AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 1997

REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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

For the Fiscal Year Ended December 31, 1996
Commission File Number 1-11893

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GUESS ?, INC.

(Exact name of registrant as specified in its charter)

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

1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100

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

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

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, par value $.01 per
share New York Stock Exchange

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of March 21, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $73,616,906.

As of March 21, 1997, the registrant had 42,898,035 shares of Common Stock
outstanding.

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TABLE OF CONTENTS

ITEM DESCRIPTION PAGE
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PART I

1 Business............................................................................................ 1

2 Properties.......................................................................................... 8

3 Legal Proceedings................................................................................... 9

4 Submission of Matters to a Vote of Security Holders................................................. 10

PART II

5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 10

6 Selected Financial Data............................................................................. 11

7 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 12

8 Financial Statements and Supplementary Data......................................................... 19

9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 19

PART III

10 Directors and Executive Officers of the Registrant.................................................. 19

11 Executive Compensation.............................................................................. 19

12 Security Ownership of Certain Beneficial Owners and Management...................................... 19

13 Certain Relationships and Related Transactions...................................................... 19

PART IV

14 Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K........................ 19

PART I

ITEM 1. BUSINESS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

Various forward-looking statements have been made in this Form 10-K.
Forward-looking statements may also be in the registrant's other reports filed
under the Securities Exchange Act of 1934, in its press releases and in other
documents. In addition, from time to time, the registrant through its management
may make oral forward-looking statements.

Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe", "expect", "anticipate", "optimistic",
"intend", "aim", "will" or similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements.

For additional information regarding forward-looking statements, refer to
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.

GENERAL

Guess ?, Inc. (the Company or "Guess"), founded in 1981 by the Marciano
brothers, designs, markets, distributes and licenses one of the world's leading
lifestyle collections of casual apparel, accessories and related consumer
products. The Company's apparel for men and women is marketed under numerous
trademarks Guess, Guess ?, Guess U.S.A., Guess Collection and Guess ? and
Triangle Design. The lines include full collections of denim and cotton
clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses,
shirts, jackets and knitwear. In addition, the Company has granted licenses to
manufacture and distribute a broad range of products that complement the
Company's apparel lines, including clothing for infants and children,
activewear, footwear, eyewear, watches, home products and other fashion
accessories. Revenue generated from wholesale and retail operations and from
licensing activities, were 52.2%, 38.1% and 9.7%, respectively, of net revenue
in 1996. The Company's total net revenue in 1996 was $551.2 million and pro
forma net earnings (as described under the Caption "Pro Forma Results of
Operations," contained in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations) were $52.3 million.

The Company derives its net revenue from the sale of Guess men's and women's
apparel worldwide to wholesale customers and distributors, from the sale of
Guess men's and women's apparel and its licensees' products through the
Company's network of retail and factory outlet stores primarily in the United
States and from net royalties from worldwide licensing activities. The following
table sets forth the net revenue of the Company through its channels of
distribution.

YEAR ENDED DECEMBER 31,
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1996 1995 1994
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(IN THOUSANDS)

Net Revenue:
Wholesale operations........................ $ 288,046 52.2% $ 270,931 55.7% $ 358,125 65.4%
Retail operations........................... 209,828 38.1 169,428 34.8 149,337 27.2
Net revenue from product sales............ 497,874 90.3 440,359 90.5 507,462 92.6
Net royalties............................... 53,288 9.7 46,374 9.5 40,350 7.4
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Total net revenue....................... $ 551,162 100.0% $ 486,733 100.0% $ 547,812 100.0%
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PRODUCTS

COMPANY PRODUCTS. The Company's apparel products are organized into two
primary categories: men's apparel and women's apparel (including Guess
Collection). A major portion of the Company's men's and women's apparel lines
consists of basic, recurring styles which the Company believes are less
susceptible to fashion obsolescence and are less seasonal in nature than fashion
product styles. Basic product styles provide the Company with a base of business
that usually carries over from season to season and year to year. Basic products
are primarily made of denim and include jeans, skirts, dresses, overalls and
shorts in a variety of fits, washes and styles. To take advantage of
contemporary trends, the Company complements its basic styles with more
fashion-oriented items. Fashion products range in style from contemporary
sportswear to casual apparel and include colored denim items, pants, shirts,
jackets and knitwear, made of a variety of materials including fine cotton,
man-made fabric and leather. A limited number of best-selling fashion items in a
collection may be included in one or more subsequent collections, and a select
few may be added to the Company's basic styles.

In 1993, the Company expanded its line of women's apparel to include the
Guess Collection, a collection of women's skirts, tops, jackets, blazers and
blouses incorporating a sophisticated combination of colors and styles. The
Guess Collection was introduced exclusively through Guess stores and, based upon
positive consumer reaction, the Company expanded distribution of the Guess
Collection to selected better department stores in the 1996 Fall season. The
Guess Collection appeals to the contemporary segment of the apparel market and
is generally sold in separate selling areas from other Guess denim and casual
apparel.

LICENSED PRODUCTS. The high level of desirability of the Guess brand name
among consumers has allowed the Company to selectively expand its product
offerings through licensing arrangements. The Company currently has 29
licensees. Sales of licensed products (as reported to the Company by its
licensees) have grown from $451.7 million in 1993 to $741.4 million in 1996. The
Company's net royalties from such sales including fees from new licensees
increased from $28.8 million in 1993 to $53.3 million in 1996. Approximately 45%
of the Company's net royalties were derived from its top four licensed product
lines in 1996.

DESIGN

Under the direction of Maurice Marciano, Guess garments are designed by an
in-house staff of four design teams (men's, women's, Guess Collection and Guess
Europe) located in Los Angeles and Florence, Italy. Guess design teams travel
throughout the world in order to monitor fashion trends and discover new
fabrics. Fabric shows in Europe, Asia and the United States provide additional
opportunities to discover and sample new fabrics. These fabrics, together with
the trends uncovered by the Company's designers, serve as the primary source of
inspiration for the Company's lines and collections. The Company also maintains
a fashion library consisting of antique and contemporary garments as an
additional source of creative concepts. In addition, design teams regularly meet
with members of the sales, merchandising and retail operations to further refine
the Company's products in order to meet the particular needs of the Company's
markets.

DOMESTIC WHOLESALE CUSTOMERS

The Company's domestic wholesale customers consist primarily of better
department stores and select upscale specialty stores, which have the image and
merchandising expertise that Guess requires for the effective presentation of
its products. Leading wholesale customers include Federated Department Stores,
Inc., The May Department Stores Company, Dillard Department Stores, Inc. and
select upscale specialty stores. During 1996, the Company sold its products
directly to over 3,000 retail doors within the United States.

A key element of the Company's merchandising strategy is the shop-in-shop
merchandising format, an exclusive selling area within a department store that
presents a full array of Guess products using Guess signage and fixtures. As of
December 31, 1996, there were approximately 1,276 shop-in-shops (excluding
shop-in-shops installed by licensees) that feature Guess products (other than
the Guess Collection) and the Company intends to add approximately 140 and
remodel approximately 100 shop-in-shops by the end of 1997. Guess also intends
to establish Guess Collection shop-in-shops, in addition to existing
shop-in-shops, in selected better department stores beginning in the Spring of
1997.

Sales representatives are located in the Company's showrooms in New York,
Los Angeles, Dallas, Atlanta, Chicago, Hong Kong, Milan and Florence. They
coordinate with buyers for the Company's customers to determine the inventory
level and product mix that should be carried in each store to maximize retail
sell-through and enhance the customers' profit margins. Such inventory level and
product mix are then used as the basis for developing sales projections and
product needs for each wholesale customer and scheduling production. The
merchandisers work with the store to ensure that the Company's products are
appropriately displayed.

Certain of the Company's domestic wholesale customers, including some under
common ownership, have accounted for significant portions of the Company's net
revenue. During 1996, Bloomingdale's, Macy's and other affiliated stores owned
by Federated Department Stores, Inc. together accounted for approximately 8.6%
of the Company's net revenue. During the same period, The May Company and
Dillard's accounted for approximately 6.7% and 5.9% of the Company's net
revenue, respectively.

DOMESTIC RETAIL OPERATIONS

As of December 31, 1996, the Company's domestic retail operations consisted
of 69 retail and 46 factory outlet stores owned and operated directly by Guess
in the United States, which principally sell Guess label products. Guess retail
stores outside the United States, with the exception of the Company-owned and
operated store in Florence, Italy, are owned and operated by the Company's
distributors and licensees. See "International Business". Since the beginning of
1993 through December 31, 1996, the Company has opened a total of 41 retail and
31 factory outlet stores and has closed 11 retail and 7 factory outlet stores.
The percentage of net revenue generated by the retail network has increased from
29.0% to 42.1% of the Company's net revenue from product sales from 1993 through
1996.

RETAIL STORES. The Company's 69 domestic retail stores typically range in
size from approximately 3,400 to 8,500 square feet. The Company's retail stores
carry a full assortment of men's and women's Guess merchandise, including most
of its licensed products. The Company intends to continue to locate its stores
in regional malls with a smaller number of flagship stores in major cities.
During 1996, the Company opened 7 retail stores and plans to open a net of
approximately 13 additional retail stores during 1997 (including two closures
and two store consolidations).

FACTORY OUTLET STORES. The Company's 46 domestic factory outlet stores
typically range in size from approximately 2,100 to 7,500 square feet and are
located in outlet malls and strip centers outside the shopping radius of the
Company's wholesale customers and its retail stores. These stores sell selected
styles of Guess apparel and licensed products at a discount to value-conscious
customers, enabling the Company to effectively control the distribution of its
excess inventory, thereby protecting the Guess image. During 1996, the Company
opened one, closed one and consolidated one factory store. The Company plans to
open an additional three factory outlet stores in 1997.

INTERNATIONAL BUSINESS

Guess derives net revenue and earnings from outside the United States from
three principal sources: (i) sales of Guess brand apparel directly to 12 foreign
distributors who distribute such apparel to better department stores, upscale
specialty retail stores and Guess-licensed retail stores operated by Guess
distributors or licensees, (ii) royalties from licensees who manufacture and
distribute Guess brand products

outside the United States and (iii) sales of Guess brand apparel by Guess Europe
directly to upscale retail stores in Italy (See Licensing Agreements and Terms).

Since 1991, the Company has been selling its products through distributors
and licensees in Asia, the Middle East and Australia. In 1993, the Company
opened a design studio, sourcing office, sales office and warehouse in Italy and
in 1994 began sourcing, marketing and distributing products directly in Italy
and executed a distribution agreement for Spain. More recently, Guess has
entered into distribution arrangements in for Belgium, Germany, the Netherlands,
Peru, Turkey and the United Kingdom.

As of December 31, 1996, 234 Guess retail stores were operated
internationally, 149 of which were operated by licensees and 85 of which were
operated by distributors. The Company's retail store license agreements
generally provide detailed guidelines for store fixtures, merchandising and
marketing programs and the appearance, merchandising and service standards of
these stores are closely monitored to ensure the Guess image is maintained. The
Company has been advised by its distributors and licensees that they plan to
establish approximately 31 new distributor-operated stores and approximately 20
licensee-operated stores, respectively, in 1997. Guess also owns and operates a
flagship Guess retail store located in Florence, Italy.

LICENSING AGREEMENTS AND TERMS

The Company's manufacturing license agreements customarily provide for a
three to five year initial term with a possible option to renew prior to
expiration for an additional multi-year period. In addition to licensing
products which complement the Company's apparel products, Guess has granted
licenses for the manufacture and sale of Guess branded products similar to the
Company's, including men's and women's denim and knitwear, in markets such as
Canada, Argentina, Mexico, the Philippines, South Korea, Brazil and Japan.
Licenses granted to certain licensees which have produced high-quality products
and otherwise have demonstrated exceptional operating performance, such as Guess
Watches and Guess Eyewear, have been renewed and in some cases expanded to
include new products or markets. The typical license agreement requires that the
licensee pay the Company the greater of a royalty based on a percentage of the
licensee's net sales of licensed products or a guaranteed minimum royalty that
typically increases over the term of the license agreement. Generally, licensees
are required to spend a percentage of the net sales of licensed products for
advertising and promotion of the licensed products. In addition, certain
licensees are required to contribute toward the protection of the Company's
trademarks within the territories granted to such licensees, thereby assisting
Guess in its efforts to prevent counterfeiting and other trademark infringement
in such countries.

