and amounts recognized inthe Company’s consolidated balance sheet as of December 31, 2006, pursuantto SFAS 158 (in thousands):

| Projected benefit  obligation                            |   | $      | (29,978 | ) |
|----------------------------------------------------------|--------|--------|---------|---|
| Plan assets at fair value                                |   | — |    |
| Net liability  (included in other long-term liabilities) |   | $      | (29,978 | ) |

 

The Company assumed adiscount rate of 5.75% as part of the actuarial valuation performed tocalculate the projected benefit obligation disclosed above. The rate isconsidered appropriate based on the timing of cash flows expected to be made inthe future to the participants. The annual pay rate increase assumed in thecalculation of the projected benefit obligation was 3%. At December 31,2006, amounts included in comprehensive income that are expected to berecognized as components of net periodic defined benefit pension cost in 2007consist of prior service costs of $1.7 million and net actuarial losses of $0.6million. No benefits are expected to be paid in any of the next five fiscalyears. Aggregate benefits assumed to be paid in the subsequent five fiscalyears amount to $4.5 million.

**(11) Related PartyTransactions**

The Company is engaged invarious transactions with entities affiliated with trusts for the respectivebenefit of Maurice and Paul Marciano, who are executives of the Company, ArmandMarciano, their brother and former executive of the Company, and certain oftheir children (the “Marciano Trusts”).

*License Agreementsand Licensee Transactions*

On September 28, 1990, the Company entered into alicense agreement with Charles David of California (“Charles David”). CharlesDavid is controlled by the father-in-law of Maurice Marciano. TheMarciano Trusts and Nathalie Marciano (the spouse of Maurice Marciano) togetherowned 50% of Charles David and the remaining 50% was owned by the father-in-lawof Maurice Marciano. During the second quarter of 2004, the Marciano Trusts andArmand Marciano sold their shares in Charles David and 

F-23

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(11) Related PartyTransactions (Continued)**

no longer own any sharesin Charles David. Nathalie Marciano, the wife of Maurice Marciano, continues toown 10% of the shares in Charles David. The license agreement granted CharlesDavid the rights to manufacture worldwide and distribute worldwide (exceptJapan and certain European countries) for men, women and some children, leatherand rubber footwear which bear the GUESS trademark. The license also includedrelated shoe care products and accessories. In 2002, the license agreement wasrenewed for six years and included athletic footwear. The Charles David licenseagreement was terminated effective December 31, 2004 for athletic footwearand June 30, 2005 for fashion footwear. There are no other rights orobligations between the Company and Charles David.

Gross royalties earned by the Company under suchlicense agreement for the years ended December 31, 2005 and 2004 were $0.3million and $2.3 million, respectively. Additionally, the Company purchased$0.4 million and $4.9 million of products from Charles David for resale in theCompany’s retail stores during the same periods. At December 31, 2006, theCompany had no royalty receivables due from Charles David.

On January 3, 2005, the Company acquired theremaining 90% of Maco Apparel, S.p.a. (“Maco”) that the Company did not alreadyown. Prior to the acquisition, the Company owned a 10% interest in Maco, whichat the time, was the Company’s licensee for the manufacture and distribution ofcertain men’s and women’s jeanswear apparel in certain parts of Europe. TheCompany recorded $5.9 million in royalty fees from Maco related to productsales in 2004, at which time the Company owned a 10% interest in Maco.

On January 1, 2003,the Company entered into a license agreement with BARN S.r.l. (“BARN”), anItalian corporation, under which the Company granted BARN the right tomanufacture and distribute children’s clothing in certain territories of Europefor a term of three years. The license agreement was amended as of June 19,2006 to, among other things, extend the term until December 31, 2009. Thelicense agreement has terms substantially similar to the Company’s otherlicense agreements. Two key employees of the Company’s wholly-owned subsidiary,Guess Italia, S.r.l., own BARN. During 2006 and 2005, the Company recorded $1.2million and $0.9 million in revenues, respectively, related to this license. AtDecember 31, 2006 and 2005, the Company had negligible royalty receivablesdue from BARN.

*Leases*

The Company leases manufacturing, warehouse andadministrative facilities from partnerships affiliated with the Marciano Trustsand certain of their affiliates. There were three of these leases in effect at December 31,2006, with expiration dates in February 2008, July 2008 and December 2014.The total lease payments to these limited partnerships are currently $0.3million per month. See lease commitments to related parties in Note 12 to theConsolidated Financial Statements.

Aggregate rent expense under the two U.S. relatedparty leases in effect was $2.9 million, $2.6 million and $3.1 million for theyears ended December 31, 2006, 2005 and 2004, respectively. The Companybelieves the related party leases have not been significantly affected by thefact that the Company and the lessors are related.

During the first quarter of 2005, the Company, througha wholly-owned Canadian subsidiary, began leasing warehouse and administrativefacilities in Montreal, Quebec from a partnership affiliated with MauriceMarciano and Paul Marciano. The lease has a term of 10 years with initial leasepayments of approximately $0.5 million Canadian (US $0.5 million) per year. TheCompany and the lessors entered 

F-24

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(11) Related PartyTransactions (Continued)**

into a written leaseagreement during the second quarter of 2005. Total rent expense wasapproximately $0.5 million Canadian (US $0.4 million) in each of the yearsended December 31, 2006 and 2005. The Company believes the related partylease has not been significantly affected by the fact that the Company and thelessors are related.

The Company entered intoan agreement with MPM Financial, LLC, a California limited liability company (“MPMFinancial”) owned by an affiliated trust of Maurice Marciano and Paul Marciano,to periodically charter an aircraft owned by MPM Financial and managed pursuantto an Aircraft Charter and Management Services Agreement dated December 31,2004 by and between MPM Financial and The Air Group, Inc. (“The Air Group”),an independent third party. Under the charter arrangement, the Company wasentitled to receive a ten percent discount from the standard hourly charterrates The Air Group charges for the aircraft to unrelated third parties.Although the Company and MPM Financial have terminated the agreement, theCompany may from time to time continue to charter the aircraft on substantiallysimilar terms to those in the prior agreement. The total fees paid under thisarrangement for the years ended December 31, 2006 and 2005 wereapproximately $1.1 million and $0.4 million, respectively.

**(12) Commitments andContingencies**

*Leases*

The Company leases its showrooms and retail storelocations under operating lease agreements expiring on various dates through December 2017.Some of these leases require the Company to make periodic payments for propertytaxes, utilities and common area operating expenses. Certain leases includelease incentives, rent abatements and fixed rent escalations, for which theeffects are being amortized and recorded over the initial lease term on astraight-line basis. The Company also leases some of its equipment underoperating lease agreements expiring at various dates through 2010.

The Company entered into a capital lease ofapproximately $16.0 million in December 2005 for a new building inFlorence, Italy, with subsequent build-outs completed in 2006. The building isthe new headquarters for the Company’s Italian operation. This transactionresulted in a capital lease obligation of $19.5 million as of December 31,2006. The Company entered into interest rate swap agreements designated asnon-hedging instruments resulting in a fixed rate of 3.55%. These interest rateswap agreements mature through 2016 and convert the nature of the capital leaseobligation from Euribor floating rate debt to fixed rate debt. The fair valueof the interest rate swap asset as of December 31, 2006 was approximately$0.5 million.

F-25

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(12) Commitments andContingencies (Continued)**

Futureminimum lease payments under capital lease and non-cancelable operatingleases at December 31, 2006 are as follows (in thousands):

| ** **                           | ** ** | ** **             | ** ** | **Operating Leases**  | ** ** | ** **           | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **Capital Lease** | ** ** | **Non-  Related  Parties** | ** ** | **Related  Parties** | ** ** | **Total** | ** ** |
| 2007                                 |       |                   | $          | 2,263                      |       |                 | $          | 77,515 |   | $ | 3,531 |   | $ | 83,309 |   |
| 2008                                 |       |                   | 2,191      |                       |       | 72,251               |       | 2,263 |   | 76,705 |   |
| 2009                                 |       |                   | 2,174      |                       |       | 66,752               |       | 468 |   | 69,394 |   |
| 2010                                 |       |                   | 2,157      |                       |       | 56,164               |       | 468 |   | 58,789 |   |
| 2011                                 |       |                   | 2,138      |                       |       | 46,762               |       | 468 |   | 49,368 |   |
| Thereafter                           |       |                   | 13,319     |                       |       | 136,923              |       | 1,404 |   | 151,646 |   |
| Total minimum  lease payments        |       |                   | $          | 24,242                     |       |                 | $          | 456,367 |   | $ | 8,602 |   | $ | 489,211 |   |
| Less interest                        |       |                   | (4,737     | )                          |       |                 |       |   |   |   |   |
| Capital lease  obligations           |       |                   | $          | 19,505                     |       |                 |       |   |   |   |   |   |
| Less current  portion                |       |                   | (1,487     | )                          |       |                 |       |   |   |   |   |
| Long-term capital lease  obligations |       |                   | $          | 18,018                     |       |                 |       |   |   |   |   |   |

 

Rental expense for alloperating leases during the years ended December 31, 2006, 2005, and 2004aggregated $84.6 million, $73.1 million, and $63.4 million, respectively.

*Incentive Bonuses*

Certain officers and key employees of the Company areentitled to incentive bonuses, primarily based on net earnings of the Companyor particular operations thereof. In addition, on September 27, 2005 theCompensation Committee (the “Committee”) of the Board of Directors of theCompany approved performance criteria for the payment of special bonuses toPaul Marciano, Chief Executive Officer of the Company, under the Company’s 2004Equity Incentive Plan (the “Incentive Plan”) if the performance targets withrespect to future earnings from operations for the Company’s licensing segmentare met. The Company recorded bonus related expense of $4.6 million, includingpayroll taxes, in 2005 related to these special licensing bonuses. Assuming thepre-established licensing performance targets are achieved in 2007 and 2008 andthe Company receives a fixed cash rights payment of $35.0 million due in 2012from one of its licensees, the Company will record a further $5.0 million inspecial bonus expense, excluding payroll taxes, to Paul Marciano through January 2012.

*Litigation*

On February 1, 2005, a complaint was filed by Michele Evetsagainst the Company in the Superior Court of the State of California for theCounty of San Francisco. The complaint purports to be a class action filed onbehalf of current and former Guess store managers in California. Plaintiffsseek overtime wages and a preliminary and permanent injunction. The Companyanswered the complaint on April 28, 2005. The parties participated in avoluntary mediation on August 16, 2006 and are in the process of finalizinga settlement agreement. As a result, in 2006 the Company accrued $1.0 millionrelated to net charges in connection with the proposed settlement arrangement.

F-26

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(12)Commitments and Contingencies (Continued)**

In 2006, the Officers of the Florence Customs Authorities (“CustomsAuthorities”) began an import customs audit with respect to the Company’sItalian Maco subsidiary in Florence, Italy, acquired in January 2005. Aspart of the audit, the Customs Authorities considered whether the Italiansubsidiary should have included the royalty expense payable to Guess?, Inc.,the parent company, as part of the cost of the product subject to customsduties. The Customs Authorities have subsequently reviewed specifictransactions which occurred in 2003, 2004 and 2005 and provided a preliminaryassessment that the royalty expenses are subject to customs duties and relatedpenalties. The Company is disputing the Customs Authorities assessment andintends to vigorously defend its position. In addition, under the terms of theMaco purchase agreement, the seller is required to indemnify the Company for90% of any loss with respect to Maco for periods prior to the acquisition. TheCompany has recently concluded that the amount of any possible loss would notbe material to our consolidated financial statements and that the likelihood ofincurring a loss is less than probable. Accordingly, no liability related tothis matter has been accrued.

The Company is alsoinvolved in various other employment-related claims and other mattersincidental to the Company’s business, the resolution of which is not expectedto have a material adverse effect on the Company’s consolidated results ofoperations or financial position. With the exception of the class action accrualdiscussed above, no material amounts were accrued as of December 31, 2006or December 31, 2005, related to any of the Company’s other legalproceedings.

*Corporate Aircraft*

In May 2006, the Company entered into anagreement to acquire a new corporate aircraft with a scheduled delivery date inDecember 2007 and has made down payments of approximately $8.1 million,with additional progress payments totaling $10.9 million to be made through theexpected delivery date. The acquisition will replace a current aircraftfractional ownership arrangement. The Company is currently negotiating with alender and may finance the full purchase price of the aircraft and isconsidering entering into a sale and leaseback arrangement on completion ofconstruction of the aircraft.

**(13) Savings Plan**

The Company establishedthe Guess?, Inc. Savings Plan (the “Savings Plan”) under Section 401(k) ofthe Internal Revenue Code. Under the Savings Plan, employees (“associates”) maycontribute up to 15% of their compensation per year subject to the electivelimits as defined by IRS guidelines and the Company may make matchingcontributions in amounts not to exceed 1.5% of the associates’ annualcompensation. Investment selections consist of cash and mutual funds and do notinclude any Company common stock. The Company’s contributions to the SavingsPlan for the years ended December 31, 2006, 2005 and 2004 amounted to $0.4million, $0.3 million and $0.3 million, respectively.

In January 2002, the Company established aqualified employee stock purchase plan (“ESPP”), the terms of which allow forqualified employees (as defined) to participate in the purchase of designatedshares of the Company’s common stock at a price equal to 85% of the lower ofthe closing price at the beginning or end of each quarterly stock purchaseperiod. See Note 16 for further details.