The Company's Licensing Department strictly monitors product design,
development, merchandising and marketing. All Guess brand products, advertising,
promotional and packaging materials must be approved in advance by Guess. The
Licensing Department meets regularly with licensees to ensure consistency with
Guess's overall marketing, merchandising and design strategies, and to ensure
uniformity and quality control.

In addition to the retail stores operated outside of the United States as
mentioned above in the section "International Business", Guess licensees operate
50 retail stores in the United States.

In March 1997, the Company signed a letter of intent to form a joint venture
in Europe with the Fingen Group, a leading European apparel manufacturer and
distributor owned by the Fratini family. The new joint venture, Maco Apparel
S.r.1., will enter into a licensing agreement with the Company for the
manufacture and sale of its jeanswear lines throughout Europe and will purchase
certain of the Company's operations in Italy. Maco Apparel S.r.1. will produce a
full collection of casual lifestyle jeanswear apparel, including men's and
women's jeans. The Company will continue to design the collections to be sold in
the European market. This transaction is expected to close during the summer of
1997.

ADVERTISING, PUBLIC RELATIONS AND MARKETING

The Company's advertising, public relations and marketing strategy is to
promote a consistent high impact image which endures regardless of changing
consumer trends. Since the Company's inception, Paul Marciano has had principal
responsibility for the Guess brand image and creative vision. All worldwide
advertising and promotional material is controlled through the Company's
Advertising Department based in Los Angeles, while Guess Public Relations and
Special Events are based in New York. Guess Jeans, Guess U.S.A. and Guess Inc.
images have been showcased in international print campaigns in dozens of major
magazines, on billboards, bus shelters and telephone kiosks, on television and
most recently in movie theaters throughout the United States.

ADVERTISING. The Company's advertising strategy is designed to promote the
Guess image rather than focus on specific products. The Company's distinctive
black and white print advertisements have garnered prestigious awards, including
Clio, Belding and Mobius awards for creativity and excellence. Such awards,
which the Company has received on numerous occasions, are generally awarded on
the basis of the judgment of prominent members of the advertising industry.
Guess has maintained a high degree of consistency in its advertisements, using
similar themes and images. The Company requires its licensees and distributors
to invest a percentage of their net sales of licensed products and net purchases
of Guess products, respectively, in advertising, promotion and marketing. During
1996, the Company's advertising expenditures, together with amounts spent by its
licensees and distributors (as reported to the Company by such licensees and
distributors), exceeded $50 million.

The Company's in-house Advertising Department is responsible for media
placement of all advertising worldwide, including that of its licensees and
distributors. The Company uses a variety of media, primarily black and white
print and outdoor advertising, in various countries. The Company has focused
advertisement placement in national and international contemporary
fashion/beauty and lifestyle magazines including Vogue, Glamour, Vanity Fair,
Harpers Bazaar, Elle, W and Details. By retaining control over its advertising
programs, the Company is able to maintain the integrity of the Guess brand image
while realizing substantial cost savings compared to the use of outside
agencies.

PUBLIC RELATIONS. The Company's Public Relations Department is responsible
for communicating the Guess image to the public and news media worldwide. The
Public Relations Department also coordinates local publicity and special events
programs for the Company and its licensees, including in-store Guess model and
celebrity appearances and fashion shows.

MARKETING. The Company utilizes various additional marketing tools such as
corporate mailers, videos, newsletters, special events and a toll free Guess
number to assist customers worldwide in finding Guess retail locations. The
Company also produces 200,000 copies of the Guess Journal, a full color,
oversized semi-annual magazine available in retail stores worldwide or through
the Guess mailing list. The Guess Journal features trends in the arts, travel
destinations, candid celebrity profiles, philanthropic events and Guess product
information. Additionally, the Company recently completed a comprehensive market
research effort to better understand its various target consumer segments. Key
findings from this research effort are expected to help the Company develop more
strategically focused programs to effectively and efficiently reach target
consumers while strengthening the equity in the Guess brand name.

The Company further strengthens communications with customers through the
World of Guess, the Company's Internet site on the World Wide Web
(http://www.guess.com). This global medium enables the Company to provide timely
information in an entertaining fashion to consumers on the Company's history,
Guess products and store locations and allows the Company to receive and respond
directly to customer feedback.

SOURCING AND PRODUCT DEVELOPMENT

The Company sources products through numerous suppliers, many of whom have
established relationships with the Company. The Company seeks to achieve the
most efficient means for the timely delivery of its high quality products. The
Company's fabric specialists work with fabric mills in the United States, Europe
and Asia to develop woven and knitted fabrics that enhance the products'
comfort, design and appearance. For a substantial portion of the Company's
apparel products, fabric purchases take place generally four to five months
prior to the corresponding selling season. Apparel production (cut, manufacture
and trim) for fashion products generally begins after the Company has received
customer orders. Delivery of wholesale fashion products to customers occurs
approximately 90 to 120 days after receipt of customers' orders. Delivery of
certain basic products are generally done through the Company's Quick Response
EDI (Electronic Data Interchange) replenishment system which ensures shipment of
such products generally within 48 hours of receipt of customer orders.

The Company engages both domestic and foreign contractors for the production
of its products. During 1996, the Company purchased approximately 63% of its raw
materials, labor and finished goods in the United States, 20% in Hong Kong,
Taiwan, South Korea and other Asian countries and 17% elsewhere. In recent
years, Guess has been increasing its sourcing of fabrics and production outside
the United States. The production and sourcing staffs in Los Angeles and Italy
oversee all aspects of fabric acquisition, apparel manufacturing, quality
control and production, as well as researching and developing new sources of
supply. The Company operates product sourcing and quality control offices in Los
Angeles, Hong Kong and Florence.

The Company does not own any production equipment other than cutting,
silkscreen and embroidery machinery. The Company's apparel products are produced
for the Company by approximately 100 different contractors. None of the
contractors engaged by the Company has accounted for more than 15% of the
Company's total production. The Company has long-term relationships with many of
its contractors, although it does not have long-term written agreements with
them. The Company uses a variety of raw materials, principally consisting of
woven denim, woven cotton and knitted fabrics and yarns. The Company must make
commitments for a significant portion of its fabric purchases well in advance of
sales, although the Company's risk is reduced because a substantial portion of
the Company's products (approximately 40% in 1996) are sewn in basic denim.

QUALITY CONTROL

The Company's quality control program is designed to ensure that products
meet the Company's high quality standards. The Company monitors the quality of
its fabrics prior to the production of garments and inspects prototypes of each
product before production runs are commenced. The Company also performs random
in-line quality control checks during and after production before the garments
leave the contractor. Final random inspections occur when the garments are
received in the Company's distribution centers. The Company believes that its
policy of inspecting its products at its distribution centers and at the
contractors' facilities is important in maintaining the quality and reputation
of its products. The Company also conducts inspections on all licensed products.

WAREHOUSE AND DISTRIBUTION CENTERS

The Company utilizes distribution centers at three strategically located
sites. Two of the distribution centers are operated by the Company and one is
operated by an independent contractor. Distribution of the Company's products in
the United States is centralized in the Los Angeles facility operated by the
Company. The Company also operates a distribution center in Florence to service
Europe (See note 16 "Subsequent Event" to the Company's consolidated financial
statements). Additionally, the Company utilizes a contract warehouse in Hong
Kong that services the Pacific Rim.

In order to ensure that each of its retail customers receives merchandise in
satisfactory condition, substantially all Company products are processed through
one of the Company's distribution centers before delivery to the retail
customer. Each customer is assigned to one of the Company's distribution
centers, depending on the customer's location.

At its distribution center in Los Angeles, the Company has also developed a
fully integrated and automated distribution system. The bar 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.

COMPETITION

The apparel industry is highly competitive and fragmented, and is subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the Guess image. Guess competes with numerous
apparel manufacturers and distributors and several well-known designers which
have recently entered or re-entered the designer denim market. The Company's
retail and factory outlet stores face competition from other retailers,
including some of the Company's major wholesale customers. The Company's
licensed apparel and accessories also compete with a substantial number of
designer and non-designer lines and various other well-known brands. Many of the
Company's competitors have greater financial resources than Guess. Although the
level and nature of competition differ among its product categories, Guess
believes that it competes on the basis of its brand image, quality of design,
workmanship and product assortment.

TRADEMARKS

The Company's owns numerous trademarks including Guess ?, Guess, Guess ? and
Triangle Design, Baby Guess, Guess Kids, Guess U.S.A. and Guess Collection. As
of December 31, 1996, the Company had more than 1,500 U.S. and international
registered trademarks or trademark applications pending with the trademark
offices of the United States and over 137 countries around the world. From time
to time, the Company adopts new trademarks in connection with the marketing of
new product lines. The Company considers its trademarks to have significant
value in the marketing of its products and has acts aggressively to register and
protect its trademarks worldwide.

Like many well-known brands, the Company's trademarks are subject to
infringement. Guess has a staff devoted to the monitoring and aggressive
protection of its trademarks worldwide.

WHOLESALE BACKLOG

The Company maintains a model stock program in its basic denim products
under which Guess can replenish a customer's inventory generally within 48
hours. Guess generally receives orders for its fashion apparel 90 to 120 days
prior to the time the products are delivered to stores. As of March 16, 1997,
the Company had unfilled wholesale orders, consisting primarily of orders for
fashion apparel, of approximately $83.0 million, compared to $64.0 million of
such orders as of March 17, 1996. Guess expects to fill substantially all of
these orders in 1997. The backlog of wholesale orders at any given time is
affected by a number of factors, including seasonality and the scheduling of
manufacturing and shipment of products. Accordingly, a comparison of backlogs of
wholesale orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.

EMPLOYEES

Guess believes that its employees ("associates") are one of its most
valuable resources. As of December 31, 1996, there were approximately 3,000
associates. Total associates include approximately 1,200 in wholesale operations
and approximately 1,800 in retail operations.

Guess is not a party to any labor agreements and none of its associates is
represented by a labor union. The Company considers its relationship with its
associates to be good and has not experienced any interruption of its operations
due to labor disputes. In addition, the Company was among the first in the
apparel industry to implement a program to monitor the compliance of
subcontractors with Federal minimum wage and overtime pay requirements. See
"Item 3. Litigation".

ENVIRONMENTAL MATTERS

The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. The Company has not incurred, and does not expect to
incur, any significant expenditures or liabilities for environmental matters. As
a result, the Company believes that its environmental obligations will not have
a material adverse effect on its financial condition or results of operations.

ITEM 2. PROPERTIES

Certain information concerning Guess's principal facilities, all of which
are leased, is set forth below:

APPROXIMATE
AREA IN
LOCATION USE SQUARE FEET
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1444 South Alameda Street Principal executive and administrative offices, design facilities, 514,000
Los Angeles, California sales offices, distribution and warehouse facilities, production
control, sourcing

1385 Broadway Administrative offices, public relations, showrooms 47,700
119 W. 40th Street
New York, New York

Kowloon, Hong Kong Distribution, showrooms, licensing coordination control 3,000

Milan, Italy Showrooms 1,800

Florence, Italy Administrative offices, design facilities, production control, 17,200
sourcing, retail distribution and warehouse facility

The Company's corporate, wholesale and retail headquarters and its
production, warehousing and distribution facilities are located in Los Angeles,
California and consist of seven adjacent buildings totaling approximately
514,000 square feet. Certain of these facilities are leased from limited
partnerships in which the sole partners are trusts controlled by and for the
benefit of Maurice Marciano, Paul Marciano and Armand Marciano and their
families (the "Principal Stockholders") pursuant to leases that expire in July
2008. The total lease payments to these limited partnerships are $218,000 per
month with aggregate minimum lease commitments to these partnerships at December
31, 1996 totaling approximately $31.1 million. See "Item 13. Certain
Relationships and Related Transactions."

In addition, Guess leases its showrooms, advertising, licensing, sales and
merchandising offices, remote warehousing facility and retail and factory outlet
store locations under non-cancelable operating lease agreements expiring on
various dates through January 2012. These facilities are located principally in
the United States, with aggregate minimum lease commitments, at December 31,
1996, totaling approximately $169.7 million.