Effective January1, 2006, the Company adopted a Non-qualified Deferred Compensation Plan (the“DCP”). Under the DCP, select employees who satisfy certain eligibilityrequirements and members of the Board of Directors may make annual irrevocableelections to defer a portion of their base compensation and/or bonuses. Thedeferred amounts and earnings thereon are payable to participants at specifiedfuture 

F-27

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(13)Savings Plan (Continued)**

distribution dates, upontermination of employment, retirement, disability, death or change in controlof the Company, in a lump sum or installments, pursuant to elections under therules of the DCP.  The DCP is not fundedby the Company, and participants have an unsecured contractual commitment bythe Company to pay the amounts due under the DCP. The Company has purchasedcorporate-owned life insurance to offset this liability which is held in arabbi trust. The assets held in the rabbi trust are not available for generalcorporate purposes except in the event of bankruptcy of the Company. Allearnings and expenses of the rabbi trust are reported in the Company’s consolidatedstatement of income. The deferred compensation liability was $2.3 million andrelated long-term asset was $2.4 million as of December 31, 2006.

**(14) QuarterlyInformation (Unaudited)**

The following is a summaryof the unaudited quarterly financial information for the years ended December 31,2006 and 2005 (in thousands, except per share data):

| **Year ended December 31, 2006** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Net revenue                                          |       | $          | 258,978    |               | $          | 231,037             |       | $                  | 348,748    |                | $          | 346,421 |   |
| Gross profit                                         |       | 103,632    |       | 92,453             |       | 163,831             |       | 159,463            |       |
| Net earnings                                         |       | 15,396     |       | 13,734             |       | 48,355              |       | 45,683             |       |
| Earnings per  share:                                 |       |       |       |               |       |                |       |               |       |
| Basic                                                |       | $          | 0.17       |               | $          | 0.15                |       | $                  | 0.53       |                | $          | 0.50 |   |
| Diluted                                              |       | $          | 0.17       |               | $          | 0.15                |       | $                  | 0.52       |                | $          | 0.49 |   |

 

| **Year ended December 31, 2005** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Net revenue                                          |       | $          | 215,608    |               | $          | 178,235             |       | $                  | 265,600    |                | $          | 276,649 |   |
| Gross profit                                         |       | 82,223     |       | 66,478             |       | 114,438             |       | 117,730            |       |
| Net earnings                                         |       | 8,163      |       | 4,164              |       | 20,684              |       | 25,802             |       |
| Earnings per  share:                                 |       |       |       |               |       |                |       |               |       |
| Basic                                                |       | $          | 0.09       |               | $          | 0.05                |       | $                  | 0.23       |                | $          | 0.29 |   |
| Diluted                                              |       | $          | 0.09       |               | $          | 0.05                |       | $                  | 0.23       |                | $          | 0.28 |   |

 

**(15) Segment Information**

In accordance with the requirements of SFAS 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company’sreportable business segments and respective accounting policies of the segmentsare the same as those described in Note 1. Management evaluates segmentperformance based primarily on revenue and earnings from operations. Corporateoverhead, interest income and interest expense are evaluated on a consolidatedbasis and not allocated to the Company’s business segments.

F-28

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(15)Segment Information (Continued)**

Segment information issummarized as follows for the years ended December 31, 2006, 2005 and 2004(in thousands):

| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenue:                      |       |                                       |       |   |   |   |   |
| Retail operations                 |       | $                                          | 721,262    |   | $ | 612,862 |   | $ | 518,855 |   |
| Wholesale operations              |       | 146,320                                    |       | 121,103 |   | 120,392 |   |
| European operations               |       | 252,363                                    |       | 153,817 |   | 42,773 |   |
| Licensing operations              |       | 65,239                                     |       | 48,310 |   | 47,242 |   |
|                              |       | $                                          | 1,185,184  |   | $ | 936,092 |   | $ | 729,262 |   |
| Earnings (loss)  from operations: |       |                                       |       |   |   |   |   |
| Retail operations                 |       | $                                          | 100,436    |   | $ | 65,274 |   | $ | 47,788 |   |
| Wholesale operations              |       | 23,963                                     |       | 7,325 |   | (5,565 | ) |
| European operations               |       | 64,211                                     |       | 28,103 |   | 7,748 |   |
| Licensing operations              |       | 57,189                                     |       | 37,804 |   | 37,722 |   |
| Corporate overhead                |       | (52,776                                    | )          | (36,696 | ) | (32,211 | ) |
|                              |       | $                                          | 193,023    |   | $ | 101,810 |   | $ | 55,482 |   |
| Capital  expenditures:            |       |                                       |       |   |   |   |   |
| Retail operations                 |       | $                                          | 35,733     |   | $ | 37,569 |   | $ | 27,577 |   |
| Wholesale operations              |       | 1,253                                      |       | 3,194 |   | 1,934 |   |
| European operations               |       | 8,436                                      |       | 5,565 |   | 945 |   |
| Licensing operations              |       | —                                     |       | 67 |   | — |   |
| Corporate overhead                |       | 4,859                                      |       | 2,399 |   | 4,323 |   |
|                              |       | $                                          | 50,281     |   | $ | 48,794 |   | $ | 34,779 |   |

 

| ** **           | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------|------------|------------|------------|
| ** **           | ** ** | **2006**              | ** ** | **2005**   | ** ** | ** ** | ** ** |
| Total assets:   |       |                  |       |       |       |   |   |
| Retail operations    |       | $                     | 217,785    |       | $          | 194,083 |   |   |   |
| Wholesale operations |       | 107,031               |       | 73,363     |       |   |   |
| European operations  |       | 245,036               |       | 133,004    |       |   |   |
| Licensing operations |       | 13,829                |       | 13,503     |       |   |   |
| Corporate overhead   |       | 253,244               |       | 219,421    |       |   |   |
|                 |       | $                     | 836,925    |       | $          | 633,374 |   |   |   |

 

The European operations segment includes net revenueand earnings from the Maco licensee acquisition commencing from the acquisitiondate of January 3, 2005. Prior to the Maco acquisition, licensing royaltyincome of $5.9 million received from Maco was included in the licensingoperations segment for 2004. The recent Focus acquisition was effective December 31,2006. The licensing royalty income received from Focus prior to the acquisitionof the Focus business was included in the licensing operations segment for theyears ended December 31, 2006 and 2005 and amounted to $4.0 million and$2.7 million, respectively. See Note 18 for details on the Focusacquisition.