The current terms of the Company's store leases, including renewal options,
expire as follows:

YEARS LEASE TERMS EXPIRE NUMBER OF STORES
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1996-1998............................................................................. 5
1999-2001............................................................................. 8
2002-2004............................................................................. 47
2005-2007............................................................................. 54
Thereafter............................................................................ 2

Guess believes that its existing facilities are well maintained, in good
operating condition and are adequate to support its present level of operations.
See "Item 13. Certain Relationships and Related Transactions." See Notes 8 and 9
of Notes to Financial Statements for further information regarding current lease
obligations.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

On August 7, 1996, a class action complaint naming the Company and certain
of its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, styled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Dist. Ct. Case No. 96-5484HLH(JGx)) (the "Federal Case").
The complaint, which sought damages and injunctive relief, alleged, among other
things, that the defendants' practices with respect to the employees of such
independent contractors have violated various federal and state labor laws and
regulations. Certain components of the complaint have been remanded to state
court (LASC Case No. BC 155 165) (the "State Case"), resulting in two litigation
cases. In the Federal Case, plaintiffs claim that the Company's independent
contractors violated the Federal Fair Labor Standards Act ("FLSA") by failing to
pay minimum wage and overtime in accordance with the FLSA. In the State Case,
also a purported class action, plaintiffs assert claims for violation of state
wage and hour laws, wrongful discharge, breach of contract, and certain counts
of negligence arising out of the Company's relationship with its independent
contractors and actions taken by the Company's independent contractors with
respect to the employees of such independent contractors. In the State Action,
plaintiffs allege that the Company breached its agreement with the United States
Department of Labor regarding the monitoring of its independent contractors. In
both actions, plaintiffs contend that the Company is liable for its contractors'
violations because it is a "joint employer" with its independent contractors.
The trial in the Federal Case is currently set for December 1997.

UNITE filed an additional unfair labor practice charge with the NLRB (No.
21-CA-31807). In this charge, the union alleges that the Company has unlawfully
threatend to move its production to Mexico and elsewhere outside the United
States thus unlawfully interfering with the organizing campaign at the Company's
headquarters, and has unlawfully ceased doing business with independent
contractors at which ongoing union organizing campaigns are being conducted.
This charge also alleges that the Company has violated the settlement agreement
in cases No. 21-CA-31524, No. 21-CA-31565 and No. 21-CA-31648 by making such
threats. Charge No. 21-CA-31807 is currently under investigation by the NLRB.
Pending a decision by the NLRB regarding the allegation that the Company
breached the settlement agreement reached in cases No. 21-CA-31524, No.
21-CA-31565 and No. 21-CA-31648, the Company has withheld paying the
approximately $70,000 in back wages agreed to in its above described settlement
with the NLRB and has not posted notice of the settlement agreement. The subject
employees, however, have been reinstated and continue to be employed by the
Company. In a separate action (No. 31-CA-22380), UNITE is seeking fees and costs
for having to defend certain causes of actions filed against UNITE by Guess. The
Company believes that the outcome of one or more of these cases could have a
material adverse effect on the Company's financial condition and results of
operations.

Guess is also a party to various other claims, complaints and other legal
actions that have arisen i n the ordinary course of business from time to time.
The Company believes that the outcome of such pending legal proceedings, in the
aggregate, will not have a material adverse effect on the Company's financial
condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since August 8, 1996, the Company's common stock has been listed on the New
York Stock Exchange under the symbol 'GES'. The following table sets forth, for
the periods indicated, the high and low sales prices of the Company's common
stock, as reported on the New York Stock Exchange Composite Tape.

YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ------------------------------------------------------------------------------------- --------- ---------

Third Quarter (from August 8, 1996).................................................. 18 1/4 13 1/4
Fourth Quarter....................................................................... 14 3/8 11 5/8

YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- --------------------------------------------------------------------------------------- --------- -----

First Quarter through March 21, 1997................................................... 14 5/8 10

On March 21, 1997, the closing sales price per share of the Company's common
stock as reported on the New York Stock Exchange Composite Tape was 10 5/8. On
March 19, 1997, there were 231 holders of record of the Company's common stock.

DIVIDEND POLICY

The Company intends to use its cash flow from operations in 1997 principally
to finance the expansion of its retail stores and operations. Any future
determination as to the payment of dividends will be at the discretion of the
Company's Board of Directors and will depend upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors. The agreement governing the Company's
revolving credit facility and the indenture pursuant to which the Senior
Subordinated Notes were issued restrict the payment of dividends by the Company.

Since its initial public offering on August 8, 1996, the Company has not
declared any dividends on its Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the related notes
included in Item 14 herein, and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)

STATEMENT OF EARNINGS DATA:
Net revenue
Product sales(1)................................... $ 497,874 $ 440,359 $ 507,462 $ 491,444 $ 491,978
Net royalties...................................... 53,288 46,374 40,350 28,780 20,788
Total net revenue................................ 551,162 486,733 547,812 520,224 512,766
Cost of sales........................................ 298,631 262,142 291,989 260,409 274,920
Gross profit(2)...................................... 252,531 224,591 255,823 259,815 237,846
Selling, general and administrative expenses......... 150,877 141,663 138,016 145,351 127,873
Reorganization charge(3)............................. 3,559 -- -- -- --
Earnings from operations......................... 98,095 82,928 117,807 114,464 109,973
Non-operating income (expense)....................... (989) (157) 322 2,552 2,413
Interest, net........................................ (14,539) (15,957) (16,948) (11,735) (1,162)
---------- ---------- ---------- ---------- ----------
Earnings before income taxes..................... 82,567 66,814 101,181 105,281 111,224
Income taxes......................................... 15,826 2,895 3,540 1,810 2,856
---------- ---------- ---------- ---------- ----------
Net earnings..................................... $ 66,741 $ 63,919 $ 97,641 $ 103,471 $ 108,368
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL STATEMENT OF EARNINGS DATA(4)
Earnings before income taxes......................... $ 82,567 $ 66,814 $ 101,181 $ 105,281 $ 111,224
Income taxes......................................... 33,241 26,726 40,472 42,112 44,490
---------- ---------- ---------- ---------- ----------
Net earnings..................................... $ 49,326 $ 40,088 $ 60,709 $ 63,169 $ 66,734
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------

Net earnings per share(5)............................ $ 1.18 $ .96
Weighted average common shares
outstanding(5)..................................... 41,906 41,675

AS OF DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------

BALANCE SHEET DATA:
Working capital...................................... $ 76,821 $ 57,572 $ 83,127 $ 74,094 $ 114,732
Total assets......................................... 239,306 202,635 207,696 181,017 226,824
Notes payable and long-term debt..................... 127,316 123,335 156,495 189,414 8,548
Net stockholders' equity (deficiency)(6)............. 34,928 10,997 373 (50,284) 167,390

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

(1) Includes net revenue from (i) sales to discontinued wholesale accounts that
did not meet the Company's merchandising standards of $.4 million, $3.8
million, $32.9 million, $51.1 million and $42.3 million for 1996, 1995,
1994, 1993 and 1992, respectively, and (ii) wholesale sales of discontinued
product lines of $.3 million, $1.7 million, $5.3 million, $31.7 million and
$82.6 million for 1996, 1995, 1994, 1993 and 1992, respectively.

(2) Certain reclassifications have been made for the periods 1992 through 1995
to conform to the 1996 presentation.

(3) In connection with the IPO, the Company recorded, during the second quarter
of 1996, a reorganization charge for certain non recurring charges related
to the write down of operating assets to be disposed of aggregating $3.6
million ($2.1 million on an after tax basis) relating to (i) the disposal of
two remote warehouse and production facilities, resulting in a net book loss
of $2.4 million and (ii) a net book loss of $1.2 million related to the
disposal of one of the Company's aircraft.

(4) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than an S corporation. Prior to the
Company's Initial Public Offering ("IPO") in August 1996, the Company had
elected to be taxed as an S corporation for Federal Income tax purposes. In
certain states, the Company was taxed as an S corporation; in other states,
the Company was taxed as a C corporation. Effective January 1, 1991, the
Company elected to be treated as an S corporation for California tax
purposes. As a result of the Company's IPO, all S corporation elections were
terminated.

(5) 1995 reflects 32,681,819 shares of Common Stock outstanding prior to the IPO
and the assumed issuance of 8,993,000 shares of Common Stock at the initial
public offering price ($18.00 per share) to generate sufficient cash to pay
a distribution of retained earnings to its then existing shareholders as
part of the termination of its S corporation status in an amount equal to
retained earnings as of December 31, 1995.

1996 reflects (i) 32,681,819 shares of Common Stock outstanding prior to the
IPO and the assumed issuance of 8,730,000 shares of Common Stock at the
initial public offering price ($18.00 per share) to generate sufficient cash
to pay a distribution of retained earnings to its then existing shareholders
as part of the termination of its S corporation status in an amount equal to
retained earnings as of the IPO date and (ii) an average of 42,682,000
shares outstanding subsequent to the IPO, representing the actual shares
outstanding.

(6) Stockholders' deficiency in 1993 resulted from the Company's repurchase of
certain of the common stock owned by a former stockholder for $203.5
million.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

GENERAL

PRO FORMA RESULTS OF OPERATIONS

The following table sets forth pro forma operating results for the periods
indicated. Pro forma operating results reflect adjustments to historical
operating results for (i) the elimination of salaries and bonuses paid to
Maurice, Paul and Armand Marciano ("the Principal Executive Officers") in excess
of an aggregate of $4.9 million per year (the estimated aggregate salaries and
bonuses to be paid to the Principal Executive Officers under their respective
employment agreements which became effective concurrently with the consummation
of the IPO), resulting in a decrease in compensation expense of $3.5 million,
$2.4 million and $3.3 million for 1996, 1995 and 1994, respectively, (ii) the
decrease in depreciation and operating costs of $1.2 million, $2.6 million and
$3.0 million for 1996, 1995 and 1994, respectively, associated with an aircraft
owned by the Company, which aircraft was sold in contemplation of the IPO, (iii)
the elimination of the minority interest in Guess Europe, B.V. ("GEBV") and
Guess Italia, S.r.1. ("Guess Italia") through the merger of Marciano
International with and into the Company in connection with the IPO, resulting in
the inclusion in net earnings of $323,000, $274,000 and $280,000 for 1996, 1995

and 1994, respectively, which amounts had previously been recorded as minority
interest and (iv) adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation
throughout the periods presented.

YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)

Net revenue:
Product sales.................................................... $ 497,874 $ 440,359 $ 507,462
Net royalties.................................................... 53,288 46,374 40,350
---------- ---------- ----------
Total net revenue.............................................. 551,162 486,733 547,812
Cost of sales...................................................... 298,631 262,142 291,989
---------- ---------- ----------
Gross profit....................................................... 252,531 224,591 255,823
Selling, general and administrative expenses....................... 146,186 136,606 131,711
---------- ---------- ----------
Earnings from operations before reorganization charge............ 106,345 87,985 124,112
Reorganization charge.............................................. 3,559 -- --
---------- ---------- ----------
Earnings from operations after reorganization charge............. 102,786 87,985 124,112
Interest expense, net.............................................. (14,539) (15,957) (16,948)
Non-operating income (expense), net................................ (666) 117 42
---------- ---------- ----------
Earnings before income taxes..................................... 87,581 72,145 107,206
Pro forma income taxes............................................. 35,257 28,858 42,882
Pro forma net earnings........................................... $ 52,324 $ 43,287 $ 64,324
---------- ---------- ----------
---------- ---------- ----------

The following table sets forth pro forma operating results as a percentage
of net revenue for the periods indicated.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Net revenue:
Product sales................................................................ 90.3% 90.5% 92.6%
Net royalties................................................................ 9.7 9.5 7.4
--------- --------- ---------
Total net revenue............................................................ 100.0 100.0 100.0
Cost of sales.................................................................. 54.2 53.9 53.3
--------- --------- ---------
Gross profit................................................................... 45.8 46.1 46.7
Selling, general and administrative expenses................................... 26.5 28.0 24.0
--------- --------- ---------
Earnings from operations before reorganization charge........................ 19.3 18.1 22.7
Reorganization charge.......................................................... 0.6 -- --
--------- --------- ---------
Earnings from operations after reorganization charge......................... 18.6 18.1 22.7
Interest expense, net.......................................................... (2.6) (3.3) (3.1)
Non-operating income, net...................................................... (0.1) 0.0 0.0
--------- --------- ---------
Earnings before income taxes................................................. 15.9 14.8 19.6
Pro forma income taxes......................................................... 6.4 5.9 7.9
--------- --------- ---------
Pro forma net earnings..................................................... 9.5% 8.9% 11.7%
--------- --------- ---------
--------- --------- ---------

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.

NET REVENUE. Net revenue increased $64.5 million or 13.2% to $551.2 million
in the year ended December 31, 1996 from $486.7 million in the year ended
December 31, 1995. Net revenue from wholesale operations increased $17.2 million
or 6.3% to $288.1 million from $270.9 million, due principally to an

increase in sales outside the United States of $31.5 million, partially offset
by a $14.3 million decline in domestic wholesale sales. The Company's domestic
net sales declined primarily as a result of increased competition in branded
basic denim apparel. Net revenue from retail operations increased $40.4 million
or 23.8% to $209.8 million from $169.4 million, primarily attributable to an
increase of 9.3% in comparable store net revenue and from volume generated by
new store openings. The increase in comparable store net revenue was primarily
attributable to a more favorable merchandise mix and the implementation of
improved inventory management systems. Net royalties increased 14.9% in the year
ended December 31, 1996 to $53.3 million from $46.4 million in the year ended
December 31, 1995. Net revenue from international operations comprised 12.1% and
6.9% of the Company's net revenue during 1996 and 1995, respectively.

GROSS PROFIT. Gross profit increased 12.4% to $252.5 million in the year
ended December 31, 1996 from $224.6 million in the year ended December 31, 1995.
The increase in gross profit resulted from increased net royalties, as well as
increased net revenue from product sales. Gross profit from product sales
increased 11.8% to $199.2 million in the year ended December 31, 1996 from
$178.2 million in the year ended December 31, 1995. Gross profit as a percentage
of net revenue decreased to 45.8% in the year ended December 31, 1996 as
compared to 46.1% in the year ended December 31, 1995. Gross profit from product
sales as a percentage of net revenue from product sales decreased to 40.0% in
the year ended December 31, 1996 as compared to 40.5% in the year ended December
31, 1995, which included a provision of $3.9 million for store closing expenses.
Without this provision, gross profit from product sales as a percentage of net
revenue from product sales would have decreased to 40.0% from 41.4%. The decline
was primarily the result of the growth in net revenue derived from international
operations which generally carry lower gross profit margins, increased occupancy
costs associated with stores opened in 1995 and lower gross margin rates
experienced in the Retail Division resulting from an increase of employee sales
at lower gross margins.

SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses
increased 6.5% in the year ended December 31, 1996 to $150.9 million, or 27.4%
of net revenue, from $141.7 million, or 29.1% of net revenue, in the year ended
December 31, 1995. On a pro forma basis, SG&A expenses would have increased 7.0%
in the year ended December 31, 1996 to $146.2 million, or 26.5% of net revenue,
from $136.6 million, or 28.1% of net revenue, in the year ended December 31,
1995. The increase in SG&A expense was primarily the result of increased store
expenses related to the expansion of the retail operation, increased
administrative expenses related to the expansion of the international operations
and a non-recurring executive bonus of $1.0 million. The decrease in SG&A
expenses as a percentage of net revenue was the result of fixed expenses being
spread over a larger revenue base in the 1996 period.

EARNINGS FROM OPERATIONS BEFORE REORGANIZATION CHARGE. Earnings from
operations, before the Reorganization Charge described below, increased 22.6% to
$101.7 million, or 18.4% of net revenue in the year ended December 31, 1996,
from $82.9 million, or 17.0% of net revenue, in the year ended December 31,
1995. On a pro forma basis, earnings from operations before the Reorganization
Charge would have increased 20.9% in the year ended December 31, 1996 to $106.3
million, or 19.3% of net revenue, from $88.0 million, or 18.1% of net revenue,
in the year ended December 31, 1995. This increase resulted primarily from the
increase in net revenue.

REORGANIZATION CHARGE. In anticipation of the IPO, in the second quarter of
1996, the Company recorded reserves for certain non-recurring charges related to
the write-downs of operating assets to be disposed of $3.6 million for: (i)
disposal of two remote warehouse and production facilities resulting in a net
book loss of $2.4 million, and (ii) the net book loss of $1.2 million incurred
by the Company in connection with the sale of one of its aircraft. The above
charges are based upon the book value of the related assets as of June 30, 1996.
The Company intends to relocate the warehouse and production operations located
at the remote facilities to its central facility in Los Angeles in an effort to
centralize its operations and improve operating efficiencies.

EARNINGS FROM OPERATIONS AFTER REORGANIZATION CHARGE. Earnings from
operations, including the Reorganization Charge described above, increased 18.3%
to $98.1 million, or 17.8% of net revenue in the year ended December 31, 1996,
from $82.9 million, or 17.0% of net revenue, in the year ended December 31,
1995. On a pro forma basis, earnings from operations including the
Reorganization Charge would have increased 16.8% in the year ended December 31,
1996 to $102.8 million, or 18.6% of net revenue, from $88.0 million, or 18.1% of
net revenue, in the year ended December 31, 1995. This increase resulted
primarily from the increase in net revenue.

INTEREST EXPENSE, NET. Net interest expense decreased 8.9% to $14.5 million
in the year ended December 31, 1996 from $16.0 million in the year ended
December 31, 1995. This decrease resulted primarily from lower outstanding debt,
as well as lower interest rates. For the year ended December 31, 1996, the
average debt balance was $144.4 million, with an average effective interest rate
of 9.4%. For the year ended December 31, 1995, the average debt balance was
$156.6 million, with an average effective interest rate of 9.6%.

INCOME TAXES. Prior to the IPO, for Federal and certain state income tax
purposes, the Company elected to be treated as an S corporation and therefore
generally was not subject to income tax on its earnings. The Company's income
taxes, which represent state income taxes and foreign taxes, plus Federal taxes
after the IPO, were $15.8 million and $2.9 million in the years ended December
31, 1996 and December 31, 1995, respectively. The Company's S corporation status
was terminated in connection with the IPO and, therefore, the Company is now
fully subject to Federal, state and foreign income taxes. On a pro forma basis,
income taxes would have been $35.3 million and $28.9 million in the years ended
December 31, 1996 and December 31, 1995, respectively.

NET EARNINGS. Net earnings increased to $66.7 million in the year ended
December 31, 1996, from $63.9 million in the year ended December 31, 1995. On a
pro forma basis, net earnings would have increased to $52.3 million in the year
ended December 31, 1996, from $43.3 million in the year ended December 31, 1995.
Excluding the Reorganization Charge, pro forma net earnings would have increased
by 25.8% to $54.4 million, or 9.9% of net revenue, in the year ended December
31, 1996 from $43.3 million, or 8.9% of net revenue, in the year ended December
31, 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

NET REVENUE. Net revenue decreased $61.1 million or 11.1% to $486.7 million
in 1995 from $547.8 million in 1994. Net revenue from wholesale operations
decreased $87.2 million to $270.9 million from $358.1 million, including a $29.1
million decline due to closing certain accounts, and a $3.6 million decline due
to the licensing out of certain apparel lines. Excluding these items, net
revenue from wholesale operations would have decreased $54.5 million. The
principal reasons for the decrease were a $49.3 million decline in domestic
sales of men's and women's apparel and a $15.5 million decrease in off-price
revenue (which represents net revenue from the liquidation of discontinued
merchandise which carries lower margins), partially offset by increased sales
outside the United States to international distributors of $10.3 million. The
Company's domestic net sales declined during this period as a result of
increased competition in branded denim apparel, the sluggish retail environment,
the consolidation taking place among department store retailers and financial
difficulties experienced by certain of the Company's wholesale customers. Net
revenue from retail operations increased $20.1 million to $169.4 million from
$149.3 million. This net increase reflects a 39.6% increase in Guess retail
store net revenue primarily resulting from new store openings, somewhat offset
by a 7.4% decline in comparable store net revenue, primarily attributable to the
continued sluggish market conditions affecting the factory outlet stores. Net
royalties increased 14.9% in 1995 to $46.4 million from $40.4 million in 1994.
This increase was attributable to the continued growth in existing licensees'
businesses as well as the addition of new licensees. Revenue from international
operations (including net royalties from international licensees) comprised 6.9%
and 3.7% of the Company's net revenue during 1995 and 1994, respectively.

GROSS PROFIT. Gross profit decreased 12.2% to $224.6 million in 1995 from
$255.8 million in 1994. Gross profit as a percentage of net revenue decreased to
46.1% in 1995 from 46.7% in 1994. The decrease in gross profit was attributable
to a $67.1 million decrease in net revenue from product sales, partially offset
by a $6.0 million increase in net royalties. Gross profit from product sales
decreased 17.3% to $178.2 million in 1995 from $215.5 million in 1994. During
the second half of 1995, the Company recorded a provision of $3.9 million for
anticipated store closing expenses. Without the $3.9 million store closure
provision, gross margin would have been 46.9% of net revenue in 1995 as compared
with 46.7% of net revenue in 1994, respectively.

SG&A EXPENSES. SG&A expenses increased 2.6% to $141.7 million, or 29.1% of
net revenue, in 1995, from $138.0 million, or 25.2% of net revenue, in 1994. On
a pro forma basis, SG&A expenses would have increased 3.7% in 1995 to $136.6
million, or 28.0% of net revenue, from $131.7 million, or 24.0% of net revenue,
in 1994. This increase was primarily the result of the continued expansion of
the retail division, an increase in advertising expenses and increased expenses
relating to the installation and remodeling of twice as many shop-in-shops as
were installed or remodeled in 1994. These increases were partially offset by
reduced expenses resulting from cost containment efforts. The increase in SG&A
expenses as a percentage of net revenue was the result of the above mentioned
advertising and shop-in-shop expenditures and fixed expenses being spread over a
smaller revenue base during the 1995 period.

EARNINGS FROM OPERATIONS. Earnings from operations decreased 29.6% to $82.9
million, or 17.0% of net revenue in 1995, from $117.8 million, or 21.5% of net
revenue, in 1994. On a pro forma basis, earnings from operations would have
decreased 29.1% in 1995 to $88.0 million, or 18.1% of net revenue, from $124.1
million, or 22.7% of net revenue, in 1994. This decline primarily resulted from
a decrease in net revenue, which was partially offset by higher net royalty
income.

INTEREST EXPENSE, NET. Net interest expense decreased 5.8% to $16.0 million
for 1995 from $16.9 million in 1994. This decrease resulted from lower debt in
1995 which more than offset the effect of higher interest rates. For 1995, the
average debt balance was $156.6 million, with an average effective interest rate
of 9.6%. For 1994, the average debt balance was $182.9 million, with an average
effective interest rate of 8.6%.

INCOME TAXES. Income taxes were $2.9 million and $3.5 million in 1995 and
1994, respectively. On a pro forma basis, income taxes would have been $28.9
million and $42.9 million in 1995 and 1994, respectively.

NET EARNINGS. Net earnings decreased 34.5% to $63.9 million, or 13.1% of
net revenue, in 1995, from $97.6 million, or 17.8% of net revenue, in 1994. On a
pro forma basis, net earnings would have decreased 32.7% to $43.3 million, or
8.9% of net revenue, in 1995, from $64.3 million, or 11.7% of net revenue, in
1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has relied primarily upon internally generated funds, trade
credit and bank borrowings to finance its operations and expansion and to make
periodic distributions to its stockholders. Since the Company has terminated its
S corporation status, it no longer intends to make periodic distributions to its
stockholders. As of December 31, 1996 the Company had working capital of $76.8
million, compared to $57.6 million at December 31, 1995. The $19.2 million
increase in working capital primarily resulted from a $9.9 million increase in
net receivables, a $6.6 million increase in inventories and a $6.6 million
increase in current deferred tax assets, partially offset by a $5.2 million
increase in payables and accrued liabilities. The increase in inventory and
receivables relates to new product lines being developed and stronger sales
recorded in the fourth quarter of 1996 compared to the prior year.

The Company's Credit Agreement provides for a $100.0 million revolving
credit facility which includes a $20.0 million sublimit for letters of credit.
As of December 31, 1996, the Company had $16.0 million in

outstanding borrowings under the revolving credit facility and outstanding
letters of credit of $8.6 million. As of December 31, 1996, the Company had
$75.4 million available for future borrowings under such facility. The revolving
credit facility will expire in December 1999. In addition to the revolving
credit facility, the Company also has a $25.0 million letter of credit facility.
As of December 31, 1996, the Company had $9.6 million outstanding under this
facility.

Capital expenditures, net of lease incentives granted, totaled $20.2 million
for 1996 and $21.7 million for 1995. The Company estimates that its capital
expenditures for 1997 will be approximately $38.0 million, primarily for the
expansion of its retail stores and operations.