F-29

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(15) SegmentInformation (Continued)**

The table below presentsinformation related to geographic areas in which the Company operated during2006, 2005 and 2004. Net revenue is primarily classified based on the countrywhere the Company’s applicable sales organization or the licensee is based (inthousands):

| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenue:             |       |                                       |       |   |   |   |   |
| U.S.                     |       | $                                          | 744,336    |   | $ | 640,630 |   | $ | 570,610 |   |
| Italy                    |       | 249,973                                    |       | 153,779 |   | 51,301 |   |
| Canada                   |       | 154,466                                    |       | 112,337 |   | 86,212 |   |
| Asia                     |       | 20,085                                     |       | 18,816 |   | 15,506 |   |
| Other European Countries |       | 8,193                                      |       | 4,385 |   | 2 |   |
| South America            |       | 2,629                                      |       | 2,827 |   | 1,499 |   |
| Mexico                   |       | 2,388                                      |       | 170 |   | 271 |   |
| Middle East              |       | 1,252                                      |       | 1,979 |   | 2,822 |   |
| South Africa             |       | 1,239                                      |       | 1,131 |   | 764 |   |
| Other                    |       | 623                                        |       | 38 |   | 275 |   |
|                     |       | $                                          | 1,185,184  |   | $ | 936,092 |   | $ | 729,262 |   |

 

| ** **               | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|--------------------------|------------|-----------------------|------------|------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005**   | ** ** | ** ** | ** ** |
| Long-lived  assets:      |       |                  |       |       |       |   |   |
| U.S.                     |       | $                     | 115,135    |       | $          | 105,049 |   |   |   |
| Italy                    |       | 50,833                |       | 29,567     |       |   |   |
| Canada                   |       | 22,923                |       | 21,255     |       |   |   |
| Other European Countries |       | 4,977                 |       | 4,760      |       |   |   |
| Asia                     |       | 2,067                 |       | 431        |       |   |   |
| Mexico                   |       | 476                   |       | —     |       |   |   |
|                     |       | $                     | 196,411    |       | $          | 161,062 |   |   |   |

 

F-30

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(16) Stock-BasedCompensation**

The Company has four stock-based compensation plans.The Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”) provides that theBoard of Directors may grant stock options to officers, key employees andcertain consultants and advisors to the Company or any of its subsidiaries. ThePlan authorizes grants of options to purchase up to 20,000,000 authorized butunissued shares of common stock. At December 31, 2006 and 2005, there were17,765,450 and 18,667,900 shares available for grant under the Plan,respectively. Stock options granted under the Plan have ten-year terms andtypically vest and become fully exercisable in increments of one-fourth of theshares granted on each anniversary from the date of grant. The two most recentannual grants had a vesting period of three years and ten months, and threeyears and nine months, with an initial vesting period of ten months and ninemonths, respectively, followed by three annual vesting periods. The Guess?, Inc.Employee Stock Purchase Plan (“ESPP”) allows for qualified employees toparticipate in the purchase of designated shares of the Company’s common stockat a price equal to 85% of the lower of the closing price at the beginning orend of each quarterly stock purchase period. The Guess?, Inc. 2006Non-Employee Directors’ Stock Grant and Stock Option Plan (the “Director Plan”)provides for the grant of certain stock and stock options to non-employeedirectors. The Director Plan authorizes grants of options to purchase up to2,000,000 authorized but unissued shares of common stock which consists of the1,000,000 shares that were initially approved for issuance on July 30,1996 plus an additional 1,000,000 shares that were approved for issuanceeffective May 9, 2006. At December 31, 2006 and 2005, there were1,075,716 and 175,032 shares available for grant under this plan, respectively.In addition, the Guess?, Inc. 1996 Equity Incentive Plan, under whichequity grants have not been permitted since the approval of the Plan in 2004,continues to govern outstanding awards previously made thereunder.

Prior to January 1, 2006, the Company accountedfor those plans under the recognition and measurement principles of APB 25, andrelated interpretations. No stock-based employee compensation cost for stockoptions was reflected in net earnings, as all options granted under those planshad an exercise price equal to the market value of the underlying common stockon the date of grant. In addition, no compensation expense was recognized forcommon stock purchases under the Employee Stock Purchase Plan. The Companyrecorded compensation expense related to its nonvested stock awards at themarket price of the underlying stock on the date of grant as unearnedcompensation and amortized this amount to expense over the vesting period.

On June 20, 2005, the Compensation Committee andthe Board of Directors approved the immediate acceleration of vesting ofoptions to purchase 750,000 shares of common stock of the Company, of which375,000 were held by each of Maurice Marciano and Paul Marciano, thenCo-Chairmen of the Board and Co-Chief Executive Officers. The accelerated stockoptions, which were originally granted on February 26, 2004 under theCompany’s 1996 Equity Incentive Plan, have an exercise price of $7.80 pershare. The closing price of the Company’s common stock on the New York StockExchange on the date of acceleration was $8.68 per share. The purpose of theacceleration of vesting was to enable the Company to avoid recognizingcompensation expense associated with these options in future periods in itsincome statement, as is required under FAS 123R. The Company strongly believesthat given the substantial share ownership of Maurice Marciano and PaulMarciano in the Company, accelerating the vesting had and will continue to haveno impact with respect to their retention.

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of SFAS 123R using the modifiedprospective transition method. Under this method, compensation cost recognizedin 

F-31

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(16)Stock-Based Compensation (Continued)**

2006 included: (a) compensationexpense for all stock-based payments granted prior to, but not yet vested asof, December 31, 2005, based on the grant date fair value estimated inaccordance with the original provisions of SFAS 123 and (b) compensationexpense for all stock-based payments granted on or after January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123R. The fair value of each stock option was estimated on thegrant date using the Black-Scholes option-pricing model with the followingweighted-average assumptions used for new grants. The risk-free interest rateis based on the U.S. Treasury yield curve in effect for the expected term ofthe option at the time of grant. The expected volatility is determined based onan average of both historical volatility and implied volatility. Impliedvolatility is derived from exchange traded options on the Company’s commonstock. The expected life is based on the “simplified” method described in theSEC Staff Accounting Bulletin No. 107. The dividend yield for 2006 andprior years was assumed to be zero since the Company had not historicallydeclared and did not have a current plan to declare dividends on an ongoingbasis until the Board of Directors authorized and approved the initiation ofquarterly dividends in February, 2007 (see Note 19). The expected forfeiturerate is determined based on historical data. Compensation expense for new stockoptions and nonvested stock awards is recognized on a straight-line basis overthe vesting period. In accordance with the modified prospective transitionmethod, results for prior periods have not been restated. SFAS 123R alsorequires the Company to estimate forfeitures in calculating the expenserelating to stock-based compensation as opposed to recognizing forfeitures asan expense reduction as they occur. The adjustment to apply estimatedforfeitures to previously recognized stock-based compensation was consideredimmaterial and as such was not classified as a cumulative effect of a change inaccounting principle. On January 1, 2006, the Company also reclassifiedthe balance in unearned compensation to paid-in capital in the consolidatedbalance sheet in accordance with the provisions of SFAS 123R.

Thefollowing table illustrates the pro-forma effect on net earnings and earningsper share for the years ended December 31, 2005 and 2004 as if the Companyhad applied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation (in thousands, except per share data):

| ** **                                                                                                                                    | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net earnings, as  reported                                                                                                                    |       | $                                      | 58,813     |   | $ | 29,566 |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       | 708                                    |       | 564 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (4,290                                 | )          | (1,960 | ) |
| Pro forma net  earnings                                                                                                                       |       | $                                      | 55,231     |   | $ | 28,170 |   |
| Earnings per  share:                                                                                                                          |       |                                   |       |   |   |
| Basic—as reported                                                                                                                        |       | $                                      | 0.66       |   | $ | 0.34 |   |
| Basic—pro forma                                                                                                                          |       | $                                      | 0.62       |   | $ | 0.32 |   |
| Diluted—as reported                                                                                                                      |       | $                                      | 0.65       |   | $ | 0.33 |   |
| Diluted—pro forma                                                                                                                        |       | $                                      | 0.61       |   | $ | 0.32 |   |

 

The fair value of stock options used to compute thepro-forma net earnings and earnings per common share disclosures above for theyears ended December 31, 2005 and 2004 is the estimated value at the grant

F-32

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(16)Stock-Based Compensation (Continued)**

dateusing the Black-Scholes option-pricing model. The following weighted-averageassumptions were used for the valuation of the grants in 2005 and 2004,respectively: risk-free interest rates of 4.05% and 3.43%; expectedvolatilities of 57% and 69%; no expected dividend yield; and a weighted-averageexpected life of 5 years. The risk-free interest rate is based on the U.S.Treasury yield curve in effect for the expected term of the option at the timeof grant. The expected volatility is determined based on an average of thehistorical volatility for the expected term. The dividend yield and expected lifeare based on historical data. Using the Black-Scholes option-pricing model, theweighted-average fair value of each option granted during 2005 and 2004 was$4.84 and $4.77, respectively.

***Stock options***

Thefollowing table summarizes the stock option activity under all of the Company’sstock plans during the year ended December 31, 2006:

| ** **                                                          | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value  ($ 000’s)** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Options  outstanding at December 31, 2005                      |       | 4,234,536                  |       |                                    | $          | 6.67                                                              |       |                                                 |       |   |   |   |   |   |   |   |
| Granted                                                             |       | 772,230                    |       |                                    | 20.39      |                                                              |       |                                                 |       |   |   |   |   |   |   |
| Exercised                                                           |       | (1,764,872                 | )          |                                    | (6.22      | )                                                                 |       |                                                 |       |   |   |   |   |   |   |
| Forfeited                                                           |       | (302,350                   | )          |                                    | (8.71      | )                                                                 |       |                                                 |       |   |   |   |   |   |   |
| Expired                                                             |       | (7,600                     | )          |                                    | (8.61      | )                                                                 |       |                                                 |       |   |   |   |   |   |   |
| Options  outstanding at December 31, 2006                      |       | 2,931,944                  |       |                                    | $          | 10.34                                                             |       |                                                 |       | 7.83 |   |   |   | $ | 62,719 |   |   |
| Exercisable at  December 31, 2006                              |       | 1,006,816                  |       |                                    | $          | 6.14                                                              |       |                                                 |       | 6.86 |   |   |   | $ | 25,748 |   |   |
| Options exercisable and  expected to vest at December 31, 2006 |       | 2,705,702                  |       |                                    | $          | 8.78                                                              |       |                                                 |       | 7.83 |   |   |   | $ | 58,374 |   |   |

 

The fair value of each stock option was estimated onthe grant date using the Black-Scholes option-pricing model with the followingweighted-average assumptions used for grants during the year ended December 31,2006: a risk-free interest rate of 4.60%, no expected dividend yield, anexpected volatility of 56.4%, an expected forfeiture rate of 17.97%; and anexpected life of 6.25 years.

The weighted-averagegrant-date fair value of options granted was $11.92 during the year ended December 31,2006.  The total intrinsic value of stockoptions exercised during the years ended December 31, 2006, 2005 and 2004was $31.0 million, $12.3 million and $4.0 million, respectively. The intrinsicvalue of stock options is defined as the difference between the Company’s stockprice on the exercise date and the grant-date exercise price. The total cashreceived from option exercises was $11.0 million,  $6.3 million and $2.4 million during theyears ended December 31, 2006, 2005 and 2004, respectively. The excess taxbenefit realized for the tax deductions from these option exercises for 2006was $9.1 million and is included in cash flows from financing activities forthe year ended December 31, 2006. The compensation expense recognized was$4.2 million before the recognized income tax benefit of $1.6 million duringthe year ended December 31, 2006. As of December 31, 2006, there wasapproximately $9.9 million of unrecognized compensation cost, net of estimatedforfeitures, related to nonvested stock options. This cost is expected to berecognized over a weighted-average period of 1.3 years.

F-33

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(16)Stock-Based Compensation (Continued)**

***Nonvested stock awards/units***

Thefollowing table summarizes the nonvested stock awards/units activity under allof the Company’s stock plans during the year ended December 31, 2006:

| ** **                           | ** ** | **Number of  Shares/Units** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------------------------|------------|
| Nonvested at  December 31, 2005 |       |                             | 353,950    |                                              |       |   | $ | 8.14 |   |   |
| Granted                              |       |                             | 438,086    |                                              |       |   | 20.96 |   |   |
| Vested                               |       |                             | (139,300   | )                                                 |       |   | (6.99 | ) |   |
| Forfeited or expired                 |       |                             | (72,450    | )                                                 |       |   | (10.06 | ) |   |
| Nonvested at  December 31, 2006 |       |                             | 580,286    |                                              |       |   | $ | 17.86 |   |   |

 

The weighted-averagegrant-date fair value of nonvested stock awards/units granted during the yearended December 31, 2006 was $20.96. The total fair value at grant date ofpreviously nonvested stock awards/units that were vested during 2006, 2005 and2004 was $1.0 million, $0.8 million and $0.7 million, respectively. During2006, 2005 and 2004, the total intrinsic value of nonvested stock awards/unitsthat vested was $2.9 million,  $1.5million and $1.6 million, respectively. The excess tax benefit realized for thetax deductions from these vested shares for 2006 was $0.7 million and has beenincluded in cash flows from financing activities for the year ended December 31,2006. The total intrinsic value of nonvested stock awards/units outstanding andunvested at December 31, 2006 was $18.4 million. The compensation expenseincluded in SG&A recognized during 2006 was $2.2 million, before therecognized income tax benefit of $0.8 million. As of December 31, 2006,there was approximately $6.1 million of total unrecognized compensation cost,net of estimated forfeitures, related to nonvested stock awards/units. Thiscost is expected to be recognized over a weighted-average period of 1.4 years.