The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1997, including retail and international expansion plans,
and interest payments on the Company's Senior Subordinated Notes, primarily with
cash flow from operations, supplemented, if necessary, by borrowings under its
revolving Credit Agreement.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

Important factors that could cause actual results to differ materially from
the registrant's forward-looking statements, as well as affect the registrant's
ability to achieve its financial and other goals, include, but are not limited
to, the following:

The Company's inability to identify and respond appropriately to changing
consumer demands and fashion trends could adversely affect consumer
acceptance of Guess products.

A decision by the controlling owner of a group of department stores or any
other significant customer to decrease the amount purchased from the Company
or to cease carrying Guess products could have a material adverse effect on
the Company's financial condition and results of operations.

The inability of the Company to control the quality, focus, image or
distribution of its licensed products could impact consumer receptivity to
the Company's products generally and, therefore, adversely affect the
Company's financial condition and results of operations.

The failure of the Company to continue to enhance operating control systems
or unexpected difficulties encountered during expansion could adversely
affect the Company's financial condition and results of operations.

Factors beyond the Company's control may affect the Company's ability to
expand its network of retail stores, including general economic and business
conditions affecting consumer spending.

A general failure by the Company to maintain and control its existing
distribution and licensing arrangements or to procure additional
distribution and licensing relationships could adversely affect the
Company's growth strategy, which could adversely affect the Company's
financial condition and results of operations.

The extended loss of the services of one or more of the Principal Executive
Officers could have a material adverse effect on the Company's operations.

The Company's operations may be affected adversely by political instability
resulting in the disruption of trade with the countries in which the
Company's contractors, suppliers or customers are located, the imposition of
additional regulations relating to imports, the imposition of additional
duties, taxes and other charges on imports, significant fluctuations in the
value of the dollar against foreign currencies or restrictions on the
transfer of funds. Also, a substantial increase in customs duties could have
an adverse effect on the Company's financial condition or results of
operations.

The inability of a manufacturer to ship the Company's products in a timely
manner or to meet the Company's quality standards could adversely affect the
Company's ability to deliver products to its customers in a timely manner.

No assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of Guess. In addition,
the laws of certain foreign countries do not protect proprietary rights to
the same extent as do the laws of the United States.

SEASONALITY

The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. The Company's wholesale
operations generally experience stronger performance in the first and third
quarters, while retail operations are generally stronger in the third and fourth
quarters. As the timing of the shipment of products may vary from year to year,
the result for any particular quarter may not be indicative of results for the
full year. The Company has not had significant overhead and other costs
generally associated with large seasonal variations.

INFLATION

The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net revenue or profitability.

EXCHANGE RATES

The Company receives United States dollars for substantially all of its
product sales and its licensing revenues. Inventory purchases from offshore
contract manufacturers are primarily denominated in United States dollars;
however, purchase prices for the Company's products may be impacted by
fluctuations in the exchange rate between the United States dollar and the local
currencies of the contract manufacturers, which may have the effect of
increasing the Company's cost of goods in the future. In addition, royalties
received from the Company's international licensees are subject to foreign
currency translation fluctations as a result of the net sales of the licensee
being denominated in local currency and royalties being paid to the Company in
United States dollars. During the last three fiscal years, exchange rate
fluctuations have not had a material impact on the Company's inventory costs.
The Company currently does not engage in hedging activities with respect to such
exchange rate risk.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," in
March 1995 which is effective for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes accounting standards for the impairment of
Long-Lived assets, certain identifiable intangibles and goodwill related to
these assets and certain identifiable intangibles to be disposed of. The Company
adopted the provisions of SFAS No. 121 effective January 1, 1996 and has,
accordingly, recorded a write-down aggregating $2.4 million in the second
quarter of 1996

related to certain operating assets to be disposed of and is included as a
component of the $3.6 million Reorganization Charge in the Company's statement
of earnings. The Company does not anticipate that SFAS No. 121 will have a
material impact on its financial statements. See note 15 to the Company's
consolidated financial statements.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board Pronouncement 25 if certain
pro forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. Effective January 1, 1996, the Company adopted the
provisions for pro forma disclosure requirements of SFAS 123 and anticipates
that SFAS 123 will not have a material impact upon its financial statements. See
note 13 to the Company's consolidated financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is incorporated herein by reference to
the Financial Statements
and Supplementary Data listed in Item 14 of Part IV of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to Directors may be found under the caption
"Directors and Executive Officers" on pages 6 and 7 of the Company's Proxy
Statement dated March 31, 1997, for the 1997 Annual Meeting of Shareholders to
be held May 28, 1997 (the "Proxy Statement"). Such information is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION

The information in the Proxy Statement set forth under the caption
"Executive Compensation" on page 8 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under the caption "Security Ownership and Certain
Beneficial Owners and Management" on page 3 of the Proxy Statement is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Relationships and
Related Transactions" on page 4 of the Proxy Statement is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K

(a) Documents Filed with Report

(1) Consolidated Financial Statements

The financial statements listed on the accompanying Index to Consolidated
Financial Statements and Financial Statement Schedule are filed as part
of this report.

(2) Consolidated Financial Statement Schedule

The financial statement schedule listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.

(3) Exhibits

The exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the last quarter of
the fiscal year ended December 31, 1996.

GUESS ?, INC.

FORM 10-K

ITEMS 8, 14(A) AND 14 (D)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

1 Consolidated Financial Statements

Independent Auditors' Report........................................................ 22

Consolidated Balance Sheets at December 31, 1996 and 1995........................... 23

Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994.................................................. 24

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.................................................. 25

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.................................................. 26

Notes to Consolidated Financial Statements.......................................... 27

2 Consolidated Financial Statement Schedule

II Valuation and Qualifying Accounts................................................ 41

GUESS ?, INC.

FORM 10-K

ITEMS 8, 14(A) AND 14 (D)

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Guess ?, Inc.:

We have audited the accompanying consolidated financial statements of Guess
?, Inc. and Subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule, as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guess ?,
Inc. and Subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG Peat Marwick LLP

Los Angeles, California
February 24, 1997

GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)

1996 1995
---------- ----------

ASSETS
Current assets:
Cash................................................................................... $ 8,800 $ 6,417
Short-term investments................................................................. 4,401 0
Receivables:
Trade receivables, net of reserves aggregating $9,737 and $10,849 at December 31,
1996 and 1995, respectively........................................................ 27,107 23,033
Royalties............................................................................ 15,613 9,975
Other................................................................................ 4,042 3,893
---------- ----------
46,762 36,901
Inventories (note 3)................................................................. 79,489 72,889
Prepaid expenses..................................................................... 5,249 5,557
Deferred tax assets (note 6)......................................................... 6,614 0
---------- ----------
Total current assets............................................................. 151,315 121,764

Property and equipment, at cost, net of accumulated depreciation and amortization (note
4)..................................................................................... 64,302 68,199
Long-term investments (note 2)........................................................... 3,106 3,394
Other assets, at cost, net of accumulated amortization of $421 and $1,800 at December 31,
1996 and 1995, respectively (note 14).................................................. 20,583 9,278
---------- ----------
$ 239,306 $ 202,635
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and long-term debt (note 5)...................... $ 6,099 $ 4,123
Accounts payable....................................................................... 39,285 40,701
Accrued expenses....................................................................... 24,935 18,332
Income taxes payable (note 6).......................................................... 4,175 1,036
---------- ----------
Total current liabilities........................................................ 74,494 64,192

Notes payable and long-term debt, net of current installments (note 5)................... 121,217 119,212
Other liabilities........................................................................ 8,667 8,234
204,378 191,638
Stockholders' equity (note 7):
Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and
outstanding.......................................................................... -- --
Common stock, $.01 par value. Authorized 150,000,000 shares; issued 62,712,611 and
52,712,611 shares at 1996 and 1995, outstanding 42,681,819 and 32,681,819 shares
actual, respectively, 20,030,792 shares held in Treasury............................. 135 35
Paid-in capital........................................................................ 155,591 181
Retained earnings...................................................................... 29,921 161,567
Foreign currency translation adjustment................................................ 57 (10)
Treasury stock, 20,030,792 shares repurchased.......................................... (150,776) (150,776)
---------- ----------
Net stockholders' equity............................................................. 34,928 10,997
---------- ----------
$ 239,306 $ 202,635
---------- ----------
---------- ----------
Commitments and contingencies (note 9)

See accompanying notes to consolidated financial statements

GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1996 1995 1994
---------- ---------- ----------

Net revenue
Product sales.............................................................. $ 497,874 $ 440,359 $ 507,462
Net royalties.............................................................. 53,288 46,374 40,350
---------- ---------- ----------
551,162 486,733 547,812
Cost of sales................................................................ 298,631 262,142 291,989
---------- ---------- ----------
Gross profit................................................................. 252,531 224,591 255,823
Selling, general and administrative expenses................................. 150,877 141,663 138,016
Reorganization charge (note 15).............................................. 3,559 0 0
---------- ---------- ----------
Earnings from operations................................................... 98,095 82,928 117,807
---------- ---------- ----------
Non-operating income (expense):
Interest, net.............................................................. (14,539) (15,957) (16,948)
Other, net................................................................. (989) (157) 322
---------- ---------- ----------
(15,528) (16,114) (16,626)
Earnings before income taxes................................................. 82,567 66,814 101,181
Income taxes (note 6)........................................................ 15,826 2,895 3,540
---------- ---------- ----------
Net earnings................................................................. $ 66,741 $ 63,919 $ 97,641
---------- ---------- ----------
---------- ---------- ----------

SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (NOTE 1):
- -----------------------------------------------------------------------------
Earnings before taxes, as presented.......................................... $ 82,567 $ 66,814 $ 101,181
Pro forma provision for
income taxes (unaudited)(note 6)............................................ 33,241 26,726 40,472
---------- ---------- ----------
Pro forma net earnings (unaudited)........................................... $ 49,326 $ 40,088 $ 60,709
---------- ---------- ----------
---------- ---------- ----------
Pro forma earnings per share................................................. $ 1.18 $ 0.96
Weighted number of common shares outstanding................................. 41,906 41,675

See accompanying notes to consolidated financial statements

GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

FOREIGN
COMMON PAID-IN RETAINED CURRENCY TREASURY
STOCK CAPITAL EARNINGS TRANS. ADJ. STOCK TOTAL
----------- ---------- ----------- ----------- ----------- -----------

Balance at December 31, 1993............ $ 35 $ 181 $ 100,307 $ (31) $ (150,776) $ (50,284)
Net earnings.......................... 0 0 97,641 0 0 97,641
Stockholder distributions............. 0 0 (47,000) 0 0 (47,000)
Foreign currency translation
adjustment.......................... 0 0 0 16 0 16
----- ---------- ----------- --- ----------- -----------
Balance at December 31, 1994............ 35 181 150,948 (15) (150,776) 373
Net earnings.......................... 0 0 63,919 0 0 63,919
Stockholder distributions............. 0 0 (53,300) 0 0 (53,300)
Foreign currency translation
adjustment.......................... 0 0 0 5 0 5
----- ---------- ----------- --- ----------- -----------
Balance at December 31, 1995............ 35 181 161,567 (10) (150,776) 10,997
Net earnings.......................... 0 0 66,741 0 0 66,741
Stockholder distributions............. 0 0 (224,600) 0 0 (224,600)
Issuance of common stock.............. 100 169,200 0 0 0 169,300
Establishment of deferred tax
assets.............................. 0 0 10,961 0 0 0
Reclassification of stockholder
distributions in excess of retained
earnings............................ 0 (15,252) 15,252 0 0 10,961
Net equity adjustments resulting from
Marciano International merger....... 0 1,462 0 0 0 1,462
Foreign currency
translation adjustment.............. 0 0 0 67 0 67
----- ---------- ----------- --- ----------- -----------
Balance at December 31, 1996............ $ 135 $ 155,591 $ 29,921 $ 57 $ (150,776) $ 34,928
----- ---------- ----------- --- ----------- -----------
----- ---------- ----------- --- ----------- -----------