***ESPP***

In January 2002, the Company established an ESPP,the terms of which allow for qualified employees (as defined) to participate inthe purchase of designated shares of the Company’s common stock at a priceequal to 85% of the lower of the closing price at the beginning or end of eachquarterly stock purchase period. The ESPP is a straight purchase plan and isnot subject to any holding period, however all Company employees are subject tothe terms of the Company’s securities trading policy which generally prohibitsthe purchase or sale of any Company securities during the two weeks before theend of each fiscal quarter through two days after the public announcement bythe Company of its earnings for that period. On January 23, 2002, theCompany filed with the SEC a Registration Statement on Form S-8registering 4,000,000 shares of common stock for the ESPP.

During the years ended December 31, 2006, 2005and 2004, 54,846, 73,288 and 70,794 shares of the Company’s common stock wereissued pursuant to the ESPP at an average price of $16.55, $7.17 and $6.39 pershare, respectively.

F-34

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(16)Stock-Based Compensation (Continued)**

The fair value of stockcompensation expense associated with our ESPP was estimated on the date ofgrant using the Black-Scholes option-pricing valuation model and the followingweighted-average assumptions for grants during 2006, 2005 and 2004.

| ** **                                 | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| **Valuation Assumptions**             | ** ** | ** **                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate                   |       | 4.77                                   | %          | 3.14 | % | 1.37 | % |
| Expected stock  price volatility           |       | 43.0                                   | %          | 51.0 | % | 45.0 | % |
| Expected life of ESPP  options (in months) |       | 3                                      |       | 3 |   | 3 |   |
|                                            |            |                                        |            |  |  |  |  |  |  |

 

The weighted-averagegrant-date fair value of ESPP options granted during 2006, 2005 and 2004 was$7.15, $4.86 and $2.42, respectively.

**(17) Share RepurchaseProgram**

In May 2001, theCompany’s Board of Directors authorized the Company to repurchase shares of itsown stock in an amount of up to $15 million from time to time in open markettransactions. In 2002, the Company purchased 1,212,000 shares at an aggregatecost of $3.2 million, or an average of $2.61 per share. No share repurchaseswere made during 2006, 2005 and 2004. Since the inception of the sharerepurchase program in May 2001, the Company has purchased 2,274,000 sharesat an aggregated cost of $7.1 million, or an average of $3.13 per share.

**(18) Acquisition of FocusEurope S.r.l. (“Focus”)**

Effective December 31, 2006, Guess?, Inc.(the “Company”), through its wholly-owned subsidiary, Guess? Europe, B.V. (“Purchaser”),completed the acquisition of 75% of the equity interest of Focus Europe S.r.l (“Focus”)from Focus Pull S.p.A. (“Seller”). The Focus agreement also provides for theacquisition of 75% of the equity interest of Focus Spain S.A. (“Focus Spain”),subject to certain closing conditions.

Since 1997, the Company has licensed to Focus theright to manufacture, distribute and retail “GUESS by MARCIANO” contemporary apparel for women and men in Europe,the Middle East and Asia. The acquisition of the licensee is expected tofurther accelerate the Company’s expansion in Europe.

The Focus purchase price is expected to be €18.4million ($24.2 million) subject to certain purchase price adjustments primarilypertaining to inventory valuations and other closing conditions, which areexpected to be completed by June 2007. The assets included in the Focusentity acquired at closing comprise inventories not older than one year,certain long term assets used to operate the business including leaseholdinterests related to four GUESS by MARCIANO stores and approximately  €1.1million ($1.5 million) in cash which will be retained by Focus to pay forcertain obligations. These obligations, that include certain royalties payableto the Company under the pre-existing license agreement and certain amounts dueunder a loan agreement, are explicitly limited to the €1.1million ($1.5 million) cash acquired. The Purchaser has not assumed any tradereceivables or other payables and debt as part of the acquisition.

F-35

----

**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(18)Acquisition of Focus Europe S.r.l. (“Focus”) (Continued)**

At closing, the Purchaser paid approximately €10.0million ($13.2 million) in cash and the Company issued €2.0million ($2.6 million) in Guess?, Inc. common stock based on the stockprice at the closing date. The remaining purchase price, presently estimated tobe €6.4million ($8.4 million), related to inventory acquired that will be paid afterthe seller pays its suppliers, may increase or decrease, based on thefinalization of the outstanding purchase price adjustments and other closingconditions. Such amount is expected to be paid upon completion of the purchaseprice adjustments described above.

The agreement also provides that at specific timesduring 2008, 2009 and 2010, Seller may require the Purchaser to acquire theremaining 25% of equity interests in Focus for cash based upon a multiple of Focus’consolidated net income for the immediately preceding fiscal year. Theagreement further provides that, at a specific time in 2011, the Purchaser willhave the option to purchase the remaining 25% of equity interest in Focus forcash based upon a multiple of Focus’ consolidated net income for theimmediately preceding fiscal year.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition of Focus. These amounts areconsidered preliminary as the Company is still in the process of finalizing thevaluations, and hence, these amounts are subject to change (in thousands):

| ** **                                           | ** ** | **Dec. 31,  2006** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| Current assets                                       |       | $                       | 18,217     |   |
| Property and  equipment, net                         |       | 1,609                   |       |
| Goodwill                                             |       | 7,561                   |       |
| Intangible assets                                    |       | 8,957                   |       |
| Total assets  acquired                               |       | 36,344                  |       |
| Current  liabilities                                 |       | (1,680                  | )          |
| Deferred Tax  Liabilities                            |       | (7,736                  | )          |
| Minority interest                                    |       | (4,148                  | )          |
| Net assets acquired,  excluding cash of $1.5 million |       | $                       | 22,780     |   |

 

The $9.0 million ofacquired intangible assets primarily comprise the value of the acquisition ofthe pre-existing license arrangement and lease acquisition costs, both of whichare subject to amortization. The acquired intangible assets have aweighted-average useful life of approximately 4.0 years. The annualamortization expense over the next four years for these acquired intangibleassets is estimated to be approximately $2.2 million each year for 2007 through2010 and will be recorded as an expense in the European operations segment.Goodwill associated with this acquisition will be recorded in the Europeanoperations segment and is non-deductible for tax purposes.

**(19) Subsequent Events**

On January 18, 2007, the Board of Directors ofthe Company approved a change in the Company’s fiscal year end from December 31to the Saturday nearest January 31 of each year. The change, which willalign the Company’s reporting cycle with the National Retail Federation fiscalcalendar and is expected to provide for more consistent quarter-to-quartercomparisons, will be effective with the Company’s 2008 fiscal year. The Company’s2008 fiscal year began on February 4, 2007 and will end February 2,2008, resulting in a one-month transition period that began January 1,2007 and ended February 3, 2007.