See accompanying notes to consolidated financial statements

GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

1996 1995 1994
---------- ---------- ----------

Cash flows from operating activities
Net earnings................................................................ $ 66,741 $ 63,919 $ 97,641
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................... 16,233 14,277 12,070
Amortization of deferred charges.......................................... 804 1,373 515
Loss on disposition of property and equipment............................. 2,235 814 726
Foreign currency translation adjustment................................... 42 (14) (5)
Contributions from minority interest...................................... 336 22 24
Equity method losses (earnings)........................................... 666 (117) (72)
(Increase) decrease in:
Receivables............................................................. (8,811) 1,599 (14,628)
Inventories............................................................. (6,529) 10,884 (3,353)
Prepaids and other current assets....................................... (1,949) (720) (1,516)
Other assets............................................................ (411) 1,858 180
Increase (decrease) in:
Accounts payable........................................................ (1,447) 10,861 8,043
Accrued expenses........................................................ 6,058 3,658 (1,337)
Income taxes payable.................................................... 2,867 22 795
---------- ---------- ----------
Net cash provided by operating activities............................. 76,835 108,436 99,083

Cash flows from investing activities
Net (purchase of) proceeds from the sale of short-term investments.......... (4,401) 0 5,000
Purchases of property and equipment......................................... (21,110) (23,757) (19,779)
Proceeds from the disposition of property and equipment..................... 6,640 192 172
Lease incentives granted.................................................... 886 2,015 1,503
Acquisition of license...................................................... (5,000) 0 0
Purchase of long-term investments........................................... (173) (23) (3,136)
---------- ---------- ----------
Net cash used by investing activities................................. (23,158) (21,573) (16,240)

Cash flows from financing activities
Proceeds from notes payable and long-term debt.............................. 176,289 131,193 222,040
Repayment of notes payable and long-term debt............................... (174,308) (164,353) (254,959)
Proceeds from issuance of common stock...................................... 115,300 0 0
Repayments of S distribution notes.......................................... (129,000) 0 0
Distributions to stockholders............................................... (39,600) (53,300) (47,000)
---------- ---------- ----------
Net cash used by financing activities................................. (51,319) (86,460) (79,919)

Effect of exchange rates on cash.............................................. 25 20 20
Net increase in cash.......................................................... 2,383 423 2,944
Cash at beginning of period................................................... 6,417 5,994 3,050
---------- ---------- ----------
Cash at end of period......................................................... $ 8,800 $ 6,417 $ 5,994
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures
Cash paid during the period for:
Interest.................................................................. $ 14,246 $ 15,396 $ 16,380
Income taxes.............................................................. 14,703 1,925 2,879

During 1996, in connection with the S corporation distribution, the Company
issued 3,000,000 shares of Common Stock to the Principal Stockholders
aggregating $54.0 million.

See accompanying notes to financial statements

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Guess ?, Inc. (the "Company" or "Guess") designs, develops, and markets
quality contemporary jeans and other casual wear for men and women. The Company
distributes its products through major department stores, specialty retailers,
foreign distributors and its network of Company-owned and-operated retail and
factory outlet stores.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Guess ?, Inc.
and its wholly-owned foreign subsidiary, Guess Europe, B.V., a Netherlands
corporation ("GEBV"). GEBV holds two wholly-owned subsidiaries, Ranche, Limited,
a Hong Kong corporation ("Ranche") and Guess Italia, S.r.l., an Italian
corporation ("Guess Italia"). Accordingly, all references herein to "Guess ?,
Inc." include the consolidated results of the Company and its subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market.

TRADE AND ROYALTY RECEIVABLES

The Company extends trade credit to its customers in the ordinary course of
business. None of the receivables due from customers at December 31, 1996 and
1995 involved factored accounts or other contingencies relating to third-party
risk, except to the extent that the Company has chosen to insure certain
accounts from risk of loss under a catastrophic loss policy.

REVENUE RECOGNITION

The Company recognizes revenue from the sale of merchandise upon shipment.
Royalty income is based upon a percentage, as defined in the underlying
agreement, of the licensees' net revenue. The Company accrues for estimated
sales returns and allowances in the period in which the related revenue is
recognized.

SIGNIFICANT CUSTOMER

An individual customer aggregating in excess of 10% of net revenue for the
years ended December 31, 1995 and 1994 is summarized as follows:

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Customer A....................................................... 8.6% 11.0% 10.3%

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION

Depreciation and amortization of property and equipment are provided using
the straight-line method over the following useful lives:

18 to 31
Building and building improvements................................... years
Land improvements.................................................... 5 years
Machinery and equipment.............................................. 3 to 5 years
Corporate aircraft................................................... 5 to 10 years
Corporate vehicles................................................... 3 years

Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Construction in progress is not
depreciated until the related asset is completed.

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight line basis over the expected
periods to be benefited, generally 15 years.

FOREIGN CURRENCY TRANSLATION

In accordance with the Financial Accounting Standards Board (the "FASB")
Statement No. 52, balance sheet accounts of the Company's foreign operations are
translated from foreign currencies into U.S. dollars at year end or historical
rates while income and expenses are translated at the weighted average exchange
rates for the year. The related translation adjustments are reflected as a
foreign currency translation adjustment in the consolidated balance sheet.

INCOME TAXES

Prior to the Company's Initial Public Offering ("IPO")in August 1996, the
Company had elected to be taxed as an S corporation for Federal income tax
purposes. In certain states, the Company was taxed as an S corporation; in other
states, the Company was taxed as a C corporation. Effective January 1, 1991, the
Company elected to be treated as an S corporation for California tax purposes.
As a result of the Company's IPO, all S corporation elections were terminated.

In February, 1992, the FASB issued Statement No. 109, "Accounting for Income
Taxes." One of the provisions of Statement No. 109 enables companies to record
deferred tax assets for the future benefit to be derived from certain deductible
temporary differences. The Company has adopted the provisions of Statement No.
109 effective January 1, 1993; however, as differences giving rise to deferred
tax assets were immaterial due to the Company's S corporation election, the
Company did not record any deferred tax assets at December 31, 1994 or 1995. As
a result of the Company's IPO and subsequent S corporation election termination,
differences in the book and tax bases of certain assets and liabilities have
resulted in the recording of deferred tax assets aggregating and $13.2 million
at December 31, 1996.

RECENT ACCOUNTING PRONOUNCEMENTS

The FASB issued statements of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived assets and for Long-Lived
Assets to be Disposed of," in March 1995 which is effective for fiscal years
beginning after December 15, 1995. SFAS 121 establishes accounting

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to these assets and certain identifiable
intangibles to be disposed of. The Company adopted the provisions of SFAS 121 in
1996 and recorded a write-down of $2.4 million pursuant to certain buildings
being disposed of. See note 15.

In October 1995, the FASB issued statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board Pronouncement 25 ("APB
Opinion No. 25") if certain pro forma disclosures are made. SFAS 123 is
effective for years beginning after December 15, 1995. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS 123.

PRO FORMA NET EARNINGS

Pro forma net earnings represent the results of operations adjusted to
reflect a provision for income taxes on historical earnings before income taxes,
which gives effect to the change in the Company's income tax status to a C
corporation as a result of the public sale of its common stock. Following the
Company's IPO, and the subsequent termination of its S corporation status on
August 12, 1996, the Company recorded an increase to additional paid in capital
resulting from the establishment of net deferred tax assets aggregating $11.0
million, representing the difference between financial reporting and tax bases
of assets and liabilities, using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The principal difference
between the pro forma income tax rate and the Federal statutory rate of 35%
relates primarily to state income taxes.

Pro forma net earnings per share has been computed by dividing pro forma net
earnings by the weighted average number of shares of common stock outstanding
during the period. Options to purchase common stock are included in the
calculation as common stock equivalents provided that their impact is not
anti-dilutive.

CREDIT RISK

The Company sells its merchandise principally to customers throughout the
United States and Europe. Management performs regular evaluations concerning the
ability of its customers to satisfy their obligations and records a provision
for doubtful accounts based upon these evaluations. The Company's credit losses
for the periods presented are insignificant and have not exceeded management's
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of the Company's financial instruments, which
principally include cash, short and long-term investments, trade receivables,
accounts payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.

The fair value of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At December 31, 1996 and 1995, the carrying value of all
financial instruments was not materially different from fair value.

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.

(2) INVESTMENTS

Long-term investments consist of certain debt and equity securities
aggregating $3,106,000 and $3,394,000 at December 31, 1996 and 1995,
respectively.

(3) INVENTORIES

Inventories are summarized as follows:

1996 1995
--------- ---------
(IN THOUSANDS)

Raw materials..................................................................... $ 12,563 $ 9,788
Work in process................................................................... 12,576 11,264
Finished goods.................................................................... 54,350 51,837
--------- ---------
$ 79,489 $ 72,889
--------- ---------
--------- ---------

(4) PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

1996 1995
---------- ----------
(IN THOUSANDS)

Land and land improvements...................................................... $ 5,729 $ 5,729
Building and building improvements.............................................. 8,462 8,446
Leasehold improvements.......................................................... 42,646 36,059
Machinery and equipment......................................................... 58,477 48,279
Corporate aircraft.............................................................. 5,160 19,138
Construction in progress........................................................ 806 2,269
---------- ----------
121,280 119,920
Less accumulated depreciation and amortization.................................. 56,978 51,721
---------- ----------
$ 64,302 $ 68,199
---------- ----------
---------- ----------

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(4) PROPERTY AND EQUIPMENT (CONTINUED)
Construction in progress at December 31, 1996 and 1995 represents the costs
associated with the construction of buildings and improvements used in the
Company's operations and other capitalizable expenses in progress.

(5) NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt is summarized as follows:

1996 1995
---------- ----------
(IN THOUSANDS)

9 1/2% Senior Subordinated Notes due 2003................................................. $ 105,000 $ 105,000
Advances under a secured $100,000,000 long-term line of credit with a syndicate of banks;
interest is variable, with average annual effective rate of 7.94% in 1996, and payable
monthly................................................................................. 16,000 13,000
Note payable, secured by corporate aircraft, bearing interest at 8.23% per year, payable
in quarterly installments of $221,003 through March 1998................................ 1,040 1,799
Other, including capitalized leases....................................................... 5,276 3,536
---------- ----------
127,316 123,335
Less current installments................................................................. 6,099 4,123
---------- ----------
$ 121,217 $ 119,212
---------- ----------
---------- ----------

Aggregate maturities of notes payable and long-term debt are summarized as
follows:

YEAR ENDING DECEMBER 31, (IN THOUSANDS):
- -----------------------------------------------------------------------------

1996......................................................................... $ 6,099
1997......................................................................... 217
1998......................................................................... 0
1999......................................................................... 16,000
2000......................................................................... 0
Thereafter................................................................... 105,000
----------
$ 127,316
----------
----------

During 1995, the Company repurchased $10.0 million of the Senior
Subordinated Notes. Additionally, the related deferred financing costs of
$281,000 were written off to interest expense during 1995.

The Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, on or after August 15, 1998, at various redemption prices.

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(6) INCOME TAXES

The provision for income taxes, including the pro forma provision for income
taxes giving effect as if the Company had been a C corporation throughout all of
1996, is summarized as follows:

YEAR ENDED DECEMBER
31,
1996 1995
---------- ----------
(IN THOUSANDS)

Federal:
Current....................................................................... $ 33,686 $ 26,112
Deferred...................................................................... (7,449) (4,572)

State:
Current....................................................................... 7,339 5,559
Deferred...................................................................... (693) (373)

Foreign:
Current....................................................................... 358 0
---------- ----------
$ 33,241 $ 26,726
---------- ----------
---------- ----------

The Company's statement of earnings includes a provision for income taxes of
$15.8 million, which principally represents the Federal and state income taxes
recorded from the date of the S corporation election termination, August 12,
1996, through December 31, 1996.

The actual pro forma provision for income taxes differs from the expected
income taxes obtained by applying the statutory Federal income tax rate to
earnings before income taxes as follows:

YEAR ENDED
DECEMBER 31,
1996
-------------
(IN
THOUSANDS)

Computed "expected" tax expense.......................................................... $ 28,924
State taxes, net of Federal benefit...................................................... 4,109
Other.................................................................................... 208
-------------
$ 33,241
-------------
-------------

Deferred income tax benefit resulted from the following for the year ended
December 31, 1996:

1996
-------------
(IN
THOUSANDS)

Bad debt and other reserves.............................................................. $ 981
Depreciation and gain on sale of fixed assets............................................ 4,101
State taxes.............................................................................. 2,569
Other.................................................................................... 491
-------------
$ 8,142
-------------
-------------

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 are presented below:

1996
-------------
(IN
THOUSANDS)

Deferred Tax Assets:
Depreciation........................................................................... $ 3,444
Deferred lease incentives.............................................................. 1,462
Rent expense........................................................................... 1,251
Uniform capitalization adjustment...................................................... 1,191
State income taxes..................................................................... 2,453
Bad debt and other reserves............................................................ 1,625
Other.................................................................................. 2,215
-------------
Total gross deferred assets.......................................................... 13,641
Less: Valuation allowance --
Less: Deferred tax liabilities........................................................... 419
-------------
Net deferred tax assets.................................................................. $ 13,222
-------------
-------------

Management believes that it is more likely than not that the results of
operations will generate sufficient taxable earnings to realize net deferred tax
assets.

(7) STOCKHOLDERS' EQUITY

In connection with the Company's initial public offering of 7,000,000 shares
of common stock at $18.00 per share, which took place on August 7, 1996, (i)
Marciano International, which was owned by the Marciano Trusts and held an
interest in the subsidiaries of Guess, was merged with and into the Company,
(ii) all of the capital stock of Guess Italia was contributed to GEBV, (iii) the
Company effected a 32.66 to 1 split of the Common Stock and (iv) the Company
declared a distribution of $185.0 million to the Principal Stockholders,
representing the Company's previously taxed and undistributed S corporation
earnings which included a distribution of $54.0 million (3,000,000 shares at
$18.00 per share) of Common Stock, $129.0 million in cash generated primarily
from the initial public offering and $2.0 million in S Distribution Notes, (v)
the Company terminated its status as an S corporation, and (vi) the Company
granted options to purchase 1,225,673 shares pursuant to the Company's 1996
Equity Incentive Plan with an exercise price equal to the initial public
offering price of $18.00 per share.

(8) RELATED PARTY TRANSACTIONS

The Company is engaged in various transactions with entities affiliated with
trusts for the respective benefit of Maurice, Paul and Armand Marciano (the
"Marciano Trusts"). The Company believes that each of the companies, in which
the Marciano Trusts have an investment, and related party transactions discussed
below were entered into on terms no less favorable to the Company than could
have been obtained from an unaffiliated third party.

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(8) RELATED PARTY TRANSACTIONS (CONTINUED)

MERGERS

On August 13, 1996, Marciano International, which was wholly owned by the
Marciano Trusts, was merged with and into the Company in connection with the
initial public offering. Consideration paid to the Marciano Trusts was $300,000.

LICENSE ARRANGEMENTS AND LICENSEE TRANSACTIONS

The Company has a licensing agreement with Charles David of California
("Charles David"). Charles David is controlled by the father-in-law of Maurice
Marciano. The Marciano Trusts and Nathalie Marciano (the spouse of Maurice
Marciano) together own 50% of Charles David, and the remaining 50% is owned by
the father-in-law of Maurice Marciano. The license agreement grants Charles
David the rights to manufacture worldwide and distribute worldwide (except Japan
and certain European countries) men's, women's and some children's leather and
rubber footwear, excluding athletic footwear, which bear the Guess trademark.
The license also includes related shoe care products and accessories. Gross
royalties earned by the Company under such license agreement for the fiscal year
ended December 31, 1996, 1995 and 1994 was $1.5 million, $1.9 million and $1.6
million, respectively. Additionally, the Company purchased $6.0 million, $6.4
million and $4.8 million of product from Charles David for resale in the
Company's retail stores during the same respective periods.

On September 1, 1994, the Company entered into a licensing agreement with
California Sunshine Activewear, Inc. ("California Sunshine"), granting it the
rights to manufacture and distribute men's and women's activewear, which bear
the Guess trademark, in the United States. The Marciano Trusts together own 51%
of California Sunshine. Gross royalties earned by the Company under such license
agreement for the fiscal year ended December 31, 1996, 1995 and 1994 was
$742,000, $343,000 and $0, respectively. Additionally, the Company purchased
$1.4 million, $254,000 and $0 of product from California Sunshine for resale in
the Company's retail stores during the same respective periods.

Effective January 1, 1995, the Company entered into a licensing agreement
with Guess ? Italia, S.r.1. ("Guess Italia"), granting it the exclusive right in
Italy and non-exclusive rights in certain other countries within Europe to
manufacture and distribute men's and women's apparel, which bear the Guess
trademark. The Company and Guess Italia also entered a retail store license
agreement as of January 1, 1995, whereby Guess Italia was granted the
non-exclusive right to operate Guess stores in Italy. Prior to the IPO, Guess
Italia was owned 79% by the Company and 21% by Marciano International, a company
wholly owned by the Marciano Trusts. As part of the reorganization in connection
with the IPO Guess Italia became a wholly-owned subsidiary of the Company when
Marciano International was merged with and into the Company. Gross royalties
earned by the Company under such license agreement for the fiscal year ended
December 31, 1996 and 1995 was $766,000 and $480,000, respectively.
Additionally, the Company purchased $327,000, $511,000 and $0 of product from
Guess ? Italia and sold $89,000, $399,000 and $1.1 million of product to Guess
Italia for resale in Guess ? Italia's retail store and to other wholesale
customers during the fiscal years ended December 31, 1996, 1995 and 1994,
respectively. All inter company transactions were eliminated during
consolidation.

Effective December 9, 1992, the Company entered into a licensing agreement
with Nantucket Industries ("Nantucket"), granting it the rights to manufacture
and distribute women's intimate apparel within the United States, which bear the
Guess trademark. Nantucket is owned 13.0% by the Company and

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(8) RELATED PARTY TRANSACTIONS (CONTINUED)
7.6% by the Marciano Trusts. During the fiscal years ended December 31, 1996,
1995 and 1994, the Company 1) recorded gross royalty income of $327,000,
$264,000 and $214,000, respectively, 2) purchased $416,000, $505,000 and
$201,000, respectively, of product for resale in its retail stores, and 3)
recorded equity losses of $349,000, $98,000 and $19,000, respectively.

Effective December 1, 1989, the Company entered into a licensing agreement
with Strandel, Inc. ("Strandel"), granting it the rights to manufacture and
distribute Men's, Women's and Children's Knits and woven sportswear in Canada,
which bear the Guess trademark. Strandel is owned 20% by the Company. During the
fiscal years ended December 31, 1996, 1995 and 1994, the Company 1) recorded
gross royalty income of $1.8 million, $1.9 million and $1.6 million,
respectively, 2) purchased $0, $0 and $782,000, respectively, of product for
resale in its retail stores, and 3) recorded equity income (losses) of
($127,000), $215,000 and $62,000, respectively.

On January 1, 1997, the Company acquired from Pour Le Bebe, Inc., a
California Corporation, a 24.75% limited partnership interest in S.W.P.I., Ltd.,
a California Limited Partnership, as payment in lieu of unpaid license fees due
November 1, 1996. The Marciano Trusts have a 75.25% ownership interest in
S.W.P.I., Ltd.. The 24.75% limited partnership in S.W.P.I., Ltd. was valued at
$1.4 million by the Company, based upon the net asset value of the real estate
limited partnership.

PURCHASING AGENCY AGREEMENT

On May 3, 1994, the Company entered into an agreement with Ranche, Ltd.
("Ranche"), now a wholly owned subsidiary of Guess Europe, BV ("GEBV") to serve
as a non-exclusive buying agent for the Company in Hong Kong, which agreement
was terminated in the first quarter of 1996 when certain of Ranche's assets were
transferred to Newtimes Guess, Ltd, a Hong Kong corporation ("Newtimes") in
which the Company and the Marciano Trusts then held indirect ownership interests
of 25% and 25%, respectively. In connection with the IPO, the Marciano Trusts'
indirect interest in Newtimes was transferred to the Company. Ranche earned
commissions of $192,000 during the period in 1996 in which the agreement was
still active. In addition, Ranche operates under a licensing arrangement to
distribute product to authorized distributors. Gross royalties earned by the
Company under such license for the fiscal years ended December 31, 1996, 1995
and 1994 were $163,000, $240,000 and $0, respectively.

In February 1996, the Company entered into a buying agency agreement with
Newtimes. Pursuant to such agreement, the Company pays Newtimes a commission
based upon the cost of finished garments purchased for the Company by Newtimes.
Commissions earned by Newtimes during the fiscal year ended December 31, 1996
was $624,000. Additionally, the Company recorded $190,000 in equity losses
during 1996.

LEASES

The Company leases manufacturing, warehouse and administrative facilities
from partnerships affiliated with the Principal Stockholders. The leases in
effect at December 31, 1996 will expire through July 2008. Aggregate lease
payments under leases in effect for the fiscal year ended December 31, 1996,
1995 and 1994 were $2.9 million, $2.8 million and $2.6 million, respectively.

The Company currently subleases, on a month-to-month basis, a portion of a
remote Guess facility to Southwest Pacific Investment Company ("SWPI"), an
entity owned by the Marciano Trusts. Monthly rental

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(8) RELATED PARTY TRANSACTIONS (CONTINUED)
charges are $12,000, effective August 1, 1996. An aggregate of $57,000 was paid
by SWPI to the Company during 1996.

(9) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its showrooms and retail store locations under operating
lease agreements expiring on various dates through January 2012. Some of these
leases require the Company to make periodic payments for property taxes and
common area operating expenses. Certain leases include rent abatements and
scheduled rent escalations, for which the effects are being amortized and
recorded over the lease term. The Company also leases some of its equipment
under operating lease agreements expiring at various dates through July 1999.

Future minimum rental payments under noncancelable operating leases at
December 31, 1996 are as follows:

YEAR ENDING DECEMBER 31, (IN THOUSANDS):
- ----------------------------------------------------------------------------------

1997.............................................................................. $22,503
1998.............................................................................. 21,026
1999.............................................................................. 19,693
2000.............................................................................. 18,923
2001.............................................................................. 15,205
Thereafter........................................................................ 72,349
----------
$169,699
----------
----------

Rental expense for all operating leases during the years ended December 31,
1996, 1995, and 1994 aggregated $26.4 million, $21.9 million, and $16.3 million,
respectively.

INCENTIVE BONUSES

Certain officers of the Company are entitled to incentive bonuses based on
the Company's profits.

LITIGATION

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
relationship with its independent contractors and actions taken by the Company's
independent contractors with respect to the employees of such independent
contractors. In the State Action, plaintiffs allege that the Company breached
its agreement with the United States Department of Labor regarding the
monitoring of its independent contractors. In both actions, plaintiffs contend
that the Company is liable for its contractors' violations because it is a
"joint employer" with its independent contractors. The trial in the Federal Case
is currently set for December 1997.

The Union of Needletrades, Industrial & Textile Employees ("UNITE") has
filed with the National Labor Relations Board ("NLRB") several charges that the
Company has engaged and is engaging in unfair labor practices within the meaning
of the National Labor Relations Act. In cases No. 21-CA-31524, No. 21-CA-31565
and No. 21-CA-31648, UNITE has alleged that the senior management of the Company
unlawfully discharged certain employees because of certain union activities and
unlawfully threatened and coerced employees in the exercise of their rights
under Section 7 of the National Labor Relations Act. In an agreement with the
NLRB, the Company agreed to reinstate all of the employees allegedly unlawfully
discharged because of their union activities and agreed to pay them back pay
which aggregates appoximately $70,000. The settlement also provides for the
posting of a notice for 60 days at the Company stating that the matter has been
settled and that the Company agrees to comply with the National Labor Relations
Act. The notice has a non-admission clause concerning liability. Prior to the
payment of the back wages, UNITE filed an additional unfair labor practice
charge with the NLRB (No. 21-CA-31807). In this charge, the union alleges that
the Company has unlawfully threatend to move its production to Mexico and
elsewhere outside the United States thus unlawfully interfering with the
organizing campaign at the Company's headquarters, and has unlawfully ceased
doing business with independent contractors at which ongoing union organizing
campaigns are being conducted. This charge also alleges that the Company has
violated the settlement agreement in cases No. 21-CA-31524, No. 21-CA-31565 and
No. 21-CA-31648 by making such threats. Charge No. 21-CA-31807 is currently
under investigation by the NLRB. Pending a decision by the NLRB regarding the
allegation that the Company breached the settlement agreement reached in cases
No. 21-CA-31524, No. 21-CA-31565 and No. 21-CA-31648, the Company has withheld
paying the approximately $70,000 in back wages agreed to in its above described
settlement with the NLRB and has not posted notice of the settlement agreement.
The subject employees, however, have been reinstated and continue to be employed
by the Company. In a separate action (No. 31-CA-22380), UNITE is seeking fees
and costs for having to defend certain causes of actions filed against UNITE by
Guess. The Company believes that the outcome of one or more of these cases could
have a material adverse effect on the Company's financial condition and results
of operations.