F-36

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**GUESS?, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(19)Subsequent Events (Continued)**

On February 12, 2007, the Board of Directors ofthe Company declared a quarterly cash dividend of $0.12 per share (pre-splitbasis) on the Company’s common stock and approved a two-for-one stock split ofthe Company’s common stock, each to be paid on or about March 12, 2007 toshareholders of record as of the close of business on February 26, 2007. Becausethe record date for the initial cash dividend preceded the March 12, 2007 stocksplit distribution date, the cash dividend will be paid on only pre-splitshares. Assuming the Board of Directors maintains the current level of cashdividends, future quarterly dividends per share will be half the current levelbut will apply to shares on a post-split basis. The payment of cash dividendsin the future will be at the discretion of our Board of Directors and will bebased upon a number of business, legal and other considerations, including ourcash flow from operations, capital expenditures, debt service requirements,cash paid for income taxes, earnings and liquidity.

F-37

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**SCHEDULEIIGUESS?, INC. & SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSYears ended December 31, 2006, 2005, and 2004(in thousands)**

| ** **                         | ** ** | **Balance at  beginning  of period** | ** ** | **Costs charged / credited to expenses** | ** ** | **Deductions  and  write-offs** | ** ** | **Balance at  end  of period** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|
| **Description**                    | ** ** |                                           | ** ** | ** **                               |       |                            | ** ** | ** **                               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| As of December 31,  2006      |       |                                           |       | ** **                               |       |                            |       |                                     |       |   |   |   |   |   |   | ** ** |   |
| Allowance for accounts receivable  |       |                                           | $          | 9,123                                    | ** ** |                            |       | $                                        | 25,636     |   |   |   | $(23,278                | ) |   |   | $ | 11,481 | ** ** |   |
| Allowance for royalties receivable |       |                                           | 650        | ** **                               |       |                            | (366       | )                                        |       |   | — |   |   |   | 284 | ** ** |   |
| Allowance for sales returns        |       |                                           | 2,737      | ** **                               |       |                            | 16,080     |                                     |       |   | (12,352 | ) |   |   | 6,465 | ** ** |   |
| As of December 31,  2005      |       |                                           |       | ** **                               |       |                            |       |                                     |       |   |   |   |   |   |   | ** ** |   |
| Allowance for accounts receivable  |       |                                           | $          | 8,206                                    | ** ** |                            |       | $                                        | 25,883     |   |   |   | $ | (24,966 | ) |   |   | $ | 9,123 | ** ** |   |
| Allowance for royalties receivable |       |                                           | 709        | ** **                               |       |                            | (59        | )                                        |       |   | — |   |   |   | 650 | ** ** |   |
| Allowance for sales returns        |       |                                           | 472        | ** **                               |       |                            | 6,208      |                                     |       |   | (3,943 | ) |   |   | 2,737 | ** ** |   |
| As of December 31,  2004      |       |                                           |       | ** **                               |       |                            |       |                                     |       |   |   |   |   |   |   | ** ** |   |
| Allowance for accounts receivable  |       |                                           | $          | 7,673                                    | ** ** |                            |       | $                                        | 25,970     |   |   |   | $ | (25,437 | ) |   |   | $ | 8,206 | ** ** |   |
| Allowance for royalties receivable |       |                                           | 1,705      | ** **                               |       |                            | (996       | )                                        |       |   | — |   |   |   | 709 | ** ** |   |
| Allowance for  sales returns       |       |                                           | 419        | ** **                               |       |                            | 2,616      |                                     |       |   | (2,563 | ) |   |   | 472 | ** ** |   |

 

F-38

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        | Guess?, Inc. |
|--------|-------------------|
|   | By:               |   |
|   |              | /s/ PAUL MARCIANO |
|   |              | Paul Marciano |
|   | * *          | *Chief  Executive Officer and* |
|   | * *          | *Vice  Chairman of the Board* |
|   |              |   |
|   |              | Date: February 28, 2007 |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| /s/ PAUL MARCIANO           |   | Chief Executive Officer,                                    |   | February 28, 2007 |
|-----------------------------|--------|-------------------------------------------------------------|--------|------------------------|
| Paul Marciano               |   | Vice Chairman of the Board and Director                     |   |                   |
|                        |   | (Principal Executive Officer)                               |   |                   |
| /s/  MAURICE MARCIANO       |   | Chairman of the Board  and Director                         |   | February 28, 2007 |
| Maurice Marciano            |   |                                                        |   |                   |
| /s/  CARLOS ALBERINI        |   | President, Chief  Operating Officer and                     |   | February 28, 2007 |
| Carlos Alberini             |   | Director                                                    |   |                   |
| /s/  DENNIS R. SECOR        |   | Senior Vice President  and                                  |   | February 28, 2007 |
| Dennis R. Secor             |   | Chief Financial Officer                                     |   |                   |
|                        |   | (Principal Financial Officer and Chief Accounting  Officer) |   |                   |
| /s/  ANTHONY CHIDONI        |   | Director                                                    |   | February 28, 2007 |
| Anthony Chidoni             |   |                                                        |   |                   |
| /s/  KAY ISAACSON-LEIBOWITZ |   | Director                                                    |   | February 28, 2007 |
| Kay  Isaacson-Leibowitz     |   |                                                        |   |                   |
| /s/  ALICE KANE             |   | Director                                                    |   | February 28, 2007 |
| Alice Kane                  |   |                                                        |   |                   |
| /s/  KAREN NEUBURGER        |   | Director                                                    |   | February 28, 2007 |
| Karen Neuburger             |   |                                                        |   |                   |
| /s/  ALEX YEMENIDJIAN       |   | Director                                                    |   | February 28, 2007 |
| Alex Yemenidjian            |   |                                                        |   |                   |

 

----

**Exhibit Index**
| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                  | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1.             |       | Restated  Certificate of Incorporation of the Registrant (incorporated by reference  from Amendment No. 3 to the Registrant’s Registration Statement on  Form S-1 (Registration No. 333-4419) filed on  July 30, 1996). |       |
| 3.2.             |       | Amended  and Restated Bylaws of the Registrant (incorporated by reference from the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 29, 2001).                                                        |       |
| 4.1.             |       | Specimen  stock certificate (incorporated by reference from Amendment No. 3 to the  Registrant’s Registration Statement on Form S-1 (Registration  No. 333-4419) filed on July 30, 1996).                               |       |
| *10.1.           |       | 1996  Equity Incentive Plan (incorporated by reference from Amendment No. 3 to  the Registrant’s Registration Statement on Form S-1 (Registration  No. 333-4419) filed on July 30, 1996).                               |       |
| *10.2.           |       | 2004  Equity Incentive Plan (incorporated by reference from Appendix A to the  Registrant’s Definitive Proxy Statement on Form 14A filed April 14,  2004).                                                                        |       |
| *10.3.           |       | First  Amendment to the Guess?, Inc. 2004 Equity Incentive Plan (incorporated  by reference from the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended April 1, 2006).                                       |       |
| *10.4.           |       | 2006  Non-Employee Directors’ Stock Grant and Stock Option Plan (incorporated  by reference from Appendix A to the Registrant’s Definitive Proxy Statement  on Form 14A filed April 14, 2006).                               |       |
| *10.5.           |       | Amendment  to the Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and  Stock Option Plan (incorporated by reference from the Registrant’s Current  Report on Form 8-K filed July 11, 2006).                       |       |
| †*10.6.     |       | Annual  Incentive Bonus Plan (as amended and restated January 18, 2007).                                                                                                                                                                    |       |
| *10.7.           |       | 2002  Employee Stock Purchase Plan (incorporated by reference from the Registrant’s  Registration Statement on Form S-8 (Registration No. 333-81274)  filed on January 23, 2002).                                            |       |
| †*10.8.     |       | Executive  Employment Agreement dated January 1, 2007 between the Registrant and  Maurice Marciano.                                                                                                                                         |       |
| †*10.9.     |       | Executive  Employment Agreement dated January 1, 2007 between the Registrant and  Paul Marciano.                                                                                                                                            |       |
| *10.10.          |       | Employment  Agreement between the Registrant and Carlos Alberini (incorporated by  reference from the Registrant’s Annual Report on Form 10-K for the  year ended December 31, 2000).                                             |       |
| *10.11.          |       | First  Amendment to Employment Agreement between the Registrant and Carlos Alberini  (incorporated by reference from the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended June 28, 2003)                         |       |
| *10.12.          |       | Employment  Agreement dated August 16, 2002 between the Registrant and Nancy  Shachtman (incorporated by reference from the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2002).                  |       |
| *10.13.          |       | Employment  Agreement between the Registrant and Stephen Pearson, effective as of  January 31, 2006 (incorporated by reference from the Registrant’s  Current Report on Form 8-K filed February 13, 2006).                   |       |
| *10.14.          |       | Employment  Letter Agreement dated February 20, 2004 between the Registrant and  Michael Relich (incorporated by reference from the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended July 1, 2006).         |       |
| *10.15.          |       | Employment  Letter Agreement dated June 8, 2006 between the Registrant and Dennis  Secor (incorporated by reference from the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended July 1, 2006).                |       |
| *10.16.          |       | Written  Description of Performance-Based Bonus Criteria for Paul Marciano  (incorporated by reference from the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended October 1, 2005).                               |       |

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| *10.17.       |   | Written  Description of Performance-Based Bonus Criteria for Named Executive Officers  with Respect to the Registrant’s Fiscal Year Ending December 31, 2006  (incorporated by reference from the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2005).                                                                                                                                                                                                  |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| †*10.18. |   | Restricted  Stock Agreement dated as of January 1, 2007 between the Registrant and  Paul Marciano.                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| *10.19.       |   | Form of  Nonqualified Stock Option Agreement (incorporated by reference from the  Registrant’s Current Report on Form 8-K filed May 16, 2005).                                                                                                                                                                                                                                                                                                                                          |   |
| *10.20.       |   | Form of  Restricted Stock Award Agreement (incorporated by reference from the  Registrant’s Current Report on Form 8-K filed May 16, 2005).                                                                                                                                                                                                                                                                                                                                             |   |
| *10.21.       |   | Indemnification  Agreements between the Registrant and certain executives and directors  (incorporated by reference from the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1996).                                                                                                                                                                                                                                                                                 |   |
| *10.22.       |   | Nonqualified  Deferred Compensation Plan (incorporated by reference from the Registrant’s  Registration Statement on Form S-8 (Registration No. 333-129349)  filed on November 1, 2005).                                                                                                                                                                                                                                                                                                |   |
| *10.23.       |   | Supplemental  Executive Retirement Plan (incorporated by reference from the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended  October 1, 2005).                                                                                                                                                                                                                                                                                                                             |   |
| *10.24.       |   | Separation  Agreement between the Registrant and Frederick G. Silny, dated as of  February 9, 2006 (incorporated by reference from the Registrant’s  Current Report on Form 8-K filed February 13, 2006).                                                                                                                                                                                                                                                                               |   |
| 10.25.        |   | Lease  Agreement between the Registrant and Robert Pattillo Properties, Inc.  (incorporated by reference from the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1999).                                                                                                                                                                                                                                                                                       |   |
| 10.26.        |   | Lease  Agreement between the Registrant and MAP Properties, Ltd. (incorporated by  reference from the Registrant’s Annual Report on Form 10-K for the  year ended December 31, 2001).                                                                                                                                                                                                                                                                                                        |   |
| 10.27.        |   | Licensing  Contribution Agreement dated as of April 28, 2003, by and between Guess?  Licensing, Inc. and Guess? IP Holder L.P. (incorporated by reference  from the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended March 29, 2003).                                                                                                                                                                                                                             |   |
| 10.28.        |   | Guess?  License Agreement dated as of April 28, 2003, by and between Guess? IP  Holder L.P. and the Registrant (incorporated by reference from the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 29, 2003).                                                                                                                                                                                                                                                  |   |
| 10.29.        |   | Purchase  Agreement among the Registrant, Guess Italia S.r.l, Fingen S.p.A. and Fingen  Apparel N.V. dated December 31, 2004 (incorporated by reference from the  Registrant’s Current Report on Form 8-K filed January 5,  2005).                                                                                                                                                                                                                                                      |   |
| 10.30.        |   | Credit  Agreement by and among the Registrant and Guess? Canada Corporation, as  Borrowers, lenders from time to time party thereto, Bank of America, N.A., as  Domestic Administrative Agent and Domestic L/C Issuer, and Bank of America,  N.A., acting through its Canada Branch, as Canadian Administrative Agent and  Canadian L/C Issuer, dated as of September 19, 2006 (incorporated by  reference from the Registrant’s Current Report on Form 8-K filed  September 25, 2006). |   |
| 14.1.         |   | Code  of Conduct of the Registrant (incorporated by reference from the Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2003).                                                                                                                                                                                                                                                                                                                                      |   |
| †21.1.   |   | List  of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| †23.1.   |   | Consent  of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
| †31.1.   |   | Certification  of Chief Executive Officer and Vice Chairman of the Board pursuant to  Section 302 of the Sarbanes- Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                  |   |
| †31.2.   |   | Certification  of President and Chief Operating Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                    |   |
| †31.3.   |   | Certification  of Senior Vice President and Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        |   |

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| †32.1. |   | Certification  of Chief Executive Officer and Vice Chairman of the Board pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| †32.2. |   | Certification  of President and Chief Operating Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                  |   |
| †32.3. |   | Certification of Senior  Vice President and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.      |   |

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*                    ManagementContract or Compensatory Plan

†                    Filed herewith

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