The Company is also a party to various other claims, complaints and other
legal actions that have arisen in the ordinary course of business from time to
time. The Company believes that the outcome of such pending legal proceedings,
in the aggregate, will not have a material adverse effect on the Company's
financial condition or results of operations.

(10) SAVINGS PLAN

On January 1, 1992, the Company established the Guess ? Inc. Savings Plan
(the Plan) under Section 401(k) of the Internal Revenue Code. Under the Plan,
employees ("associates") may contribute up to 15% of their compensation per year
subject to the elective limits as defined by IRS guidelines and the Company may
make matching contributions in amounts not to exceed 1.5% of the associates'
annual

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(10) SAVINGS PLAN (CONTINUED)
compensation. The Company's contributions to the Plan during the years ended
December 31, 1996, 1995 and 1994 aggregated $284,000, $261,000 and $213,000,
respectively.

(11) QUARTERLY INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1996 and 1995 (in thousands):

FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------

Net revenue...................................................... $ 134,898 $ 122,508 $ 154,498 $ 139,258
Gross profit..................................................... 64,419 55,874 70,214 62,024
Earnings before income taxes..................................... 25,318 11,149 26,263 19,837
Net earnings..................................................... 24,047 10,822 20,338 11,534

Supplemental pro forma earnings:
Earnings before income taxes................................... 25,318 11,149 26,263 19,837
Net earnings................................................... 15,267 6,723 15,626 11,710

YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------

Net revenue...................................................... $ 124,903 $ 104,749 $ 133,129 $ 123,952
Gross profit..................................................... 59,636 49,207 59,148 56,600
Earnings before income taxes..................................... 21,271 12,998 17,322 15,223
Net earnings..................................................... 20,712 12,282 16,484 14,441

Supplemental pro forma earnings:
Earnings before income taxes................................... 21,271 12,998 17,322 15,223
Net earnings................................................... 12,763 7,798 10,395 9,132

The supplemental pro forma earnings presents net earnings, based on
historical earnings before income taxes, as if the Company was taxed as a C
corporation rather than an S corporation for all periods presented.

(12) SEGMENT INFORMATION

Net revenue is summarized as follows for the years ended December 31, 1996,
1995 and 1994:

1996 1995 1994
---------- ---------- ----------

Domestic..................................................................... $ 484,358 $ 453,344 $ 527,296
International................................................................ 66,804 33,389 20,516
---------- ---------- ----------
$ 551,162 $ 486,733 $ 547,812
---------- ---------- ----------
---------- ---------- ----------

(13) STOCK OPTION PLAN

On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Non-Employee Directors' Stock Option Plan pursuant to which the Board of
Directors may grant stock options to non-employee directors. The Plan authorizes
grants of options to purchase up to 500,000 shares of authorized but

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(13) STOCK OPTION PLAN (CONTINUED)
unissued common stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. As of December 31, 1996,
there were no options issued under this plan.

On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Equity Incentive Plan (the "Plan") pursuant to which the Board of Directors may
grant stock options to officers, key associates and consultants. The Plan
authorizes grants of options to purchase up to 4,500,000 shares of authorized
but unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Stock options have
ten year terms (five years in the case of an incentive stock option granted to a
ten percent shareholder) and vest and become fully exercisable after varying
time periods from the date of grant based on length of service or specified
performance goals.

At December 31, 1996, there were 3,248,895 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 was $5.50 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996
expected dividend yield 0.0%, risk-free interest rate of 6.57%, and expected
life of four years.

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's pro forma net earnings and net earnings per share for the year ended
December 31, 1996 would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):

Pro forma net earnings............................................. $ 48,287
Pro forma earnings per share....................................... $ 1.15

Pro forma net earnings reflects only options granted since the inception of
the Plan on July 30, 1996. The full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period of four years.

Stock option activity during the period indicated is as follows:

NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- -----------------

Balance at December 31, 1995................................... 0 $ 0.00
Granted.................................................... 1,287,105 17.74
Exercised.................................................. 0 0.00
Forfeited.................................................. (36,000) 18.00
Expired.................................................... 0 0.00
---------- ------
Balance at December 31, 1996................................... 1,251,105 $ 17.73
---------- ------
---------- ------

At December 31, 1996, the weighted average exercise price and
weighted-average remaining contractual life of outstanding options was $17.73
and 9.63 years, respectively.

At December 31, 1996, the number of options exercisable was 35,568, and the
weighted-average exercise price of those options was $18.00.

GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

(14) ACQUISITION

On December 4, 1996, the Company entered into an Asset Purchase Agreement in
which the Company purchased the rights, title and interest to the existing
License Agreement between the Company and Sweatshirt Apparel U.S.A., Inc.
("Sweatshirt Apparel"), for the manufacturing and distribution rights for Guess
Ladies Knitwear products. In connection with the Asset Purchase Agreement, the
existing License Agreement between the Company and Sweatshirt Apparel was
terminated on December 31, 1996. The aggregate purchase price was $10.0 million,
of which $5.0 million was paid in cash prior to December 31, 1996, and $2.0
million was paid in cash and $3.0 million was settled in the form of a stock
issuance made on January 2, 1997 (216,216 shares at $13.87 per share). In
addition, one of the Principal Stockholders of Sweatshirt Apparel will receive
an earnout of no less than $.5 million for each of five years, commencing in
1997.

(15) REORGANIZATION CHARGE

In the second quarter of 1996, the Company recorded a provision of $3.6
million for certain non-recurring charges relating to the write-down to net
realizable value of operating assets associated with the (i) disposal of two
currently active remote warehouse and production facilities, resulting in a net
book loss of $2.4 million, and (ii) the net book loss of $1.2 million incurred
by the Company in connection with the sale of one of its aircraft.

The write-down to net realizable value related to the disposal of the
warehouse and production facilities of $2.4 million is based upon the asset
carrying value of $5.7 million less its appraisal value of $3.9 million and
includes a provision of $600,000 for estimated disposal costs, comprised
primarily of commissions, title fees and other customary real estate closing
costs. The write-down related to the sale of the aircraft of $1.2 million is
based upon the asset carrying value of $7.2 million less the sale price of $6.0
million. The estimated costs of disposal of the aircraft were immaterial. The
above assets are included in property and equipment at December 31, 1996 and the
Company has not recorded any depreciation expense on these assets from the date
the dispositions were contemplated.

The Company has not recorded the Charge related to the warehouse and
production facilities to be disposed of as a cumulative effect from the
implementation of SFAS No. 121 recorded net of tax, because the effect of such
implementation is immaterial to the consolidated financial statements.

(16) SUBSEQUENT EVENT

SCHEDULE II
GUESS ?, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)

BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------

As of December 31, 1994
Allowance for obsolescence...................................... 1,000 1,400 -- 2,400
Accounts receivable............................................. 15,906 758 (6,273) 10,391

As of December 31, 1995
Allowance for obsolescence...................................... 2,400 2,352 (392) 4,360
Accounts receivable............................................. 10,391 5,147 (4,689) 10,849

As of December 31, 1996
Allowance for obsolescence...................................... 4,360 (218) (885) 3,257
Accounts receivable............................................. 10,849 4,280 (5,392) 9,737

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Los Angeles, State
of California, on March 24, 1997.

GUESS ?, INC.

By: /s/ MAURICE MARCIANO

-----------------------------------
Maurice Marciano

Title: CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE
OFFICER AND DIRECTOR

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

Chairman of the Board, Chief
/s/ MAURICE MARCIANO Executive Officer and
- ------------------------------------------- Director (Principal March 24, 1997
Maurice Marciano Executive Officer)

/s/ PAUL MARCIANO
- ------------------------------------------- President, Chief Operating March 24, 1997
Paul Marciano Officer and Director

/s/ ARMAND MARCIANO Senior Executive Vice
- ------------------------------------------- President, Secretary and March 24, 1997
Armand Marciano Director

Executive Vice President and
/s/ ROGER WILLIAMS Chief Financial Officer
- ------------------------------------------- (Principal Financial Officer March 24, 1997
Roger Williams and Chief Accounting
Officer)

Aldo Papone Director

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------

3.1. Restated Certificate of Incorporation of the Registrant.(5)
3.2. Bylaws of the Registrant.(5)
4.1. Indenture, dated August 23, 1993, between the Registrant and First Trust National Association, as
Trustee.(1)
4.2. First Supplemental Indenture, dated August 23, 1993, between the Registrant and First Trust National
Association, as Trustee.(1)
4.3. Specimen stock certificate.(5)
*10.1. Amended and Restated Stockholders' Agreement.
10.2. Letter Agreement, dated July 9, 1993, among the Registrant, Georges Marciano, Maurice Marciano, Paul
Marciano, Armand Marciano and trusts for their respective benefit.(1)
10.3. Employment Agreement, dated March 1, 1994, between the Registrant and Roger A. Williams.(2)
10.4. Letter Agreement, dated January 22, 1996, between the Registrant and Andrea Weiss.(5)
10.5. Employment Agreement, dated as of May 14, 1996, between the Registrant and Francis K. Duane.(5)
10.6. General Release and Indemnity Agreement, dated August 23, 1993, among Maurice, Paul and Armand
Marciano, their respective trusts, the Registrant, Georges Marciano and his trust.(1)
10.7. General Release Agreement, dated August 23, 1993, among Maurice, Paul and Armand Marciano, their
respective trusts, the Registrant, and Georges Marciano and his trust.(1)
10.8. Cancellation and Reassignment Agreement, dated August 23, 1993, among the Registrant, MSKMarciano,
Inc., Georges Marciano, Inc. and Georges Marciano.(1)
10.9. Alameda Lease, dated July 29, 1992, among the Registrant and 1444 Partners, Ltd.(1)
10.10. Revolving Credit Agreement, dated as of December 20, 1993, between the Registrant and The First
National Bank of Boston, as agent, and Sanwa Bank California, as co-agent, and the group of financial
institution party thereto (the "Revolving Credit Agreement").(2)
10.11. Security Agreement, dated December 20, 1993, between the Registrant and the First National Bank of
Boston, as agent for itself and for certain lenders.(2)
10.12. Amendment No. 1 to the Revolving Credit Agreement, dated January 20, 1994, among the parties
thereto.(3)
10.13. Amendment No. 2 to the Revolving Credit Agreement, dated April 1, 1994, among the parties thereto.(3)
10.14. Amendment No. 3 to the Revolving Credit Agreement, dated July 18, 1994, among the parties thereto.(3)
10.15. Amendment No. 4 to the Revolving Credit Agreement, dated October 24, 1994, among the parties
thereto.(3)
10.16. Amendment No. 5 to the Revolving Credit Agreement, dated February 13, 1995, among the parties
thereto.(4)

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------

10.17. Amendment No. 6 to the Revolving Credit Agreement, dated September 14, 1995, among the parties
thereto.(4)
10.18. Amendment No. 7 to the Revolving Credit Agreement, dated December 22, 1995, among the parties
thereto.(4)
10.19. Amendment No. 8 to the Revolving Credit Agreement, dated February 13, 1996, among the parties
thereto.(5)
*10.20. Amended and Restated Revolving Credit Agreement, dated as of March 28, 1997 among the parties thereto.
(+ Exhibits A-K)
10.21. Agreement as to Consignment of Documents and Related Matters, dated December 22, 1995, between the
Registrant and The First National Bank of Boston.(4)
10.22. 1996 Equity Incentive Plan.(5)
10.23. 1996 Non-Employee Directors' Stock Option Plan.(5)
10.24. Annual Incentive Plan.(5)
*10.25. Employment Agreement between the Regristrant and Maurice Marciano.
*10.26. Employment Agreement between the Regristrant and Paul Marciano.
*10.27. Employment Agreement between the Regristrant and Armand Marciano.
*10.28. Registration Rights Agreement among the Registrant and certain stockholders of the Registrant.
*10.29. Indemnification Agreement among the Registrant and certain stockholders of the Registrant.
*10.30. Indemnification Agreements between the Registrant and certain executives and directors.
21.1. List of Subsidiaries.(5)
*27.1. Financial Data Schedule.

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

* Filed herewith

(1) Incorporated by reference from the Registration Statement of Form S-1
(Registration No. 33-69236) originally filed by the Company on September 22,
1993.

(2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 27, 1994.

(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.

(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.

(5) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.

(B) FINANCIAL STATEMENT SCHEDULE:

DESCRIPTION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTANTS