LITTLE SWITZERLAND INC/DE, 10-K, 1997-10-08

LITTLE SWITZERLAND INC/DE
10-K, 1997-10-08
JEWELRY STORES

Previous: MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND INC, 497, 1997-10-08

Next: BMC WEST CORP, 15-12G, 1997-10-08

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------

FORM 10-K

(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended May 31, 1997

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]

For the transition period from ___________ to ___________

Commission File Number 0-19369

LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)

Delaware 66-0476514
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

161-B Crown Bay Cruise Ship Port
St. Thomas U.S.V.I. 00802 00802
(Address of Principal Executive Offices) (Zip Code)

(Registrant's Telephone Number, Including Area Code) (809) 776-2010

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)

Preferred Stock Purchase Rights
-------------------------------
(Title of Class)

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 [ ] No [X ]

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

As of August 31, 1997 and October 1, 1997, 8,462,359 shares of $0.01 par value
Common Stock of the registrant were outstanding. The aggregate market value of
the voting stock held by non-affiliates of the registrant based upon the closing
price of $71/8 per share for the registrant's Common Stock, as reported on the
NASDAQ National Market System as of August 31, 1997, was $60,294,308.

================================================================================

<PAGE>

PART I

ITEM 1. BUSINESS

General

Little Switzerland, Inc. ("Little Switzerland" or the "Company") is a
specialty retailer of luxury items. The Company operates 27
distinctively-designed retail stores on ten islands and Alaska and has seven
franchise locations in the Bahamas. The Company markets a wide selection of high
quality products including watches, jewelry, crystal, china, fragrances, gifts
and accessories. The Company is the exclusive retailer of certain brand name
products on some islands. The Company's customers are primarily tourists from
the United States.

Little Switzerland was incorporated in the state of Delaware on May 23,
1991, as a subsidiary of Switzerland Holding, Inc., which was a subsidiary of
Town & Country Corporation ("Town & Country"). At that time, Town & Country
transferred to Little Switzerland all of the stock of L.S. Holding, Inc. (L.S.
Holding") and L.S. Wholesale, Inc. ("Wholesale"). On July 17, 1991, Switzerland
Holding, Inc. sold approximately 68% of the outstanding common stock, par value
$.01 per share (the "Common Stock"), of Little Switzerland in a public offering.

In November 1994, approximately 2.4 million shares of Town & Country's
remaining shares of the Company's Common Stock were distributed to holders of
Town & Country's exchangeable preferred stock upon exercise of their right to
exchange such shares for Little Switzerland Common Stock on a share-for-share
basis. Currently, 152,241 shares of the Company's Common Stock are held in a
trust for the benefit of Town & Country and the holders of Town & Country's
exchangeable preferred stock (see note 1 in Notes To Consolidated Financial
Statements).

As of May 31, 1997, there were ten subsidiaries of L.S. Holding
incorporated in various jurisdictions. Wholesale acts as purchasing agent for
items sold by the Company's stores.

LITTLE SWITZERLAND, INC.
ORGANIZATIONAL STRUCTURE

Little Switzerland, Inc.
Delaware, May 1991

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

LS Wholesale, Inc. LS Holding, Inc.
Massachusetts USVI, July 1980
October 1989
Montres et Bijoux, S.A.R.L.
St. Martin/St. Barths
France, 1986

World Gift Imports N.V.
St. Maarten
Netherlands Antilles, 1984

LS Holding (Aruba) N.V.
Aruba, 1987

LS Holding (Curacao) N.V.

<PAGE>

Netherlands Antilles, 1987

Little Switzerland (Antigua) Limited
Antigua, 1988

Little Switzerland (St. Kitts and Nevis) Limited
St. Kitts, 1992

Little Switzerland (St. Lucia) Limited
St. Lucia, 1992

Little Switzerland (BVI) Limited
British Virgin Islands, 1993

L.S. Holding (USA), Inc.
Ketchikan, Alaska, 1994

World Gift Imports (Barbados) Limited
Barbados, 1996

The Company's executive offices are located at 161-B Crown Bay Cruise
Ship Port, St. Thomas, U.S.V.I. 00802, and its telephone number is (809)
776-2010. The terms "Little Switzerland" and the "Company" as used in this
Annual Report include, where the context so requires, its subsidiaries.

As used throughout this report on Form 10-K, the terms fiscal 1997, 1996
and 1995 refer to the Company's twelve month periods ended May 31, 1997, June 1,
1996, and May 31, 1995, respectively.

Merchandising

High-Quality Merchandise. Little Switzerland offers high-quality
merchandise generally available in the world's finest stores and on some islands
is the exclusive retailer of certain brand name products. The Company sells
internationally renowned product lines such as Rolex, Rado and Cartier watches,
Baccarat, Waterford, Atlantis and Swarovski crystal and Wedgwood, Rosenthal,
Lladro and Herend china.

Advantageous Pricing. Little Switzerland offers tourists visiting the
Caribbean many of the same luxury products available in fine stores in the
United States, often at significant savings. The Company seeks to price its
merchandise at levels which compare favorably to prices generally available in
the United States. In addition, United States tourists shopping at the Company's
stores take advantage of duty-free allowances upon returning home.

Presentation of Merchandise. The Company places particular emphasis on
effective marketing and merchandise presentation through well-designed stores
situated in prime retail locations. The layout, fixtures and upscale
presentation of merchandise create an inviting and relaxed atmosphere which is
conducive to shopping for luxury items. Superior customer service is a high
priority, and a knowledgeable and courteous sales staff is available to assist
customers.

Availability of Merchandise. Little Switzerland's customers are tourists
who may be staying in one location only a short time. Often they travel as
couples or families and while on vacation they find themselves with time to
shop. To meet the demands and interests of these tourists, the Company stocks a
broad selection of luxury products and carries a significant inventory so that
most items offered by a particular store are available for immediate delivery.

<PAGE>

Name Recognition. Little Switzerland enjoys excellent name recognition
in the United States and locally in the Caribbean. It has an established
reputation for providing a wide variety of high-quality product lines, and its
stores are recognized as desirable places to purchase luxury products.

Product Lines

The principal product lines offered by the Company are watches, jewelry,
crystal, china, fragrances, gifts and accessories.

Watches. The most significant product line for Little Switzerland is
watches. Sales of watches comprised 44%, 43% and 43% of sales in fiscal 1997,
1996 and 1995, respectively. The primary watch lines marketed by Little
Switzerland include such quality brand names as Rolex, Rado, Omega,
Audemars-Piguet, Cartier, Tag-Heuer, Breitling and Raymond Weil, prices for
which generally range from $50 to $30,000. The Company is the exclusive
authorized retailer for Rolex watches on the islands on which the Company
operates. Sales of Rolex watches accounted for 24%, 23% and 25% of the Company's
sales in fiscal 1997, 1996 and 1995, respectively. Rolex is the only
manufacturer whose products accounted for more than 10% of the Company's sales
in any of the last three fiscal years.

Jewelry. The second most significant product line for Little Switzerland
is jewelry. Most of the jewelry is produced by international manufacturers and
sales of such items accounted for 27%, 24% and 22% of sales in fiscal 1997, 1996
and 1995, respectively. Jewelry items include rings, earrings, bracelets,
necklaces, pendants and charms, which range in price from $30 to $5,000.

Crystal, China, Gifts and Flatware. The Company sells numerous lines of
crystal, china, gifts and flatware, including Baccarat, Lalique, Swarovski,
Atlantis, Waterford, Wedgwood, Royal Doulton, Aynsley, Lladro, Herend, Villeroy
& Boch, Christofle and Rosenthal, prices for which generally range from $20 to
$3,000. Sales of this product category accounted for 17%, 22% and 25% of sales
in fiscal 1997, 1996 and 1995, respectively.

Fragrances and Accessories. Little Switzerland carries in excess of 90
fragrance lines, including Yves Saint-Laurent, Estee Lauder, Chanel, Calvin
Klein, Guerlain and Christian Dior, prices for which generally range from $15 to
$150. The Company also offers leather good lines including Prima Classe, Paloma
Picasso, Karl Lagerfeld, Bally, Moschino and writing instrument lines including
Mont Blanc, Cartier and Waterman.

Pricing

Little Switzerland seeks to price its merchandise at levels which
compare favorably to prices generally available for the same products in the
United States. The cost of much of the inventory purchased by the Company is
often lower than the cost to retail stores in other markets since the Company is
not required to pay a duty or tariff on most incoming products in the Caribbean.
In addition, Little Switzerland can offer price advantages since inventory
purchases are generally directly from manufacturers and large quantities are
purchased at the same time for multiple store locations. Within the Caribbean,
there are no sales taxes in the jurisdictions in which the Company operates. In
addition, tourists from the United States may bring certain amounts of
merchandise home from the Caribbean duty-free. The Company regularly monitors
prices available for comparable merchandise in the United States and adjusts
pricing structures to maintain Little Switzerland's competitive advantage.

Little Switzerland makes manufacturers' warranties available to its
customers and generally accepts the return of merchandise within 30 days of its
purchase. Merchandise returns historically have been nominal.

<PAGE>

Purchasing and Distribution

Little Switzerland purchases its merchandise from suppliers worldwide.
The Company has developed long-term relationships with a number of its key
suppliers. The Company believes that these relationships are an important factor
in its success and have enabled it to become the exclusive authorized retailer
of certain important brands of merchandise on certain islands. Most of these
exclusive relationships are not based on binding agreements with suppliers, but
rather are based on factors such as the Company's effective representation of
product lines, its prompt payment for inventory and the suppliers' long-standing
relationships with the Company. The Company believes that the loss of any major
supplier, including Rolex, could adversely affect the Company's results of
operations.

Many of the Company's suppliers manufacture merchandise only to specific
order, and the time required for manufacture may be considerable. As a result,
orders for many key items may be placed only two or three times a year. The
Company's inventory levels are typically high, particularly as the winter
tourist season approaches, to assure tourists immediate delivery of items. The
Company's buyers continually seek to identify new product lines with an emphasis
on non-branded items which usually carry more attractive margins. Little
Switzerland utilizes its information on buying patterns in each store and
management experience and expertise to anticipate trends in customer demand.

Little Switzerland merchandise is shipped by vendors to three
distribution centers owned by the Company which supply the stores in their
respective region.

Little Switzerland stores are designed to place the customer in an
environment which is conducive to the purchasing of luxury items. Most stores
are designed by the same architectural firm and decorated in similar fashion to
present a consistent theme of luxury retailing throughout the network of stores.
Stores are located in areas which are easily accessible to tourists, often in
so-called "duty-free" ports which are visited by cruise ships. The quantity and
mix of products carried by Little Switzerland stores vary from location to
location based on store size and tourist buying patterns and preferences.

Marketing and Advertising

The Company's marketing plan includes targeted advertising in national,
high-circulation travel magazines and in a large selection of local publications
which are distributed to overnight guests wherever Little Switzerland stores are
located and elsewhere throughout the Caribbean. The Company's choices of print
media are shaped by customer and tourist demographics, local and historical
sales trends which provide information about the types of tourists who are
likely to purchase merchandise, and by retail buying patterns in the United
States.

Participation in promotional programs offered by many of the world's
largest cruise ship lines is another key element in the Company's strategy to
gain greater name recognition for Little Switzerland and increase store traffic.
Presentations by "Port Lecturers" aboard the major cruise ships provide cruise
ship passengers with highly targeted shopping information on retailers who
participate in the program before the passengers disembark at each port of call.
Similar hotel promotions which focus on overnight guests also contribute to the
Company's overall effort to increase its market share of the Caribbean retail
industry.

Inventory Control and Security

Little Switzerland management utilizes modern inventory control and
security systems, careful personnel screening and well-articulated policies and
procedures to control losses and shrinkage. The Company has inventory control
and management information systems which integrate sales, inventory and
financial reporting and control. These systems provide vital management
information such as store-by-store data, which includes sales, profitability and
inventory levels by product category.

<PAGE>

Given the high value of the merchandise offered by the Company, security
is a high priority. Sophisticated alarm systems are in place in each location,
and security guards are assigned at individual stores as needs dictate. Most
jewelry and watches are returned to vaults each day at closing under close
scrutiny. The Company's cycle count inventory program provides the Company with
periodic verification of merchandise. The Company carries insurance coverage on
its inventory in amounts which it believes to be customary and adequate.

Competition

The Company's markets contain numerous retail stores and the competition
for tourist dollars is intense. Little Switzerland also competes with stores
selling similar products in the United States and in other markets where
tourists travel. The majority of the Company's local competitors are
independently owned stores and do not offer the variety of brand name luxury
products which Little Switzerland markets. The Company believes that its status
as the exclusive authorized retailer of certain brand name products in a number
of markets enhances its competitive position. The loss of one or more of these
exclusive relationships could adversely affect the Company's ability to compete.

Employees

Little Switzerland employs an average of approximately 480 people, with
the number of sales personnel varying from season to season. Currently, the
Company has no collective bargaining agreements and has never experienced a work
stoppage. In February 1995, the employees of the Company's subsidiary in St.
Maarten, Netherlands Antilles voted to be represented by a local labor union.
The Company is engaged in negotiations with the union but no collective
bargaining agreement has been consummated. The Company considers relations with
its employees to be good.

Growth and Expansion Strategy

The Company's strategic business plan for long-term growth and expansion
focuses on these specific areas: existing stores; new stores in existing
locations and expansion into new markets.

A well-trained and motivated sales staff is basic to the success of this
plan, which is detailed below. The Company has, accordingly, invested in an
on-going training program to ensure that all personnel involved in selling have
complete product knowledge and possess the skills to maximize sales. Successful
completion of this training is required of all sales personnel. In addition, in
fiscal 1995, the Company modified its sales commission system to provide more
employee incentive and to adjust compensation to be more flexible with sales.
Management believes that the continuation of this program and successful
implementation of the commission system has had and will continue to have a
positive impact on the Company's overall effort to generate revenue growth.

1. Existing stores: The Company's strategy includes competitive
marketing efforts to generate increased sales in existing stores by careful
management of product mix in each location, and by maximum use of available
selling space.

2. Market expansion: Little Switzerland continually searches for
opportunities to increase its penetration of current island locations and to
expand geographically into new markets. In February 1996, the Company opened a
new store in the new Royal Plaza Mall in Aruba. A 6,200 square foot store serves
as the anchor tenant and offers a full range of Little Switzerland merchandise,
including in-store boutiques of Hermes and Gianni Versace accessories.

<PAGE>

The mall is strategically located across from the increasingly popular cruise
ship dock. The Company also opened a 950 square foot store in St. Lucia on
December 12, 1996. In May 1996, the Company opened a 2,500 square foot store in
Juneau, Alaska. This popular summer cruise destination is expected to receive
nearly 500,000 passengers in the short summer season. In May 1997, the Company
continued its expansion into Alaska, opening an 1,850 square foot store in
Skagway. In February 1996, the Company purchased the assets of two retail stores
located in Barbados, West Indies, which previously operated under the name of
Louis Bayley. A 5,200 square foot store located in the prime shopping area
offers a full range of Little Switzerland products. Additionally, the Company
operates a 1,600 square foot store in a shopping complex located within the
cruise dock facility servicing cruise passengers as they embark/disembark. In
addition, the Company continues to investigate the feasibility of moving into
the Western Caribbean and to explore opportunities that exist not only in other
new destinations but also in resort retailing. Worldwide resort demographics and
international tourism trends are critical factors in evaluating potential sites
for Little Switzerland expansion.

Inasmuch as the $7 billion tourism industry is the primary source of
revenue for all the Caribbean destinations in which Little Switzerland stores
are located, the Company expects that the cruise ship and hotel industries, as
well as local tourism boards, will continue to increase their annual advertising
and promotional budgets to attract greater numbers of visitors to the islands.

Working Capital and Seasonality

The Company's primary needs for working capital are to support its
inventory requirements, which fluctuate during the year due to the seasonal
nature of the Company's business, to maintain and remodel its existing stores
and to finance the opening or acquisition of new stores. In addition, a
significant investment in inventory is required at all times in order to meet
the demands of its customers who, as tourists, require immediate delivery of
purchased goods.

As a general policy, the Company does not sell merchandise on account.
Virtually all sales are paid by cash, check or major credit card.

On the basis of its current operating plan, the Company anticipates that
its cash flow from operations together with funds available from bank financing
will be sufficient to fund its operations and expansion for at least the next
three years. See Item 7 "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Liquidity and Capital Resources."

The Company's business is seasonal in nature, reflecting travel patterns
to the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. The peak selling season in Alaska runs from late spring through
the summer. Working capital requirements generally reflect this seasonality as
the Company increases its inventory in anticipation of the peak selling season.
Since the Company has less cash available from operations in the off-season, it
may be required to borrow to finance its build-up of inventory and any expansion
of Company operations. See Item 7 "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Seasonality."

Inflation

Historically, the Company has generally been able to increase prices to
reflect cost increases resulting from inflation and expects to be able to do so
in the future. While the Company cannot precisely determine the effect of
inflation on its operations, the Company does not believe that its operations
have been materially affected by inflation during the three most recent fiscal
years.

<PAGE>

Other Matters

Foreign and Domestic Operations. See Note 2 of Notes to Consolidated
Financial Statements.

Environmental. In the opinion of Little Switzerland, compliance with
current laws and regulations pertaining to the environment, health and safety
has not materially affected its business or financial condition and will not do
so in the foreseeable future.

Customers. Little Switzerland is not dependent upon any single customer
or upon any single group of customers, the loss of which would have a material
effect on Little Switzerland.

Patents and Trademark. Little Switzerland holds a number of licenses,
trademarks and trade names. None of the foregoing is believed to be material to
Little Switzerland.

Other. Little Switzerland does not have significant research and
development expenditures.

Little Switzerland does not have significant backlog of orders and
inventory. Little Switzerland must carry adequate inventory to enable tourists
to receive immediate delivery of items.

Little Switzerland does not have any business under government contract.

ITEM 2. PROPERTY

Little Switzerland's 27 stores are all situated in prime retail
locations. The Company owns its facility in Philipsburg, St. Maarten and leases
the 26 other stores it operates. Most of its stores are free-standing. In
addition to approximately 70,000 square feet of selling space, the Company has
approximately 33,000 square feet of warehouse space, 11,000 square feet of which
is at the Company's main warehouse on St. Thomas. The Company owns the building
which houses its headquarters and warehouse on St. Thomas and leases the
underlying real property from the Virgin Islands Port Authority under a ten-year
ground lease. The ground lease is subject to two five-year renewal terms and may
be terminated by the lessor prior to the expiration of its term subject to
payment to the Company of the fair market value of the Company's improvements.
The Company anticipates that in most cases retail space for new stores opened or
acquired will be leased. This arrangement provides the Company not only with
greater flexibility in selecting prime retail locations for its stores, but also
allows the Company to utilize its capital to more effectively design and
decorate its stores with quality furnishings commensurate with the prestigious
image the Company maintains.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings which, in the
opinion of management, will not result in a material adverse effect on the
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 the stockholders of the Company
during the fourth quarter of the fiscal year ended May 31, 1997.

<PAGE>

PART II

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

Price range of Common Stock and Dividend Policy

The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "LSVI." The following table sets forth for the periods
indicated the high and low sale prices per share of the Common Stock on the
NASDAQ National Market System, as reported by NASDAQ. The Company's initial
public offering of its Common Stock at $ 12.00 per share occurred on July 18,
1991.

High Low
---- ---

Fiscal Year ended May 31, 1997
------------------------------

Quarter ended August 30, 1996 5 3/4 4
Quarter ended November 29, 1996 5 1/2 4 1/4
Quarter ended February 28, 1997 5 1/8 4 7/16
Quarter ended May 31, 1997 6 3/8 4 1/4

Fiscal Year ended June 1, 1996
------------------------------

Quarter ended August 31, 1995 6 1/2 4
Quarter ended December 2, 1995 6 1/8 3 1/2
Quarter ended March 2, 1996 4 1/4 3 1/2
Quarter ended June 1, 1996 6 1/4 3 3/4

The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.

On October 1, 1997, there were 142 holders of record of the Company's
Common Stock.

Recent Sales of Unregistered Securities

Little Switzerland has not sold any securities within the past three
years that were not registered under the Securities Act of 1933, as amended.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands except per share amounts)

Year Ended
--------------------------------------------------------------------------
May 31, June 1, May 31, May 31, May 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>

Income Statement Data:
Net sales $ 88,314 $ 62,895 $ 72,240 $ 64,312 $ 63,396
Operating income 2,661 1,666 4,736 5,221 6,556
Net income $ 1,159 $ 915 $ 3,694 $ 4,098 $ 5,191
========== ========== =========== ========== ==========

Net income per share (1) $ 0.14 $ 0.11 $ 0.44 $ 0.49 $ 0.62
========== ========== =========== ========== ==========

Balance Sheet Data:
Total assets 77,391 77,877 58,446 52,869 54,160
Long-term debt 6,119 8,068 - - -

Operating Data:
Gross profit margin 43.7% 42.5% 42.8% 44.1% 46.2%
Operating income margin 3.0% 2.7% 6.6% 8.1% 10.3%
Stores open at period end (2) 27(8) 27(7) 24(6) 23(4) 18(3)
Comparable store net sales
(decrease) increase (5) (14.3%) 17.3% 4.1% 0.6% 6.2%

</TABLE>

(1) See Notes 2 and 13 of Notes to Consolidated Financial Statements.
(2) In addition to the stores described, the Company's franchisee, Solomon
Brothers Ltd., currently has eight stores in the Bahamas which are
operated pursuant to a franchise agreement entered into in fiscal 1988.
(3) During fiscal 1993, the Company opened a new store in St. Lucia.
(4) In fiscal 1994, the Company opened two "Little Treasures" stores in
Curacao and St. Thomas, a Little Switzerland store in St. Thomas and
reopened a Little Switzerland store in Aruba which had been closed since
November 1992 due to remodeling of the hotel in which it is located. In
April 1994, the Company acquired "La Parfumerie", a fragrance store in
Antigua.
(5) Comparable store sales are calculated using sales of stores which were
open for the full period.
(6) In fiscal 1995, the Company opened a new Little Switzerland store on the
island of St. Martin on the French side and in Ketchikan, Alaska. Also,
it closed one store in St. Thomas due to the expiration of its lease.
(7) In fiscal 1996, the Company opened two new stores in Aruba and one in
Juneau, Alaska. In addition, it acquired two stores previously operating
under the name "Louis Bayley" on the island of Barbados. It also closed
its American Yacht Harbor and Little Treasures stores on St. Thomas.
(8) In fiscal 1997, the Company opened a new Little Switzerland store on the
island of St. Lucia and in Skagway, Alaska. Also, it closed a Little
Treasures store in Curacao and its accessories store in Aruba.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS

This Annual Report contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.

The future operating results and performance trends of the Company may
be affected by a number of factors, including, without limitation, the
following: (i) the frequency of tourist visits to the locations where the
Company maintains retail stores, (ii) the Company's ability to retain
relationships with its major suppliers of product for resale, (iii) weather in
the Company's markets, (iv) actions of the Company's competitors and the
Company's ability to respond to such actions, (v) economic conditions that
affect the buying patterns of the Company's customers, (vi) availability of new
tourist markets for expansion and (vii) the continued success of the Company's
efforts to implement its planned strategic initiatives. In addition to the
foregoing, the Company's actual future results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth in the Company's various filings with the Securities and
Exchange Commission and of changes in general economic conditions, changes in
interest rates and/or exchange rates and changes in the assumptions used in
making such forward-looking statements.

The following represents the components of operating results for the
three years ended:

Fiscal Year Ended
--------------------------------------------------------------
May 31, June 1, May 31,
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>

Net sales 100.0% 100.0% 100.0%

Cost of sales 56.3 57.5 57.2

Gross profit 43.7 42.5 42.8

Selling, general and administrative
expenses 41.3 47.3 36.3

Gain on insurance proceeds (0.6) (7.5) -
--------- --------- --------

Operating Income 3.0 2.7 6.5
Interest expense, net 1.7 0.9 0.3
--------- ---------- --------

Income before Provision
for Income Taxes 1.3 1.8 6.2

Provision for Income Taxes 0.0 0.3 1.1
--------- ---------- --------

Net income 1.3% 1.5% 5.1%
========= ========== ========

</TABLE>

<PAGE>

Employee Defalcation Loss

In July, 1997 management disclosed to its independent auditors that
certain transactions may have been recorded in error on the books of the
Company. As a result, the Company engaged Arthur Andersen, LLP to evaluate the
matter and determine the impact, if any, on the Company's previously and
currently reported consolidated financial statements. After extensive review,
analysis and evaluation, which focused on unlocated differences in cash
balances, management believes that an employee defalcation has occurred during
the current fiscal year. The estimated loss of approximately $2.4 million has
been classified as a general and administrative expense in the accompanying
consolidated financial statements for the fiscal year ended May 31, 1997. The
Company is in the process of reviewing its insurance coverage which calls for a
maximum claim limitation of $1,000,000, and intends to submit a claim to its
fidelity bond carrier and seek full restitution from the employee. The amount of
insurance recovery from its insurance carrier, if any, relating to these losses
has not been reflected in the accompanying financial statements.

Fiscal 1997 Compared to Fiscal 1996

Net sales for the fiscal year ended May 31, 1997 increased approximately
$25.4 million or 40% from $62.9 million in fiscal 1996 to $88.3 million in
fiscal 1997. Sales for stores open in all of fiscal 1997 and 1996 decreased
approximately $3.5 million or 14.3% from $24.7 million in fiscal 1996 to $21.1
million in fiscal 1997. Both the large increase in overall sales and the
comparable store sales decline are attributable to the impact in fiscal 1996 of
hurricanes Luis and Marilyn which inflicted damage to several of the Company's
stores and caused significant damage to various islands' infrastructures. Those
stores that were not damaged and did remain open in fiscal 1996 benefited from
the closure of neighboring stores and thus reported higher than normal sales.
The store located on the harbor in Marigot, St. Martin, the last of the
hurricane damaged stores, reopened in November, 1996. While the reopening of the
Company's hurricane damaged stores and the opening of two new stores in fiscal
1997 contributed to the overall increase in sales in fiscal 1997 compared to
fiscal 1996, management believes that the impact of the hurricanes continued to
have a negative impact on sales into fiscal 1997.

Gross profit margin improved slightly from 42.5% of net sales in fiscal
1996 to 43.7% of net sales in fiscal 1997. Management attributes this
improvement to the stronger US dollar measured against European currencies
partially offset by the impact on margins of certain inventory liquidation
efforts.

Selling, General and Administrative expenses ("SG&A") for the year ended
May 31, 1997 increased 23% from $29.8 million in fiscal 1996 to $36.5 million in
fiscal 1997. The increase is largely due to the estimated loss of approximately
$2.4 million resulting from the employee theft described above, which has been
classified as a general and administrative expense in the accompanying
consolidated financial statements for the fiscal year ended May 31, 1997. See
"Employee Defalcation Loss." In addition, management further attributes the
increase to the lower than normal SG&A expenses in the prior year from the
closed stores as well as additional expense associated with its new store in
Alaska. Management also noted higher depreciation associated with stores
remodeled after the hurricanes.

Net interest expense increased from $558,000 in fiscal 1996 to $1.5
million in fiscal 1997 primarily due to higher average borrowings, caused by the
Company's acquisition of the inventory, leasehold rights, and fixed assets of
its two stores in Barbados. Additionally, the weighted average interest rate
increased from 6.5% in fiscal 1996 to 7.9% in fiscal 1997.

The Company's income is subject to taxation in each of the jurisdictions
in which it operates at rates currently ranging from 3.7% to 42%, and,
accordingly, the effective tax rate for any given year is a function of the
relative mix of taxable income generated at each of the Company's locations. The
Company's wholly-owned subsidiary, L.S. Wholesale, Inc. which acts as a
purchasing agent for items sold by the Company's stores and charges fees for
acting as such an agent, has elected to be treated as a "936 Company" under
section 936 of the Internal Revenue Code of 1986, as amended.

12
<PAGE>

Under an agreement which expires in 1998 (subject to renewal), L.S. Wholesale,
Inc. benefits from a lower tax rate on its income earned outside the U.S. Virgin
Islands, which is taxed at a rate of 3.74%. The Company's effective tax rate was
0.0% and 17.4% in the fiscal years ended May 31, 1997 and June 1, 1996,
respectively.

The Company utilizes software and related technologies throughout its
business that will be affected by the "Year 2000 problem," which is common to
most corporations, and concerns the inability of information systems, primarily
computer software programs, to recognize and process date sensitive information
properly as the year 2000 approaches. An internal study is currently under way
to determine the full scope and related costs of the Year 2000 problem to ensure
that the Company's systems continue to meet its internal needs and those of its
customers. The Company currently believes it will be able to modify or replace
its affected systems in time to minimize any detrimental effects on operations.
While it is not possible, at present, to give an accurate estimate of the cost
of this work, the Company expects that such costs may be material to its
results of operations in one or more fiscal quarters or years, but
will not have a material adverse impact on the long-term results of operations,
liquidity or consolidated financial position of the Company. System
maintenance or software modification costs will be expensed as incurred, while
the costs of new software will be capitalized and amortized over the software's
useful life.

Fiscal 1996 Compared to Fiscal 1995

In September, 1995, Hurricanes Luis and Marilyn inflicted damage on
several of the Company's stores and caused significant damage to various
islands' infrastructures, including hotels and other tourist facilities. As of
July 30, 1996, all stores have reopened with the exception of one store in
Marigot, St. Martin, which is scheduled to reopen in the fall of 1996.

The Company has settled all outstanding claims related to the hurricanes
with its insurance carriers. In connection with the final settlement, the
Company received approximately $13.4 million in property and business
interruption proceeds. The Company recorded a net gain of approximately $4.7
million in fiscal 1996, after write-offs related to damaged assets of
approximately $8.1 million, including furniture and fixtures, inventory and
other assets related to stores affected by the hurricanes. In addition,
approximately $560,000, representing lost profits for the as yet unopened
Marigot store related to fiscal 1997, has been recorded as deferred income on
the Company's consolidated balance sheet as of June 1, 1996.

Net sales for the fiscal year ended June 1, 1996, decreased
approximately $9.3 million or 13% from $72.2 million in fiscal 1995 to $62.9
million in fiscal 1996. Sales for stores open in all of fiscal 1995 and 1996
increased approximately $3.6 million or 17.3% from $20.6 million in fiscal 1995
to $24.2 million in fiscal 1996. The sales trends were dictated by the impact of
hurricanes Luis and Marilyn, which struck the Caribbean in September 1995,
forcing stores closures on the island of St. Thomas, St. Maarten, St. Barths,
St. Kitts and Antigua. As of year-end all but two little Switzerland stores
reopened. One Marigot, St. Martin store reopened in mid-June 1996, with the
other Marigot store scheduled to reopen in November 1996. As a result of the
store closures and damaged island infrastructures management believes tourism
was redirected to other destinations, thereby benefitting Little Switzerland
stores on undamaged islands.

Gross profit margin decreased from 42.8% of sales in fiscal 1995 to
42.5% of sales in fiscal 1996. The Company attributes this decline to the weak
U.S. Dollar as compared to European currencies during the early portion of the
year as well as the impact of certain fixed components of cost-of-sales as
measured against a much lower sales base.

<PAGE>

SG&A expenses were $29.8 million or $3.6 million and 13.6% higher than a
year ago. Management attributes these increases mostly to new stores opened
during fiscal 1996.

Net interest expense increased from $240,000 in fiscal 1995 to $558,000
in fiscal 1996. The increase reflects higher average borrowings, primarily due
to the Company's acquisition of the inventory, leasehold rights and fixed assets
of two stores in Barbados in February 1996. The weighted average interest rate
decreased from 7.9% in fiscal 1995 to 6.5% in fiscal 1996.

The Company's income is subject to taxation in each of the jurisdictions
in which it operates at rates currently ranging from 3.7% to 42.0%, and,
accordingly, the effective tax rate for any given year is a function of the
relative mix of taxable income generated at each of the Company's locations. The
Company's wholly-owned subsidiary, L.S. Wholesale, Inc., which acts as a
purchasing agent for items sold by the Company's stores and charges fees for
acting as such an agent, has elected to be treated as a "936 Company" under
Section 936 of the Internal Revenue Code of 1986, as amended. Under an agreement
which expires in 1998 (subject to renewal), Wholesale benefits from a lower tax
rate on its income earned outside the U. S. Virgin Islands, which is taxed at a
rate of 3.74%. The Company's effective tax rate was 17.8% in fiscal 1995 and
17.4% in fiscal 1996.

Fiscal 1995 Compared to Fiscal 1994

Net sales for the fiscal year ended May 31, 1995 increased approximately
$7.9 million or 12.3% from $64.3 million in fiscal 1994 to $72.2 million in
fiscal 1995. Sales for stores open in all of fiscal 1994 and 1995 increased
approximately $2.6 million or 4.1% from $64.3 million in fiscal 1994 to $66.9
million in fiscal 1995. The Company's stores in St. Barth, Aruba, Antigua and
St. Lucia experienced sales increases in fiscal 1995. St. Thomas sales were flat
due to ongoing street and sewer construction which affected the downtown area
where most of the stores are located as well as a weak summer tourist season
which negatively impacted sales in the first half of the fiscal year. The
increase in total net sales is largely attributable to new stores in St. Thomas,
Ketchikan, Antigua and Marigot, St. Martin. The comparable store increase
resulted from sales increases in St. Barths, Aruba, Antigua and St. Lucia.

Gross profit margins decreased from 44.1% of net sales in fiscal 1994 to
42.8% in fiscal 1995 thereby impairing overall net income. The Company
attributes this decline to its program to reduce aged inventory levels and to
refine its product mix as well as a decline in the value of the U.S. Dollar
relative to European currencies in which much of its merchandise purchases are
denominated.

SG&A increased approximately $3.1 million or 13.3% from $23.1 million in
fiscal 1994 to $26.2 million in fiscal 1995. As a percentage of net sales, SG&A
increased from 36.0% in fiscal 1994 to 36.3% in fiscal 1995. The $3.1 million
increase in SG&A was due mostly to costs of new stores. On a comparable store
basis SG&A expenses increased 3.7% from the prior fiscal year.

Net interest expense increased slightly from $225,000 in fiscal 1994 to
$240,000 in fiscal 1995. The increase reflects higher interest rates. The
weighted average interest rate increased from 5.6% in fiscal 1994 to 7.9% in
fiscal 1995. The borrowing represented utilization of the Company's short-term
credit facilities to finance inventory buildup prior to the high selling season.

The Company's effective tax rate was 18.0% in fiscal 1994 and 17.8% in
fiscal 1995.

Liquidity and Capital Resources

The Company's primary needs for liquidity are to support its inventory
requirements, which fluctuate during the year due to the seasonal nature of the
Company's business, and to maintain and remodel its existing stores and finance
the opening or acquisition of new stores.

<PAGE>

Inventory is maintained at levels to adequately meet the demands of customers
who, as tourists, require immediate delivery of purchased goods.

Cash provided by operations during fiscal 1997, 1996 and 1995 was $0.4
million, $3.8 million and $2.5 million, respectively. The decrease in fiscal
1997 was primarily due to the loss of approximately $2.4 million in cash as a
result of the alleged employee theft during fiscal 1997 more fully disclosed
above. See "Employee Defalcation Loss."

The Company has available unsecured credit facilities of $19.3 million
of which $8.1 million in borrowings were outstanding as of May 31, 1997.
Additionally, in February 1996, the Company secured term debt of approximately
$8.9 million from its two lead banks to finance its acquisition of the fixtures,
leasehold rights and inventories of two stores in Barbados. Interest on this
debt is payable monthly and the principal is payable in equal quarterly payments
over a four year period commencing March 1997. As of May 31, 1997, the Company
was in compliance with all restrictive covenants related to its unsecured and
term debt agreements. Additionally, the Company has available separate
facilities for foreign exchange contracts. It remains management's expectation
that funds available from operations and existing credit facilities will be
sufficient to fund operations and expansion for at least the next three years.

Capital expenditures (excluding acquisitions) during fiscal 1997, 1996
and 1995 were approximately $4.4 million, $6.8 million and $4.5 million,
respectively. Capital expenditures during fiscal 1997 include approximately $3.6
million for the refurbishment of existing stores and approximately $800,000 for
computer and point-of-sale hardware and software upgrades. Capital expenditures
during fiscal 1996 included approximately $3.4 million for new stores and
fixtures and $2.5 million for the refurbishment of existing stores and
approximately $715,000 for computer and point-of-sale hardware and software
upgrades.

The Company currently leases 26 of its 27 stores and anticipates
obtaining retail space for new stores through leases. This arrangement allows
the Company to more effectively design and decorate its stores with quality
furnishings consistent with the prestigious image the Company maintains.

Seasonality

The Company's business is seasonal in nature, reflecting travel patterns
to the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. Accordingly, approximately one-third of the Company's sales have
historically occurred during the third fiscal quarter, and the Company may incur
losses in the first and second fiscal quarters. Working capital requirements
generally reflect this seasonality as the Company increases its inventory in
anticipation of the peak selling season. Since the Company has less cash
available in the off season, it may be necessary to borrow to finance its
build-up of inventory and any expansion of the Company's operations. Unaudited
quarterly financial information for the Company for fiscal 1996 and 1995 is
included in Note 9 of Notes to Consolidated Financial Statements.

Inflation

Exchange Rates

While the Company receives United States dollars for most of its sales,
a significant portion of the Company's inventory purchases are transacted in
foreign currencies. Because of the Company's need to maintain adequate levels of
inventory, the Company must place large orders for merchandise many months in
advance of when it will receive payment for the merchandise from customers.

<PAGE>

The Company's ability to offer attractive pricing of luxury goods purchased in
foreign currency depends in part on the relative exchange rates between the
United States dollar and the various foreign currencies. The Company engages in
hedging transactions to minimize the effects of fluctuating foreign exchange
rates on the Company's results of operations. The Company enters into foreign
exchange contracts to hedge against foreign currency fluctuations for purchase
commitments and accounts payable denominated in foreign currencies. The Company
believes that foreign currency hedging has been effective in minimizing the
impact of foreign currency fluctuations on gross margin in prior years and
expects to continue this program. See Note 2 of Notes to Consolidated Financial
Statements.

Other Matters

In August 1995, the Company announced that it had received inquiries
from third parties regarding a possible acquisition of or business combination
with the Company. The Company asked its financial advisors, Wasserstein Perella
& Co. and Triumph Capital Group, to assist the Company in evaluating these
inquiries.

During fiscal 1997, the Company again received inquiries from third
parties regarding a possible strategic transaction with the Company. After
completing an operational and strategic review of the Company, Little
Switzerland announced in August 1997 that it was pursuing various strategic
alternatives and that its financial advisor, Wasserstein Perella & Co., Inc.,
would discuss possible business combinations with certain third parties.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LITTLE SWITZERLAND, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Public Accountants................................. 18

Consolidated Balance Sheets.............................................. 19

Consolidated Statements of Income........................................ 20

Consolidated Statements of Changes in Stockholders' Equity............... 21

Consolidated Statements of Cash Flows.................................... 22

Notes to Consolidated Financial Statements............................... 23

<PAGE>

ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Little Switzerland, Inc.:

We have audited the accompanying consolidated balance sheets of Little
Switzerland, Inc. (a Delaware corporation) and subsidiaries as of May 31, 1997
and June 1, 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the fiscal years ended May 31,
1997, June 1, 1996 and May 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Little Switzerland, Inc. and subsidiaries as of May 31, 1997 and June 1, 1996,
and the results of their operations and their cash flows for each of the fiscal
years ended May 31, 1997, June 1, 1996 and May 31, 1995, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
September 25, 1997

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

May 31, June 1,
ASSETS 1997 1996
---------- ----------
<S> <C> <C>

Current assets:
Cash and cash equivalents (Notes 2 and 13).............................. $ 1,710 $ 5,393
Accounts receivable..................................................... 2,083 1,892
Inventory (Note 2)...................................................... 44,728 43,678
Prepaid expenses and other current assets............................... 2,172 1,607
--------- ----------
Total current assets.................................................. 50,693 52,570
--------- ----------

Property, plant and equipment, at cost, (Note 2)........................... 38,565 34,247
Less--Accumulated depreciation.......................................... 15,201 12,522
--------- ----------
23,364 21,725
Other assets (Note 2)...................................................... 3,334 3,582
--------- ----------

Total assets.......................................................... $ 77,391 $ 77,877
========= ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long term debt (Note 4).............................. $ 2,225 $ 832
Unsecured notes payable (Note 4)........................................ 8,100 7,100
Accounts payable........................................................ 7,002 6,839
Accrued and currently deferred income taxes (Notes 2 and 5) ............ 429 2,002
Other accrued expenses and deferred income (Notes 2 and 12) ............ 2,431 3,225
--------- ----------

Total current liabilities............................................. 20,187 19,998

Long term debt............................................................. 6,119 8,068

Deferred income taxes (Notes 2 and 5)...................................... 186 90
--------- ----------

Total liabilities..................................................... 26,492 28,156
========= ==========

Commitments and contingencies (Note 6).....................................

Minority interest (Note 11)................................................ 1,619 1,619
--------- ----------

Stockholders' equity (Notes 1, 3 and 10):
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none.......................................... --- ---
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,462 shares in 1997 and 8,457 in 1996 ....... 85 85
Capital in excess of par................................................ 14,811 14,792
Retained earnings....................................................... 34,384 33,225
--------- ----------

Total stockholders' equity............................................ 49,280 48,102
========= ==========

Total liabilities, minority interest and stockholders' equity ........ $ 77,391 $ 77,877
--------- ----------

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)

For the Years Ended
-------------------------------------------
May 31, June 1, May 31,
1997 1996 1995
--------- ---------- --------
<S> <C> <C> <C>

Net sales............................................................ $ 88,314 $ 62,895 $ 72,240

Cost of sales........................................................ 49,721 36,164 41,307
--------- --------- ---------

Gross profit......................................................... 38,593 26,731 30,933

Selling, general and administrative expenses (Notes 2 and 13) ....... 36,492 29,778 26,197

Gain on insurance proceeds (Note 12)................................. 560 4,713 -
--------- --------- ---------

Operating income................................................. 2,661 1,666 4,736

Interest expense, net................................................ 1,502 558 240
--------- --------- ---------

Income before provision for income taxes......................... 1,159 1,108 4,496

Provision for income taxes (Notes 2 and 5)........................... - 193 802
--------- --------- ---------

Net income........................................................... $ 1,159 $ 915 $ 3,694
========= ========= =========

Net income per share (Note 2)........................................ $ 0.14 $ 0.11 $ 0.44
========= ========= =========

Weighted average shares outstanding (Notes 1 and 2) 8,526 8,456 8,451
========= ========= =========

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)

Common Stock Capital in
--------------------- Excess of Retained
Shares Amount Par Earnings Total
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>

Balance, May 31, 1994..................... 8,449 $ 84 $ 14,758 $ 28,616 $ 43,458

Net income............................ - - - 3,694 3,694

Shares issued under stock
purchase plan (Note 10)............. 3 1 18 - 19
------ -------- --------- -------- --------

Balance, May 31, 1995..................... 8,452 $ 85 $ 14,776 $ 32,310 $ 47,171

Net income............................ - - - 915 915

Shares issued under stock
purchase plan (Note 10)............. 5 - 16 - 16
------ -------- --------- -------- --------

Balance, June 1, 1996..................... 8,457 $ 85 $ 14,792 $ 33,225 $ 48,102

Net income............................ - - - 1,159 1,159

Shares issued under stock
purchase plan (Note 10)............. 5 - 19 - 19
------ -------- --------- -------- --------

Balance, May 31, 1997..................... 8,462 $ 85 $ 14,811 $ 34,384 $ 49,280
====== ======== ========= ======== ========

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

For the Years Ended

May 31, June 1, May 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>

Cash flows from operating activities:
Net income................................................ $ 1,159 $ 915 $ 3,694
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization......................... 3,077 2,489 2,157
Deferred gain from insurance proceeds (560) - -
Loss on retirement of fixed assets.................... 22 2,918 -
Increase (decrease) in deferred income taxes 96 (144) (122)
Changes in assets and liabilities:
(Increase) in accounts receivable....................... (191) (72) (244)
(Increase) in inventory................................. (1,050) (3,499) (4,477)
(Increase) decrease in prepaid expenses
and other current assets.............................. (522) 178 (489)
Increase in accounts payable............................ 163 355 1,350
Increase (decrease) in other accrued expenses
and deferred income................................... (234) 1,065 100
Increase (decrease) in accrued and
currently deferred income taxes....................... (1,573) (395) 536
--------- --------- ---------
Net cash provided by operating activities ............... 387 3,810 2,505
--------- --------- ---------

Cash flows from investing activities:
Capital expenditures...................................... (4,388) (6,806) (4,542)
Decrease (increase) in other assets....................... (145) (1,609) 286
Acquisition of inventory and fixed assets
(Notes 2 and 11)........................................ - (8,917) -
--------- --------- ---------
Net cash used in investing activities......................... (4,533) (17,332) (4,256)
--------- --------- ---------

Cash flows from financing activities:
Borrowing under unsecured notes payable .................. 26,950 32,400 36,297
Repayment of unsecured notes payable...................... (25,950) (25,300) (36,297)
Proceeds from (repayments of) long term borrowings ....... (556) 8,900 -
Issuance of common stock.................................. 19 16 18
--------- --------- ---------
Net cash provided by financing activities .............. 463 16,016 18

Net (decrease) increase in cash and cash equivalents ......... (3,683) 2,494 (1,733)

Cash and cash equivalents, beginning of year ................. 5,393 2,899 4,632
--------- --------- ---------

Cash and cash equivalents, end of year........................ $ 1,710 $ 5,393 $ 2,899
========= ========= =========

Cash paid during the year for:
Income Taxes.......................................... $ 1,543 $ 762 $ 620
========= ========= =========
Interest.............................................. $ 1,450 $ 590 $ 289
========= ========= =========

Non-cash activity:
Issuance of Preferred Stock by subsidiary
in acquisition of inventory and fixed assets ............. - 1,619 -
========= ========= =========

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

(1) Organization

Little Switzerland, Inc. (the "Company") was incorporated in May 1991. A
wholly owned subsidiary of Town & Country Corporation ("Town & Country")
contributed to the Company all of the outstanding shares of L.S. Holding, Inc.
and L.S. Wholesale, Inc. in exchange for 10,000,000 shares of the Company's
Common Stock. On June 3, 1991, the Company declared an 84 for 100 reverse stock
split resulting in outstanding shares of Common Stock of 8,400,000, which has
been retroactively reflected in the accompanying consolidated financial
statements.

L.S. Holding, Inc. was incorporated in July 1980 and has nine operating
subsidiaries: Montres et Bijoux, S.A.R.L.; World Gifts Imports N.V.; L.S.
Holding (Aruba) N.V.; L.S. Holding (Curacao) N.V.; Little Switzerland (St. Kitts
& Nevis) Limited; Little Switzerland (Antigua) Limited; Little Switzerland (St.
Lucia) Limited and L.S. Holding (USA), INC., World Gift Imports (Barbados)
Limited, (Note 2) which operate retail stores in the Virgin Islands, Aruba, St.
Kitts, Antigua, St. Lucia, the French and Netherlands Antilles, and Barbados.
Little Switzerland (BVI) Limited, incorporated in the British Virgin Island was
not yet in operation at June 1, 1996. L.S. Wholesale, Inc. was incorporated in
October 1987 and purchases inventory for distribution to L.S. Holding, Inc.'s
retail stores.

In July 1991, the Company completed an initial public offering (the
"Offering") whereby Switzerland Holding Inc., a wholly-owned subsidiary of Town
& Country, sold 5,700,000 shares of the Company's Common Stock at $12 per share.
Switzerland Holding, Inc. received all of the proceeds and paid substantially
all of the costs of the Offering.

Subsequent to the Offering, Switzerland Holding owned 2,700,000 shares
of the Company's Common Stock (approximately 32% of the issued and outstanding
Common Stock as of May 31, 1994) which were not registered in the Offering. In
connection with the consummation of the recapitalization of Town & Country
("T&C") in May 1993 (the "Recapitalization"), Switzerland Holding was dissolved
and 2,533,279 shares of the Company's Common Stock were transferred to a trust
(the "Trust") established for the benefit of T&C and the holders of T&C's
Exchangeable Preferred Stock (the "T&C Exchangeable Preferred Stock"). Each
holder of a share of T&C Exchangeable Preferred Stock may exchange such share
for one share of the Company's Common Stock held in the Trust.

On April 6, 1993, T&C exercised its rights under a Registration Rights
Agreement and requested that the Company file with the SEC a registration
statement covering the shares of the Company's Common Stock currently held in
The Trust. In accordance with the terms of the Registration Rights Agreement,
the Company caused such shares to be registered with the SEC.

In November 1994, holders of an aggregate of 2,381,038 shares of T&C
Exchangeable Preferred Stock exercised their right to exchange such shares for
Little Switzerland Common Stock on a share-for-share basis. Accordingly, the
Trust currently holds 152,241 shares of Little Switzerland Common Stock for the
benefit of T&C and the holders of T&C Exchangeable Preferred Stock.

(2) Summary of Significant Accounting Policies

Presentation

The accompanying consolidated financial statements include the
operations of the Company and its wholly owned subsidiaries, L.S. Holding, Inc.
and L.S. Wholesale, Inc. Certain reclassifications have been made to prior
years' consolidated financial statements to conform to the May 31, 1997
presentation. All significant intercompany balances have been eliminated in
consolidation.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

Effective with the second quarter of fiscal 1996, the Company adopted a
"4-5-4" fiscal calendar wherein each fiscal quarter contains two four week
periods and one five week period, with each period beginning on a Sunday and
ending on a Saturday. Previously, the Company used calendar months for its
fiscal periods. The purpose of this change is to provide more consistent
comparability between fiscal periods. The change in fiscal calendar added one
day to fiscal 1996 as compared to fiscal 1997. Management estimates that the one
day gained from this calendar change had no material effect on the reported net
income for fiscal 1996.

Risks and Uncertainties

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

Foreign Operations

Net sales and operating income from foreign operations (non-U.S.
possessions) amounted to 62%, 61% and 54%, and 22%, 174% and 40% of total net
sales and operating income, respectively, in fiscal 1997, 1996 and 1995,
respectively. Inter-segment sales were not material for all periods presented.
Identifiable assets of foreign operations amounted to 63%, 53% and 54% of total
assets as of May 31, 1997, June 1, 1996 and May 31, 1995, respectively.

Inventory

Inventory is valued at the lower of cost (first-in, first-out) or market
value and consists almost entirely of finished merchandise purchased for resale.

Advertising

The Company expenses the costs of advertising as advertisements are
printed and distributed. The Company's advertising consists primarily of
advertisements with local and national travel magazines which are produced on a
periodic basis and distributed to visiting tourists and fees paid for
promotional "port lecturer" programs directed primarily at cruise passengers.

Advertising expense for fiscal 1997, 1996 and 1995 was approximately
$3,138,000, $3,008,000 and $2,078,000, respectively. Prepaid advertising of
approximately $663,000 and $461,000 at May 31, 1997 and June 1, 1996,
respectively, is included in the consolidated balance sheets as prepaid expenses
and other current assets.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

Property, Plant and Equipment

Fixed assets are depreciated over their estimated useful lives,
principally using the straight-line method. Property, plant and equipment
consist of the following:

Estimated
Useful Life May 31 June 1
Range 1997 1996
------------ -------- ------
<S> <C> <C> <C>

Land and buildings............................. 20-40 Years $ 7,215,000 $ 7,191,000
Furniture and fixtures......................... 3-10 Years 12,338,000 11,671,000
Equipment...................................... 3-20 Years 4,735,000 3,615,000
Construction in progress....................... - 162,000 414,000
Leasehold improvements......................... Life of the lease
or useful life,
whichever is shorter 14,115,000 11,356,000
----------- -----------
$38,565,000 $34,247,000
=========== ===========

</TABLE>

Income Taxes

The Company follows the liability method of accounting for income taxes
as set forth in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Other Assets

Other assets consist primarily of amounts related to non-competition
agreements, rental deposits and the excess of cost over the fair market value of
the net assets of the business acquired (goodwill). Amounts related to
non-competition agreements are amortized over the lives of the respective
agreements. Amounts related to goodwill are being amortized over periods of up
to 10 years. Accumulated amortization totaled $340,821 and $33,132 at May 31,
1997 and June 1, 1996, respectively.

The Company accounts for long-lived and intangible assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of May 31, 1997 or June 1, 1996.

Foreign Exchange Contracts

The Company enters into foreign exchange contracts to hedge against
foreign currency fluctuations for purchase commitments and accounts payable
denominated in foreign currencies. Gains and losses on contracts to hedge
purchase commitments are included in the cost basis of the related purchases.
Deferred (losses) gains of approximately ($296,000) and $213,000, respectively,
are included in the inventory balances at May 31, 1997 and June 1, 1996,
respectively.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

At May 31, 1997, the Company had various contracts maturing during the
period from June through September, 1997 at contractually predetermined rates
totaling approximately $4,800,000.

The Company's functional currency, under Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation, for all foreign
locations is the U.S. dollar. Accordingly, all transaction and translation gains
and losses are included in the accompanying consolidated income statements.
Gains and losses for all periods presented were not material.

Other Accrued Expenses and Deferred Income

Other accrued expenses and deferred income are comprised of the
following:

May 31, June 1,
1997 1996
------- -------

Deferred income (Note 12)...................... $ -- $ 560,000
Customer deposits.............................. 484,000 512,000
Payroll and related items...................... 1,028,000 1,569,000
Other.......................................... 919,000 584,000
---------- ----------
$2,431,000 $3,225,000
========== ==========

Fair Value of Financial Instruments

In accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company has determined the estimated
fair value amounts of its financial instruments using appropriate market
information and valuation methodologies. Considerable judgement is required to
develop the estimates of fair value; thus, the estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and bank debt. The carrying value of these assets and
liabilities are a reasonable estimate of their fair value at May 31, 1997.

Net Income per Share

Net Income per share is computed based on the weighted average number of
common and common equivalent shares outstanding, where dilutive, during each
period. Common equivalent shares result from the assumed exercise of stock
options (Note 10). In February, 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of
Information about Capital Structure" effective for fiscal years ending after
December 15, 1997. Earlier adoption is not permitted. The Company's adoption of
SFAS No. 128 for fiscal 1997 will not materially impact its earnings per share
calculation and the adoption of SFAS No. 129 will have no impact on the
Company's current disclosures.

Cash Flows

For the purpose of the Consolidated Statements of Cash Flows, the
Company considers all highly liquid instruments with a purchased maturity of
three months or less to be cash equivalents. The carrying amount of cash and
cash equivalents approximates fair value due to the short maturities.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

(3) Transactions with Affiliates

The Company enters into a number of transactions with Town & Country of
which one of the Company's Directors is an Executive Officer. The Company
purchases a portion of its merchandise from Town & Country and its affiliated
companies at prices that management believes approximate arm's-length
transactions. Such purchases totaled approximately $640,000, $1,443,000 and
$2,502,000 in fiscal 1997, 1996 and 1995, respectively.

(4) Credit Arrangements

The Company has available a total of $19.3 million in unsecured credit
facilities, of which $7.6 million is available for borrowing with maturities
ranging from one to three years from May 31, 1997. Any unfunded portion of the
facilities can be withdrawn at the bank's discretion. Outstanding borrowings
against these credit facilities totaled $8.1 million and $7.1 million as of May
31, 1997 and June 1, 1996, respectively. Outstanding letters of credit against
these credit facilities totaled $3.6 million and $3.0 million as of May 31,
1997 and June 1, 1996, respectively. Additionally, in February 1996, the
Company secured term debt of approximately $8.9 million from its two lead banks
to finance its acquisition of the fixtures, leasehold rights and inventories of
two stores in Barbados. Interest on this debt accrues at an annual interest rate
of approximately 7.25% and is payable monthly. The principal is payable in equal
quarterly payments over a four year period commencing March 1997. As of May 31,
1997, the Company was in compliance with all restrictive covenants related to
its unsecured and term debt agreements. Additionally, the Company has available
separate facilities for foreign exchange contracts. The weighted average
interest rates incurred during fiscal 1997, 1996 and 1995 were approximately
7.9%, 6.5% and 7.9%, respectively.

(5) Income Taxes

The domestic (United States Virgin Islands "USVI", and Ketchikan, Juneau
and Skagway, Alaska) and foreign components of income before income taxes are as
follows:

For the Fiscal Years Ended
----------------------------------------------
May 31, June 1, May 31,
1997 1996 1995
-------- -------- ------

Domestic...................... $ 2,010,000 $ 202,000 $ 3,583,000
Foreign....................... (851,000) 906,000 913,000
----------- ----------- -----------

$ 1,159,000 $ 1,108,000 $ 4,496,000
=========== =========== ===========

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

The components of the provision (benefit) for income taxes are as follows:

For the Fiscal Years Ended
May 31, June 1, May 31,
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>

Current:
Domestic............................... $ (96,000) $ 137,000 $ 522,000
Foreign................................ - 200,000 402,000
------------ ------------ -----------

(96,000) 337,000 924,000
------------ ------------ -----------

Deferred:
Domestic............................... 96,000 (144,000) (122,000)
Foreign................................ - - -
------------ ------------ -----------
$ - $ 193,000 $ 802,000
============ ============ ===========

</TABLE>

The deferred tax provision (benefit) results primarily from the use of
different depreciation methods for financial reporting and tax purposes as well
as the difference in timing as to when insurance recoveries are taxable and when
they are recorded as income in the financial statements.

The Company's effective tax rate is less than the USVI statutory rate of
37.4% due to the following:

For the Fiscal Years Ended
-----------------------------------------------
May 31, June 1, May 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>

Computed tax provision at statutory rate............. $ 434,000 $ 426,000 $ 1,682,000

Increases (reductions) resulting from--
Differences between foreign provisions
recorded and provisions at USVI rate............. (441,000) (59,000) 62,000

Effect of earnings of subsidiary in USVI subject
to lower tax rate................................ (891,000) (1,032,000) (942,000)

Effect of subsidiary net operating losses not
benefited........................................ 898,000 858,000 -
------------ ------------ ------------

$ - $ 193,000 $ 802,000
============ ============ ============

</TABLE>

The lower tax rate in effect on certain of the income of a subsidiary in
the USVI expires, subject to renewal, in 1998 and had the effect of increasing
earnings per share by $0.12, $0.12 and $0.11 in fiscal 1997, 1996 and 1995,
respectively.

The net effective tax rate was approximately 0.0%, 17.4% and 17.8% for
fiscal 1997, 1996 and 1995, respectively.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

The deferred tax liability of $186,000 and $90,000 at May 31, 1997 and
June 1, 1996, respectively, is the result of the use of accelerated depreciation
methods for tax purposes as well as the difference in timing as to when
insurance proceeds are taxable and when they are recorded as income in the
financial statements. The Company's only deferred tax assets consist of net
operating loss carryforwards totaling approximately $1,756,000 and $858,000 as
of May 31, 1997 and June 1, 1996, for which a full valuation reserve has been
recorded. The valuation allowance relates to uncertainty surrounding the
realizability of the deferred tax assets in excess of the deferred tax
liabilities, principally the net operating loss carryforwards. For tax reporting
purposes, the Company has net operating loss carryforwards of approximately
$2,402,000 and $2,294,000 as of May 31, 1997 and June 1, 1996, respectively.
Utilization of the net operating loss carryforward is contingent on the
Company's ability to generate income in future years. The net operating loss
carryforwards will expire from 2011 to 2012 if not utilized.

(6) Commitments and Contingencies

Certain of the Company's facilities and retail stores are occupied under
operating leases expiring at various dates. The Company's rental commitments
under the noncancelable portion of these leases for each of the next five years
and, in total, thereafter at May 31, 1997 are as follows:

Total Lease
Year Commitment

1998............................................ $ 3,859,000
1999............................................ 3,254,000
2000............................................ 2,761,000
2001............................................ 2,314,000
2002............................................ 1,369,000
Thereafter...................................... 1,529,000
------------
$ 15,086,000

Rental expense included in the accompanying consolidated statements of
income amounted to approximately $4,167,000, $3,345,000 and $3,027,000 in fiscal
1997, 1996 and 1995, respectively.

The Company owns the building which houses its headquarters and
warehouse on St. Thomas and leases the underlying real property from the Virgin
Islands Port Authority under a 10-year ground lease. The ground lease is subject
to two five-year renewal terms and may be terminated by the lessor prior to the
expiration of its term subject to payment to the Company of the fair market
value of the Company's improvements.

Prior to the Company's initial public offering, Town & Country and
several of its wholly-owned subsidiaries had supplied the Company with jewelry.
Pursuant to written agreements entered into between Town & Country and each of
its subsidiaries and the Company, the subsidiaries have continued to supply
jewelry to the Company at the Company's option on the same terms and conditions
as were in effect prior to the initial public offering (Note 1). These
agreements are automatically renewed each year unless either party terminates
upon 60 days notice prior to the end of a year.

The Company is not a party to any material pending legal proceedings,
other than ordinary litigation incidental to the business. In the opinion of
management of the Company, these suits and claims should not result in final
judgments or settlements which, in the aggregate, would have a material adverse
effect on the Company's financial condition or results of operations.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

During 1997, the Company received an assessment from the local
government in Aruba that relates to the Company's 1987-1991 local income tax
returns regarding the deductibility of goodwill. The government in Aruba has
failed to provide the Company with the details of the assessment. The outcome of
this matter is uncertain, and as a result, management is not able to quantify
the related financial exposure, if any, at this time. However, in the opinion of
management of the Company, this assessment should not result in a final judgment
which would have a material adverse effect on the Company's financial condition
or results of operations.

(7) Franchise Agreement

In fiscal 1988, the Company entered into a 10-year franchise agreement
with Solomon Brothers Limited ("Solomon"), a Bahamian company engaged in the
wholesale and retail distribution of jewelry, gift items and consumables in the
Bahamas. The Company signed a new franchise agreement with Solomon, effective
November 1, 1996, with a two year term and option to renew for an additional two
years. Solomon is responsible for developing each store, in accordance with the
Company's specifications, once a new location has been agreed upon. The Company
provides ongoing assistance in retail and merchandising methods. Solomon is
responsible for the operation of each store, but the general operating methods
are dictated by the Company. Currently, Solomon operates eight locations in the
Bahama Islands under the name of "Little Switzerland."

In return for the use of the Little Switzerland name and the services
provided by Little Switzerland, the Company receives an annual franchise fee
which enables the Company to participate in the revenue of both Little
Switzerland stores operated by Solomon and other Solomon retail stores which are
not operated under the Little Switzerland name. Franchise fees are accrued by
the Company as earned based upon Solomon's revenues, as defined, or a minimum
annual fee of $100,000, and for fiscal 1997, 1996 and 1995 were approximately
$100,000, $100,000 and $37,000, respectively.

(8) Employee Benefit Plans

The Company provided a tax-qualified discretionary contribution
retirement plan for eligible USVI employees to which the Company, at its
discretion, contributed. Each employee became a participant following completion
of one year's employment, or, if later, the attainment of age 21. All
participants became fully vested after seven years of service. The amount
accrued and charged to expense for fiscal 1995 in connection with this plan was
approximately $50,000.

Effective June 1, 1996, the Company replaced its Discretionary
Contribution Plan with a 401(k) Plan under which the Company matches each
employee's contribution up to 3% of compensation. During fiscal 1997 and 1996
the Company matching totaled approximately $82,000 and $92,000, respectively.
The Company's contributions vest based on the employee's years of service, with
full vesting after five years of service.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

(9) Quarterly Data (Unaudited)

The following presents the unaudited quarterly results of operations for
fiscal 1997 and 1996 (in thousands except per share data):

First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
August 31 November 30 March 1 May 31
--------- ----------- ------- ------
<S> <C> <C> <C> <C>

Fiscal 1997
Net sales $ 15,868 $ 17,458 $ 32,624 $ 22,364
Gross profit 6,896 7,638 14,498 9,561
Net income(loss) (769) (560) 2,411 77
Net income(loss) per share $ (0.09) $ (0.07) $ 0.28 $ 0.01

August 31 December 2 March 2 June 1
--------- ---------- ------- ------
Fiscal 1996
Net sales $ 14,068 $ 9,751 $ 20,680 $ 18,396
Gross profit 6,091 4,170 8,886 7,584
Net income(loss) (250) (1,891) 397 2,659
Net income (loss) per share $ (0.03) $ (0.22) $ 0.05 $ 0.31

</TABLE>

(10) Stockholders' Equity

Stock Options

During 1991, the Company established the 1991 Option Plan to cover
option awards to key employees and directors who are also full time employees of
the Company. Under this plan, the Company may grant stock options for the
purchase of up to 500,000 shares of the Company's Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
During 1996, the Company amended the 1991 Option Plan to increase the aggregate
number of shares of the Common Stock of the Company available for grant under
the Plan from 500,000 to 900,000. As of May 31, 1997, 815,500 option shares were
outstanding under the 1991 Plan. Options granted under the Plan vest ratably
over a three to five year period and must be exercised within 10 years of the
date of grant.

During 1992, the Company established the 1992 Option Plan for
non-employee directors of the Company. Under this plan, the Company may grant
stock options for the purchase of up to 150,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the date of grant. As of May 31, 1997, 88,000 option shares have been granted
and were outstanding under the 1992 Plan. Options granted under the 1992 Option
Plan vest immediately and must be exercised within 10 years of the date of
grant.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

A summary of the status of the Company's stock option plan at May 31,
1997, June 1, 1996 and May 31, 1995 together with changes during the periods
then ended are presented in the following table:

1997 1996 1995
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Shares Average Price Shares Average Price Shares Average Price
Per Share Per Share Per Share
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>

Outstanding at beginning of period 839,344 6.36 531,844 8.02 425,594 10.50
Grants during period............. 65,000 4.79 315,000 3.61 232,000 5.13
Exercised during period.......... -- - - - - -
Forfeitures/Cancellations during
period ....................... 844 10.00 7,500 8.67 125,750 10.82
Outstanding at end of period 903,500 6.24 839,344 6.36 531,844 8.02

Options exercisable at end of
period .......................... 402,800 7.28 279,999 8.59 222,498 9.48

</TABLE>

Statement of Financial Accounting Standards No. 123 ("SFAS No. 123")

During 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock Based Compensation, which defines a fair value based
method of accounting for an employee stock option or similar equity instruments
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans.

The Company has elected to account for its stock-based compensation
plans under APB No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during fiscal 1997 and
1996, using the Black-Scholes option pricing model as prescribed by SFAS No. 123
and the following weighted average assumptions used for grants:

1997 1996
---- ----
Risk-free interest rate 6.41% 6.07%
Expected dividend yield 0% 0%
Expected lives 10 years 10 years
Expected volatility 32.21% 41.35%

Adjustments are made for options forfeited prior to vesting. The
total value of options granted was computed and would be amortized on a
straight-line basis over the vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's net
income and pro forma net income per share would have been reported as follows:

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

NET INCOME:

Year Ended May 31, Year Ended June 1
------------------ -----------------
1997 1996
---- ----

As Reported $ 1,159,266 $ 914,921
Pro Forma $ 967,129 $ 776,527

PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:

Year Ended May 31, Year Ended June 1
------------------ -----------------
1997 1996
---- ----

As Reported $ 0.14 $ 0.11
Pro Forma $ 0.11 $ 0.09

Employee Stock Purchase Plan

During 1992, the Company approved an Employee Stock Purchase Plan
permitting eligible employees to purchase Common Stock, semiannually on June 30
and December 31, at the average trading price during the six-month period, but
not less than specified minimums. Under this plan, 23,537 shares have been
issued as of May 31, 1997.

Shareholder Rights Agreement

On July 24, 1991, the Board of Directors adopted a Shareholder Rights
Plan and declared a dividend distribution of one preferred stock purchase right
for each outstanding share of Common Stock to stockholders of record as of the
close of business on July 25, 1991. Such rights only become exercisable, and
transferable apart from the Common Stock upon the earliest to occur of (I) ten
business days after the first public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of 15% or
more of the outstanding shares of Common Stock (an "Acquiring Person") (the date
of the public announcement is hereinafter referred to as the "Stock Acquisition
Date"); (ii) ten business days following the commencement of tender or exchange
offer that would result in a person or group becoming an Acquiring Person, or
(iii) the declaration by the Board of Directors that any person is an Adverse
Person. A "Grandfathered Person" (as defined below) shall not become an
Acquiring Person unless such Person shall become the beneficial owner of more
than the Grandfathered Percentage (as defined below) of the outstanding shares
of Common Stock. In the event that a person becomes an Acquiring Person or the
Board of Directors determines that a person is an Adverse Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive upon exercise that number of Units of Series A Preferred Stock
having a market value of two times the exercise price of the Right. In the event
that, at any time following the Stock Acquisition Date, the Company is acquired
in a merger or other business combination transaction or 50% of the Company's
assets or earning power is sold, the rights entitle holders to acquire common
stock of the acquiring company having a value equal to two times the exercise
price of the rights (such right is referred to as the "Merger Right"). The
rights may be redeemed in whole by the Company at $.01 per right at any time
prior to (I) the date on which a person is declared an Adverse Person, (ii) the
tenth business day after the Stock Acquisition Date, or (iii) the occurrence of
an event giving right to a Merger Right. The rights will expire on July 24,
2001.

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

A Grandfathered Person is generally defined as any person who or which,
together with its affiliates and associates, was, as of the close of business on
July 25, 1991, the beneficial owner of 15% or more of the shares of Common Stock
then outstanding. The Grandfathered Percentage is generally defined as the
percentage of outstanding shares of Common Stock beneficially owned by a
Grandfathered Person as of the close of business on July 25, 1991 plus an
additional two percentage points.

The Shareholder Rights Agreement was amended in April 1993 in connection
with the recapitalization of Town & Country to permit, among other things, the
shares of Common Stock owned by Town & Country to be transferred to a trust
established for the benefit of Town & Country and the holders of shares of Town
& Country's Exchangeable Preferred Stock.

(11) Acquisitions

On February 16, 1996, World Gift Imports (Barbados), Inc., a subsidiary
of LS Holding, Inc. which is a subsidiary of the Company, purchased the
leasehold rights, fixtures and inventories of two retail stores located in
Barbados, West Indies from Dacosta Mannings Inc., a subsidiary of Barbados
Shipping & Trading Company Limited. The two stores were previously operated
under the name of Louis Bayley and sold merchandise similar to that carried in
the Company's retail stores such as name brand watches, jewelry, china, crystal
and gift items at duty free prices. The Company began operating the two stores
as "Little Switzerland" stores on February 19, 1996.

The purchase price of approximately $10.6 million was financed by bank
borrowing provided by the Company's two primary banks, Chase Bank and Bank of
Nova Scotia, of approximately $9 million and the issuance of preferred stock of
approximately $1.6 million by World Gift Imports (Barbados), Inc. to the seller.
The preferred stock has been presented as a minority interest in a consolidated
subsidiary in the accompanying financial statements. The purchase price is
subject to adjustment three and four years after the closing date, based on the
sales performance of the two purchased stores and any additional stores that may
be opened by the Company in Barbados during that period. As a part of the
purchase agreement, the Company pays to the seller a management fee of 2.5% of
its Barbados stores annual sales up to $15 million and 1.25% of annual sales in
excess of $15 million, so long as the preferred stock is unredeemed. These
management fees totaled approximately $190,000 and $55,000 in 1997 and 1996,
respectively. The preferred stock may be redeemed by the Company at face value
at any time after three years from the date of close through nine years from the
date of close. Following that period, the Company retains the right of first
refusal to match any bona fide offer from a third party to purchase the
preferred stock.

The transaction was accounted for as a purchase transaction whereby the
purchase price, including transactions costs, was allocated to the tangible and
intangible assets acquired, based on their estimated fair value as of February
16, 1996.

Unaudited pro forma operating results of the Company for the years ended
June 1, 1996 and May 31, 1995 as adjusted for the debt financing and estimated
effects of the acquisition as if it had occurred on June 1, 1994, are as
follows:

<PAGE>

LITTLE SWITZERLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1997

Fiscal Year Ended
------------------------------
June 1, May 31,
1996 1995
-------- -------

Net sales.................................... $ 68,661,000 $ 77,932,000
Net income................................... 1,103,000 2,944,000
Net income per share......................... .13 .35
Weighted average shares outstanding.......... 8,456,000 8,451,000

(12) Gain on Insurance Proceeds

In September, 1995, Hurricanes Luis and Marilyn inflicted damage on
several of the Company's stores and caused significant damage to various
islands' infrastructures, including hotels and other tourist facilities.
All damaged stores had reopened by November 30, 1996.

The Company settled all outstanding claims related to the hurricanes
with its insurance carrier. In connection with the final settlement, the Company
received approximately $13.4 million in property and business interruption
proceeds. The Company recorded a net gain of approximately $4.7 million in
fiscal 1996, after write-offs related to damaged assets of approximately $8.1
million, including furniture and fixtures, inventory and other assets related to
stores affected by the hurricanes. Approximately $560,000 of deferred income as
of June 1, 1996 representing fiscal 1997 lost profits for the Marigot store, has
been recorded as income in the Company's consolidated statement of income for
fiscal 1997.

(13) Employee Defalcation Loss

<PAGE>

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

The firm of Arthur Andersen & Co. has served as the Company's
independent public accountants since its incorporation and has served as the
accountant for certain of its subsidiaries since 1980. Accordingly, there have
been no changes in the Company's accountants during the two most recent fiscal
years and no material disagreements between the Company and its accountants.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Directors

The Board of Directors of the Company consists of six members and is
divided into three classes, with two Directors in each class. Directors serve
for three-year terms, with one class of Directors being elected by the Company's
stockholders at each annual meeting. The Board of Directors has established an
Audit Committee, a Compensation Committee and an Investment Committee. The
members of the Audit Committee are Ms. Jacobs and Messrs. Correra and Donaldson.
The Audit Committee reviews the financial statements of the Company and the
scope of the annual audit, monitors the Company's internal financial and
accounting controls and recommends to the Board of Directors the appointment of
independent certified public accountants. The members of the Compensation
Committee are Messrs. Carey and Donaldson and Ms. Jacobs. The Compensation
Committee recommends the compensation levels of officers and employees of the
Company to the Board of Directors and is responsible for administering the
Company's stock option plans pursuant to authority delegated to it by the Board
of Directors. The members of the Investment Committee are Messrs. Correra and
Carey. The Investment Committee is responsible for reviewing and presenting to
the Board of Directors strategic alternatives available to the Company. The
Board of Directors does not have a nominating committee.

Directors who are officers or employees of the Company receive no
compensation for service as Directors. Directors who are not officers or
employees of the Company receive such compensation for their services as the
Board of Directors may from time to time determine. Non-employee Directors each
receive an annual retainer of $5,000, plus a fee of $2,500 for each Board of
Directors meeting attended ($500 if such meeting is held via telephone
conference) and $1,000 for each committee meeting attended ($500 if such meeting
is held via telephone conference) if such meeting does not take place in
conjunction with a regularly scheduled Board of Directors meeting. All Directors
are reimbursed for expenses incurred in connection with attendance at meetings.
Pursuant to the Company's 1992 Non-Employee Directors' Nonqualified Stock Option
Plan (the "1992 Option Plan"), each eligible non-employee Director automatically
receives an option to purchase 3,000 shares of Common Stock on the last day of
the Company's fiscal year. All options granted pursuant to the 1992 Option Plan
vest and are immediately exercisable upon grant. All options granted under the
1992 Option Plan have an exercise price equal to 100% of the fair market value
of a share of Common Stock on the grant date. On May 31, 1997, the eligible
non-employee Directors of the Company each received an option to purchase 3,000
shares of Common Stock at an exercise price of $4.50 per share, the fair market
value of the Common Stock on May 30, 1997.

Set forth below is certain information regarding the Directors of the
Company as of October 1, 1997, based on information furnished by them to the
Company.

<PAGE>

Name Age Director Since
- ---- --- --------------

Class I-Term Expires 1998

Francis X. Correra.................................. 59 1991
Ilene B. Jacobs..................................... 50 1991

Class II-Term Expires 1999

Timothy B. Donaldson................................ 63 1991
Kenneth W. Watson................................... 54 1991

Class III-Term Expires 1997

C. William Carey.................................... 60 1991
John E. Toler, Jr. ................................. 54 1995

The principal occupation and business experience during at least the
last five years for each Director of the Company is set forth below.

Mr. Carey is Chairman of the Board of Directors of the Company.
Since January 1997, Mr. Carey has been President of Carey Associates, Inc. From
1965 through January 3, 1997, he served as Chairman, Chief Executive Officer,
President and Treasurer of Town & Country Corporation which was the sole
shareholder of the Company prior to the public offering of approximately 68% of
the Company's Common Stock in July 1991. Mr. Carey is also a Director of
Prospect Street High Income Portfolio, Inc. and Solomon Brothers, Limited.

Mr. Correra has been President of Town & Country Fine Jewelry Group
since July 1996. Prior to such time, Mr. Correra served as Senior Vice President
and Chief Financial Officer of Town & Country since 1983.

Mr. Donaldson has been Chairman and Chief Executive Officer of Dynamo M.
Ltd. since 1995. He has been Ambassador to the United States, Government of the
Bahamas (1993 to 1995); Chairman, Bank of Montreal (Bahamas & Caribbean Ltd.)
(1980 to 1983); Governor, the Central Bank of The Bahamas (1968 to 1980);
Governor, International Monetary Fund (1974 to 1980); Governor, The World Bank
(1974 to 1980); and Governor, Caribbean Development Bank (1975 to 1980).

Ms. Jacobs has been Vice President of Digital Equipment Corporation
since 1986 and served as Treasurer of Digital Equipment Corporation from 1984
through July 1996. Ms. Jacobs currently serves as a Director of Arkwright Mutual
Insurance Company and AmerUs Life Holdings, Inc.

Mr. Toler has served as President and Chief Executive Officer and a
Director of the Company since November 1, 1995. Prior to joining the Company,
Mr. Toler was Director of Merchandising of Trimingham's, Bermuda, from May 1995
through October 1995 and President and Chief Executive Officer of Sage-Dey, Inc.
from August 1991 to May 1993. From October 1990 through July 1991, Mr. Toler was
President and Chief Executive Officer of Sage-Allen, Inc. Mr. Toler was a
15-year employee of May Department Stores Company where he served as President
and Chief Executive Officer of several regional department store divisions.

Mr. Watson served as Chief Executive Officer and President of the
Company from January 1, 1994 to October 21, 1994, and has been a Director since
1991. Since October 1996, Mr. Watson has served as Vice President-Consumer-New
York Times Magazine Group of the New York Times Company. Mr. Watson served as
Executive Vice President of KMart Corporation from October 1994 through March
1996. Mr. Watson was President of Louis Vuitton Stores, Inc. from July 1992 to
March 1993. Previously, he was Chairman and Chief Executive Officer of Gump's, a
retailer of jewelry, art and gift items from September 1989 to June 1992 and
President and Chief Executive Officer of Cartier, Inc. from 1985 to September
1989.

<PAGE>

Executive Officers

The names and ages of all executive officers of the Company and the
principal occupation and business experience during at least the last five years
for each are set forth below as of October 1, 1997.

Name Age Position
---- --- --------
<S> <C> <C>

John E. Toler, Jr. ....................... 54 Chief Executive Officer and President

Thomas Liston............................. 59 Entering Chief Financial Officer, Vice
President and Treasurer

Ronald J. Lataille........................ 35 Resigning Chief Financial Officer, Vice
President and Treasurer

William Canfield.......................... 50 Vice President of Store Operations

</TABLE>

Mr. Liston joined the Company on September 29, 1997 and will become its
new Chief Financial Officer, Vice President and Treasurer, effective no later
than October 31, 1997. Until recently, Mr. Liston was Vice Chairman and Chief
Financial Officer of Barry's Jewelers, Inc. Prior to his tenure with Barry's,
Mr. Liston held senior management positions with Crescent Jewelers Inc. and
Gump's.

Mr. Lataille has served as Chief Financial Officer, Vice President and
Treasurer of the Company since May 1991 but will be resigning as such effective
no later than October 31, 1997. From October 21, 1994 through October 31, 1995,
Mr. Lataille also served as the acting Chief Executive Officer and President of
the Company. He was Controller of the Company from May 1990 to May 1991. Prior
to joining the Company, he was an Audit Manager with Coopers & Lybrand from
January 1990 to May 1990 and an Audit Supervisor from January 1987 to January
1990. Mr. Lataille has agreed to remain with the Company through October in
order to facilitate a smooth transition in personnel.

Mr. Canfield has been Vice President of Store Operations since June
1994. Mr. Canfield was Retail General Manager -Watches and Jewelry of Colombian
Emeralds International from December 1979 to June 1994.

Each of the officers holds his respective office until the regular
annual meeting of the Board of Directors following the annual meeting of
stockholders and until his successor is elected and qualified or until his
earlier resignation or removal.

Denis X. Comment served as Senior Vice President of Merchandise of the
Company from 1994 through August 31, 1997 and, prior to such time, served as
Vice President of Merchandise of the Company since 1987. Mr. Comment was a buyer
of watches and jewelry and a supervisor of crystal, china and perfume buyers for
the Company from 1986 to 1987 and a store manager from 1980 through 1985. Mr.
Comment resigned from the Company, effective August 31, 1997.

<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of the
Company's outstanding shares of Common Stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and NASDAQ.
Officers, directors and greater than ten percent stockholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons that no Section
16(a) reports were required for those persons, the Company believes that during
the fiscal year ended May 31, 1997, all filing requirements were complied with.

ITEM 11. EXECUTIVE COMPENSATION

The following sections of this Annual Report set forth and discuss the
compensation paid or awarded during the last three years to the Company's Chief
Executive Officer and the four most highly compensated executive officers who
earned in excess of $100,000 during Fiscal 1997.

Summary Compensation Table

The following table shows for the fiscal years ended May 31, 1995, June
1, 1996 and May 31, 1997 compensation paid by the Company to the Chief Executive
Officer and the four most highly compensated executive officers who earned in
excess of $100,000 during Fiscal 1997.

Long Term Compensation
-----------------------------
Annual compensation Awards Payouts
------------------------------ ------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Annual Restricted Securities LTIP All Other
Name and Compensation Stock Award(s) Underlying Payouts Compensation
Principal Position Year Salary($) Bonus($) ($) ($) Options (#) ($) ($)
- ------------------ ---- --------- -------- --------------- -------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

John E. Toler, Jr. 1997 300,000 - 3,000(5) - - - 519(10)
President and Chief 1996 177,804 50,000 1,750(6) - 300,000(8) - -
Executive Officer(1) 1995 - - - - - - -

Ronald J. Lataille 1997 150,000 44,202(3) - - - - -
President and Chief 1996 110,000 70,000(4) 1,250(7) - - - -
Executive Officer, 1995 110,000 15,000 1,750(6) - 75,000(9) - -
Chief Financial Officer
and Vice President (2)

Denis X. Comment 1997 165,000 - - - - - 3,894(10)
Senior Vice President 1996 150,000 15,000 - - - - 4,335(11)
of Merchandise 1995 136,538 10,000 - - 75,000(9) - -

William Canfield 1997 173,000 - - - - - -
Vice President of 1996 156,327 15,000 - - - - -
Store Operations 1995 141,923 55,000 - - 60,000 - -
- -------------------

</TABLE>

(1) Mr. Toler was appointed Chief Executive Officer and President on
November 1, 1995.

(2) Mr. Lataille resigned as the acting Chief Executive Officer and
President of the Company on October 31, 1995.

(3) Mr. Lataille was awarded a bonus of $44,202 as compensation for certain
specific services to the Company performed in Fiscal 1996.

(4) Mr. Lataille was awarded a bonus of $50,000 as compensation for his
services to the Company as its acting President and Chief Executive
Officer from October 21, 1994 to October 31, 1995.

(5) This amount represents the cost to the Company for one year of certain
automobile allowances.

<PAGE>

(6) This amount represents the cost to the Company for seven months of
certain automobile allowances.

(7) This amount represents the cost to the Company for five months of
certain automobile allowances.

(8) In connection with his appointment as President and Chief Executive
Officer of the Company, the Company granted Mr. Toler an option to
purchase 300,000 shares of the Company's Common Stock pursuant to the
1991 Option Plan. See "Option Grants in Last Fiscal Year."

(9) In connection with the December 21, 1994 grant of an option to purchase
75,000 shares of the Company's Common Stock pursuant to the 1991 Option
Plan, the Company canceled an option to purchase 25,000 shares of the
Company's Common Stock that was granted on November 6, 1992 pursuant to
the 1991 Plan.

(10) Effective June 1, 1996, the Company replaced its tax-qualified
discretionary contribution retirement plan (the "Retirement Plan")
with a 401(k) Plan under which the Company matches each employee's
contribution up to 3% of compensation. In Fiscal 1997, the Company
contributed $519 and $3,894 to individual accounts maintained on behalf
of Mr. Toler and Mr. Comment, respectively, pursuant to the 401(k) Plan.

(11) The Company contributed $4,335 to the Retirement Plan on behalf of Mr.
Comment in Fiscal 1996. As of May 31, 1997, the total amount of
contributions made by the Company to Mr. Comment's account pursuant to
the Retirement Plan was $11,767. The Company made no contributions to
the Retirement Plan on behalf of Mr. Comment in Fiscal 1997 or
Fiscal 1995.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Values

The following table sets forth the shares acquired and the value
realized upon exercise of stock options during Fiscal 1997 by the Chief
Executive Officer and each other executive officer named in the Summary
Compensation Table and certain information concerning the number and value of
unexercised options.

(a) (b) (c) (d) (e)
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at
Shares Acquired on Value Options at FY-End(#) FY-End($)(1)
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>

John E. Toler, Jr........ - - 60,000 240,000 60,000 240,000

Ronald J. Lataille....... - - 63,500 30,000 - -

Denis X. Comment......... - - 71,000 30,000 - -

William Canfield......... - - 18,500 41,500 - -

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

</TABLE>

(1) Equal to the market value of shares covered by in-the-money options on
May 31, 1997 (based on the market value of $4.50 per share as reported
by the NASDAQ National Market as of May 30, 1997) less the aggregate
option exercise price. Options are in-the-money if the market value of
the shares covered thereby is greater than the option exercise price.

<PAGE>

Report of the Compensation Committee of the Board of Directors on Executive
Compensation

The Compensation Committee of the Board of Directors of the Company
consists of C. William Carey, Timothy B. Donaldson and Ilene B. Jacobs, all of
whom are outside directors. The Compensation Committee approves Company
compensation policies and procedures and establishes compensation levels for
executive officers. The Compensation Committee also administers and grants
awards under the 1991 Option Plan and the Company's Employee Stock Purchase
Plan.

Compensation Policies for Executive Officers

The Compensation Committee's executive compensation philosophy is to
provide competitive levels of compensation, integrate management's pay with
Company performance, reward above average individual performance, and assist the
Company in attracting and retaining qualified management. The Compensation
Committee has determined that base salaries of executive officers should be set
at levels that are competitive within the local retail industry. In addition,
the Compensation Committee believes that it is appropriate to reward outstanding
performance through a combination of cash bonuses and stock option grants and,
through stock option grants, to provide a competitive compensation package that
will enable the Company to attract and retain the executives needed to achieve
such performance. The Compensation Committee also has determined that any stock
option or other equity-based compensation should involve long-term vesting to
encourage long-term tenure and enhancement of shareholder value over the
long-term.

Base salaries for executive officers are targeted according to the
salaries of employees holding similar offices and having similar
responsibilities within the local retail industry. The Compensation Committee
also considers the relative cost of living within the United States Virgin
Islands. Annual salary adjustments for executive officers are determined by
evaluating the competitive marketplace, the performance of the Company, the
performance of the executive officer and any change in the responsibilities
assumed by the executive officer. Salary adjustments are normally determined
and made on an annual basis.

The base salary and salary adjustments for John E. Toler, Jr., President
and Chief Executive Officer since November 1, 1995, and William Canfield, Vice
President of Store Operations since June 16, 1994, were established pursuant to
their respective employment agreements, as described below under "Employment
Agreements." The terms of employment of Ronald J. Lataille, the Chief Financial
Officer, Vice President and Treasurer of the Company, were determined by the
Compensation Committee and approved by the Board of Directors. See
"--Compensation of the Chief Executive Officer" below.

Cash bonuses paid to executive officers generally are earned primarily
through the achievement of financial goals relative to each officer's
responsibilities. Such financial goals include targeted sales and profit levels,
earnings before interest and taxes ratios, selling, general and administrative
expense ratios, return on assets, inventory shrinkage and inventory turns.
Executive officers generally are eligible to earn up to 25% of their base
salaries in cash bonuses. Based upon the foregoing criteria, neither Mr.
Lataille nor Mr. Comment received any bonus for Fiscal 1997 performance. Cash
bonuses may also be paid to executive officers in accordance with the terms of
their employment agreements. Bonuses payable pursuant to such agreements
generally are earned through the achievement of the financial goals similar to
those discussed above and may also be awarded for executive retention purposes
in the sole discretion of the Compensation Committee. Pursuant to their
respective employment contracts, Messrs. Toler and Canfield were each eligible
to earn a bonus of up to 37.22% and 25%, respectively, of their respective base
salaries for Fiscal 1997. Based upon the performance of the Company for Fiscal
1997, neither Mr. Toler nor Mr. Canfield received any bonus. Occassionally,
cash bonuses are paid to executive officers for the performance of services to
the Company outside the scope of their offices, as determined by the Board of
Directors of the Company. See "--Compensation of the Chief Executive Officer"
and "Employment Agreements" below.

Stock options are designed to attract and retain executives who can make
significant contributions to the Company's success; reward executives for such
significant contributions; and give executives a longer-term incentive to
increase shareholder value. In determining whether to grant stock options to
executive officers, the Compensation Committee evaluates each officer's
performance by examining criteria similar to that involved in fixing cash
bonuses (but without any specific performance measures) and awards reflect
individual performance reviews. The Compensation Committee also may grant stock
options for executive retention purposes, taking into account, among other
things, general industry practice. Stock options typically vest over three to
five years in order to encourage outstanding performance over the long-term.
Historically, stock options generally have been

<PAGE>

granted with a ten-year term and an exercise price equal to 100% of the fair
market value of the Common Stock on the grant date.

Compensation of the Chief Executive Officer

John E. Toler, Jr. The base salary and bonus for Mr. Toler, the
Company's President and Chief Executive Officer since November 1, 1995, were
established by Mr. Toler's employment agreement. See "Employment Agreements"
below. During Fiscal 1997, there were no adjustments made to Mr. Toler's base
salary, and he received no cash bonus, in accordance with the terms of his
employment agreement. Additionally, pursuant to the terms of Mr. Toler's
employment agreement, the Company granted Mr. Toler an option to purchase
300,000 shares of the Company's Common Stock at $3.50 per share pursuant to the
1991 Option Plan. This option vests and becomes exercisable ratably over a
five-year period beginning on November 1, 1996.

Federal Tax Regulations

As a result of Section 162(m) of the Internal Revenue Code (the "Code"),
the Company's deduction of executive compensation may be limited to the extent
that a "covered employee" (i.e., the chief executive officer or one of the four
highest compensated officers who is employed on the last day of the Company's
taxable year and whose compensation is reported in the summary compensation
table in the Company's proxy statement) receives compensation in excess of
$1,000,000 in such taxable year of the Company (other than performance-based
compensation that otherwise meets the requirements of Section 162(m) of the
Code). The Company intends to take appropriate action to comply with such
regulations, if applicable, in the future.

C. William Carey Ilene B. Jacobs Timothy B. Donaldson

Compensation Committee Interlocks and Insider Participation

Mr. Carey, a member of the Compensation Committee and Chairman of the
Board of Directors of the Company, is the controlling stockholder of Town &
Country and was President, Chief Executive Officer and Chairman of the Board of
Town & Country until January 3, 1997. Town & Country and certain of its
subsidiaries supply the Company with jewelry. The aggregate amount of purchases
by the Company from these entities totaled approximately $2.5 million, $1.4
million and $640,000, in Fiscal 1995, 1996 and 1997 respectively. Pursuant to
written agreements among Town & Country, these subsidiaries and the Company,
Town & Country and the subsidiaries have agreed to supply jewelry to the Company
at the Company's option, on the terms and conditions in effect prior to the
Company's initial public offering. These agreements are automatically renewed
each year unless either party terminates upon 60 days' notice prior to the end
of a year. The Company believes that all jewelry purchased pursuant to these
agreements with Town & Country and its subsidiaries can be readily purchased
from other suppliers on comparable terms, and that these agreements do not
restrict the Company from purchasing from other sources. See "Certain
Relationships and Related Transactions."

On June 2, 1996, Mr. Carey entered into a consulting agreement with the
Company (the "Carey Consulting Agreement"). Pursuant to the Carey Consulting
Agreement, Mr. Carey has agreed to make himself available for a period of three
(3) years commencing on June 2, 1996 to provide consulting services to the
Company, including, without limitation, advice with respect to business and
product planning, marketing strategy, leasing and new store development and
executive recruitment. In exchange for such services, Mr. Carey will receive a
consulting fee at the annual rate of $150,000, payable in monthly installments.
In addition, Mr. Carey is entitled to receive reimbursement for all reasonable
expenses incurred by him on behalf of the Company in connection with the
performance of his obligations thereunder.

Shareholder Return Performance Graph

Set forth below is a line graph comparing the yearly percentage change
in the cumulative total shareholder return on the Company's Common Stock, based
on the market price of the Company's Common Stock and assuming reinvestment of
dividends, with the total return of companies within the NASDAQ stock market and
the companies within the NASDAQ Retail Trade Stocks Index prepared by the Center
for Research in Security Prices ("CRSP") at The University of Chicago Graduate
School of Business. The calculation of total cumulative return assumes a $100
investment in the Company's Common Stock, the NASDAQ stock market and the
NASDAQ Retail Stocks Index on July 18, 1991.

<PAGE>

[stock performance graph]

Comparison of Five-Year Cumulative Total Returns
Performance Report for
Little Switzerland, Inc.

Prepared by the Center for Research in Security Prices
Produced on 08/07/97 including data to 05/30/97

Company Index: CUSIP Ticker Class Sic Exchange

53752810 LSVI 5940 NASDAQ

Fiscal Year-end is 05/31/97

Market Index: Nasdaq Stock Market (US Companies)

Peer Index: Nasdaq Retail Trade Stocks
SIC 5200-5599, 5700-5799, 5900-5999 US & Foreign

Date Company Market Market Peer
Index Index Count Index
05/29/92 100.000, 100.000, 3955, 100.000,
06/30/92 93.878, 96.091, 3935, 93.556,
07/31/92 91.837, 99.494, 3899, 96.608,
08/31/92 108.163, 96.453, 3880, 90.804,
09/30/92 105.102, 100.038, 3878, 97.631,
10/30/92 108.163, 103.978, 3890, 100.257,
11/30/92 116.327, 112.253, 3906, 104.976,
12/31/92 123.469, 116.385, 3930, 106.382,
01/29/93 122.449, 119.698, 3918, 104.344,
02/26/93 116.327, 115.233, 3949, 98.821,
03/31/93 116.327, 118.568, 3973, 100.688,
04/30/93 89.796, 113.508, 4007, 94.650,
05/28/93 81.633, 120.288, 4035, 99.559,
06/30/93 62.245, 120.845, 4071, 99.411,
07/30/93 60.204, 120.987, 4103, 101.266,
08/31/93 59.184, 127.241, 4138, 107.010,
09/30/93 52.041, 131.030, 4173, 110.260,
10/29/93 63.265, 133.975, 4221, 114.676,
11/30/93 73.469, 129.979, 4304, 110.283,
12/31/93 75.510, 133.603, 4376, 112.255,
01/31/94 59.184, 137.659, 4400, 111.940,
02/28/94 69.388, 136.374, 4439, 109.659,
03/31/94 55.102, 127.988, 4491, 103.171,
04/29/94 57.143, 126.328, 4520, 103.389,
05/31/94 53.061, 126.636, 4562, 100.989,
06/30/94 51.020, 122.005, 4576, 98.963,
07/29/94 51.020, 124.507, 4594, 99.125,
08/31/94 53.061, 132.444, 4612, 106.569,
09/30/94 53.061, 132.106, 4615, 108.187,
10/31/94 43.878, 134.702, 4637, 109.507,
11/30/94 43.878, 130.234, 4653, 105.349,
12/30/94 42.857, 130.599, 4658, 102.272,
01/31/95 33.673, 131.331, 4648, 98.691,
02/28/95 42.857, 138.276, 4650, 100.728,
03/31/95 40.816, 142.375, 4644, 101.166,
04/28/95 36.735, 146.857, 4655, 100.613,
05/31/95 38.775, 150.644, 4654, 103.005,
06/30/95 35.714, 162.852, 4671, 111.437,
07/31/95 34.694, 174.822, 4690, 117.490,
08/31/95 48.980, 178.365, 4713, 117.160,
09/29/95 32.653, 182.466, 4709, 119.290,
10/31/95 30.612, 181.421, 4746, 117.185,
11/30/95 31.633, 185.681, 4778, 116.562,
12/29/95 31.633, 184.693, 4818, 112.667,
01/31/96 33.673, 185.604, 4808, 111.543,
02/29/96 33.673, 192.670, 4838, 118.912,
03/29/96 32.653, 193.308, 4877, 126.720,
04/30/96 47.449, 209.345, 4922, 138.175,
05/31/96 47.959, 218.958, 4980, 141.432,
06/28/96 42.857, 209.087, 5033, 135.439,
07/31/96 37.245, 190.464, 5065, 127.142,
08/30/96 35.714, 201.136, 5089, 136.150,
09/30/96 35.204, 216.521, 5095, 142.979,
10/31/96 39.796, 214.128, 5137, 137.077,
11/29/96 37.245, 227.367, 5177, 140.439,
12/31/96 37.245, 227.160, 5174, 134.322,
01/31/97 40.306, 243.303, 5159, 137.163,
02/28/97 38.776, 229.869, 5169, 132.431,
03/31/97 36.735, 214.869, 5168, 127.738,
04/30/97 40.306, 221.592, 5153, 123.604,
05/30/97 46.939, 246.713, 5147, 136.590,

The index level for all series was set to 100.0 on 5/29/92

Employment Agreements

On November 1, 1995, Mr. Toler entered into an employment agreement with
the Company (the "Toler Employment Agreement"), pursuant to which Mr. Toler
serves as President and Chief Executive Officer of the Company for a five-year
term. Under the Toler Employment Agreement, Mr. Toler receives a base salary of
$300,000 over each twelve month term ending on October 31, beginning with the
term ending on October 31, 1996. The Toler Agreement does not provide for any
adjustment of base salary over the term. Pursuant to the Toler Employment
Agreement, Mr. Toler is entitled to receive a bonus if certain performance
criteria are satisfied, ranging from 33.33% of base salary for Fiscal 1996 to
50% of base salary for fiscal year 1999 and each fiscal year thereafter. In the
event Mr. Toler's employment is terminated without cause, Mr. Toler is entitled
to receive the salary plus pro rata share of any cash bonus he would have
received if he had continued his employment for 18 months following the date of
such termination. Mr. Toler is subject to certain non-competition provisions
during the term of his employment and, in certain circumstances, for a period of
18 months subsequent to his leaving the Company.

On June 16, 1994, Mr. Canfield entered into an employment agreement with
the Company (the "Canfield Employment Agreement"), pursuant to which Mr.
Canfield serves as the Vice President of Store Operations of the Company for a
five-year term. Under the Canfield Employment Agreement, Mr. Canfield receives a
base salary ranging from $157,000 over the twelve-month term ending on June 15,
1996 to $182,000 over the twelve-month term ending on June 15, 1999, and upon
the achievement of certain financial performance criteria, a bonus in an amount
of up to 25% of his base salary in each year. Pursuant to the Canfield
Employment Agreement, Mr. Canfield received a signing bonus equal to $50,000 on
the date he became Vice President of Store Operations of the Company. In the
event Mr. Canfield's employment is terminated due to his disability, for
non-performance or without cause, Mr. Canfield is entitled to receive the salary
he would have received had he continued his employment for 60 days, 90 days or
12 months, respectively, following the date of such termination. Mr. Canfield is
subject to certain non-competition provisions during the term of his employment
and, in certain circumstances, for a period of up to one year subsequent to his
leaving the Company.

<PAGE>

Change-in-Control Agreements

Messrs. Lataille and Comment have each entered into Change-in-Control
Agreements (the "Change-in-Control Agreements") with the Company. Each
Change-in-Control Agreement provides that in the event of a "Termination Event"
(as defined in the Change-in-Control Agreements, and generally any termination
of employment (a) for any reason other than death or "For Cause" (as defined in
the Change-in-Control Agreements), or (b) by the executive subsequent to the
occurrence of a 10% reduction in the executive's annual base salary) subsequent
to a "Significant Event" (as defined in the Change-in-Control Agreements, and
generally a change in control, sale or other disposition of all or substantially
all of the assets, or liquidation or dissolution of the Company), the following
benefits will be provided: a monthly cash payment beginning 30 days after the
date of the Termination Event equal to one twenty-fourth (1/24th) of an
aggregate amount equal to two times the sum of the executive's highest annual
base salary paid at any time during the twenty-four months prior to the
Termination Event plus the amount of any bonuses paid during the previous fiscal
year; such monthly payment to be paid for a period of 24 months if the
Termination Event occurs within 1 year after a Significant Event or for a period
of 12 months if the Termination Event occurs any time after 1 year subsequent to
the Significant Event. A change in control is deemed to have occurred if, in the
event of certain tender offers, mergers, consolidations, sale of assets,
contested elections or other transactions in which the Company is acquired, (a)
directors of the Company before the transaction cease to constitute a majority
of the Board of Directors of the Company (or of any successor entity); (b) the
Company is not the surviving corporation; or (c) the stockholders of the Company
immediately prior to such transaction do not hold immediately after such
transaction a majority in the aggregate of the outstanding common shares of the
surviving entity.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table sets forth on the following page, to the best knowledge and
belief of the Company, certain information regarding the beneficial ownership of
the Company's Common Stock as of October 1, 1997 by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each of the Company's Directors, (iii) each of the named executive
officers in the Summary Compensation Table and (iv) all of the Company's
executive officers and Directors as a group.

<PAGE>

Shares
Directors, Executive Officers Beneficially Percent of
and 5% Stockholders Owned(1) Class(2)

<S> <C> <C>
ValueVest Partners L.P................................................. 837,400(3) 9.5%
1 Sansome Street, 39 Floor, San Francisco, CA 94104
Donald L. Sturm
3033 East First Avenue, Suite 200, Denver, CO 80206

Franklin Advisory Services, Inc........................................ 795,000(4) 9.0%
One Parker Plaza, Sixteenth Floor, Ft. Lee, NJ 07024
Franklin Resources, Inc.
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard, San Mateo, CA 94404

Heartland Advisors, Inc................................................ 665,000(5) 7.5%
790 North Milwaukee Street, Milwaukee , WI 53202

The TCW Group, Inc..................................................... 627,600(6) 7.1%
Robert Day
865 South Figueroa Street, Los Angeles, CA 90017

T. Rowe Price Associates, Inc.......................................... 431,100(7) 4.9%
T. Rowe Price New Horizons Fund, Inc.
100 E. Pratt Street, Baltimore, MD 21202

William Canfield....................................................... 31,000(8) *
C. William Carey....................................................... 55,000(9) *
Denis X. Comment....................................................... 72,459(10) *
Francis X. Correra..................................................... 30,000(11) *
Timothy B. Donaldson................................................... 21,000(12) *
Ilene B. Jacobs........................................................ 30,000(13) *
Ronald J. Lataille..................................................... 64,468(14) *
John E. Toler, Jr...................................................... 120,000(15) *
Kenneth W. Watson...................................................... 27,000(16) *
All directors and executive officers
as a group (9 persons)............................................... 450,927 5.1%

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

</TABLE>

* Less than 1%.

(1) Beneficial share ownership is determined pursuant to Rule 13d-3 under
the Exchange Act. Accordingly, a beneficial owner of a security includes
any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has or shares the
power to vote such security or the power to dispose of such security.
The amounts set forth as beneficially owned include shares owned, if
any, by spouses and relatives living in the same home as to which
beneficial ownership may be disclaimed. The amounts set forth as
beneficially owned include shares of Common Stock which such Directors
or officers had the right to acquire within 60 days of October 1, 1997
under options previously granted pursuant to the 1991 Option Plan and
the 1992 Option Plan.

(2) Percentages are calculated on the basis of 8,835,859 shares of stock
outstanding as of October 1, 1997, which includes 88,000 shares subject
to options exercisable within 60 days of October 1, 1997 granted
pursuant to the 1992 Option Plan, and 285,500 shares subject to options
exercisable within 60 days of October 1, 1997 granted pursuant to the
1991 Option Plan.

(3) The above information is based on copies of a statement on Schedule 13D
filed with the SEC on May 5, 1997, as amended by Amendment No. 1 to
Schedule 13D filed with the SEC on August 4, 1997, which indicates that
ValueVest Partners L.P. has sole voting and dispositive power with
respect to 395,300 shares and Donald L. Sturm has sole voting and
dispositive power with respect to 442,100 shares.

<PAGE>

(4) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 13, 1997, which indicates that the
Franklin Advisory Services, Inc. has sole voting and dispositive power
with respect to all 795,000 shares.

(5) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 14, 1997, which indicates that the
Heatland Advisors, Inc. has sole voting and dispositive power with
respect to all 665,000 shares.

(6) The above information is based on copies of a statement on Schedule 13D
filed with the SEC on February 13, 1996, which indicates that The TCW
Group, Inc. and Robert Day each has sole voting and dispositive power
with respect to all 627,600 shares.

(7) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 14, 1997, which indicates that T. Rowe
Price Associates, Inc. ("Price Associates") has sole dispositive power,
and T. Rowe Price New Horizons Fund, Inc. has sole voting power, with
respect to all 431,100 shares. These securities are owned by various
individual and institutional investors including T. Rowe Price New
Horizons Fund, Inc., for which Price Associates serves as investment
adviser with power to direct investments. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, as amended, Price
Associates is deemed to be a beneficial owner of such securities;
however, Price Associates expressly disclaims that it is, in fact, the
beneficial owner of such securities.

(8) Represents shares of Common Stock deemed to be beneficially owned by Mr.
Canfield which are subject to options previously granted pursuant to the
1991 Option Plan.

(9) Includes 10,000 shares and 20,000 shares of Common Stock deemed to be
beneficially owned by Mr. Carey which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively. Includes 25,000 shares of Common Stock deemed to be
beneficially owned by Mr. Carey which may be acquired pursuant to the
conversion of shares of Exchangeable Preferred Stock of Town & Country
Corporation beneficially owned by Mr. Carey. Does not include 152,241
shares of Common Stock held in the Trust by Linchmen Company, c/o State
Street Bank & Trust Company, as trustee for the Trust established in
connection with the recapitalization of Town & Country, of which Mr.
Carey is Chairman, President and the controlling stockholder. Does not
include 166,721 shares of Common Stock beneficially owned by Town &
Country.

(10) Includes 71,000 shares of Common Stock deemed to be beneficially owned
by Mr. Comment which are subject to options previously granted pursuant
to the 1991 Option Plan.

(11) Represents 10,000 shares and 20,000 shares of Common Stock deemed to be
beneficially owned by Mr. Correra which are subject to options
previously granted pursuant to the 1991 Option Plan and 1992 Option
Plan, respectively. Does not include 152,241 shares of Common Stock held
in the Trust by Linchmen Company, c/o State Street Bank & Trust Company,
as trustee for the Trust established in connection with the
recapitalization of Town & Country, of which Mr. Correra is Senior Vice
President and Chief Financial Officer. Does not include 166,721 shares
of Common Stock beneficially owned by Town & Country.

(12) Represents 10,000 shares and 11,000 shares of Common Stock deemed to be
beneficially owned by Mr. Donaldson which are subject to options
previously granted pursuant to the 1991 Option Plan and 1992 Option
Plan, respectively.

(13) Represents 10,000 shares and 20,000 shares of Common Stock deemed to be
beneficially owned by Ms. Jacobs which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively.

(14) Includes 63,500 shares of Common Stock deemed to be beneficially owned
by Mr. Lataille which are subject to options previously granted pursuant
to the 1991 Option Plan.

(15) Represents shares of Common Stock deemed to be beneficially owned by Mr.
Toler which are subject to options previously granted pursuant to the
1991 Option Plan.

(16) Represents 10,000 shares and 17,000 shares of Common Stock deemed to be
beneficially owned by Mr. Watson which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively.

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Carey, a Director and Chairman of the Board of Directors of the
Company, is the controlling stockholder of Town & Country and was Chairman,
President and Chief Executive Officer of Town & Country until January 3, 1997.
Prior to the consummation of Town & Country's recapitalization on May 14, 1993
(the "Recapitalization"), Switzerland Holding, Inc., a wholly-owned subsidiary
of Town & Country ("Switzerland Holding"), owned 2,700,000 shares of the
Company's Common Stock (approximately 32.0% of the issued and outstanding Common
Stock at that time). In connection with the consummation of the
Recapitalization, Switzerland Holding was dissolved and 2,533,279 shares of such
stock were transferred to a trust (the "Trust") established for the benefit of
Town & Country and the holders of Town & Country's Exchangeable Preferred Stock
(the "Town & Country Exchangeable Preferred Stock"). Generally, each holder of a
share of Town & Country Exchangeable Preferred Stock may exchange such share for
one share of the Company's Common Stock held in the Trust. On April 6, 1993,
Town & Country exercised its rights under a Registration Rights Agreement and
requested that the Company file with the SEC a registration statement covering
the shares of the Company's Common Stock currently held in the Trust. In
accordance with the terms of the Registration Rights Agreement, the Company
caused such shares to be registered with the SEC. In November 1994, holders of
an aggregate of 2,381,038 shares of Town & Country Exchangeable Preferred Stock
exercised their right to exchange such shares for shares of the Company's Common
Stock on a share-for-share basis. Accordingly, the Trust currently holds 152,241
shares of the Company's Common Stock for the benefit of Town & Country and the
holders of Town & Country Exchangeable Preferred Stock.

In addition to Mr. Carey, Mr Correra is President of Town & Country
Fine Jewelry Group and was Senior Vice President and Chief Financial Officer of
Town & Country from 1983 through June 1996. Town & Country and certain of its
subsidiaries supply the Company with jewelry. The aggregate amount of purchases
by the Company from these entities totaled approximately $2.5 million, $1.4
million and $640,000 in Fiscal 1995, 1996 and 1997 respectively. Pursuant to
written agreements among Town & Country, these subsidiaries and the Company,
Town & Country and the subsidiaries have agreed to supply jewelry to the Company
at the Company's option, on the terms and conditions in effect prior to the
Company's initial public offering. These agreements are automatically renewed
each year unless either party terminates upon 60 days' notice prior to the end
of a year. The Company believes that all jewelry purchased pursuant to these
agreements with Town & Country and its subsidiaries can be readily purchased
from other suppliers on comparable terms, and that these agreements do not
restrict the Company from purchasing from other sources.

Mr. Carey, a Director of the Company, is also a Director of Solomon
Brothers, Limited, the Company's franchisee which operates nine stores under the
Little Switzerland name in the Bahamas. In addition, Mr. Carey entered into the
Carey Consulting Agreement with the Company on June 2, 1996, which provides,
among other things, that Mr. Carey will receive in exchange for certain services
a consulting fee at the annual rate of $150,000 over a three (3) year term. See
"Executive Compensation--Compensation Committee Interlocks and Insider
Participation."

<PAGE>

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(1) Financial Statements

The financial statements filed as part of the report are listed on the
Index to Consolidated Statements on page 17.

(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulations of the Security and Exchange Commission are not required
under the related instructions or are not material, and therefore have
been omitted.

(3) Articles of Incorporation and By-Laws:

3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on Form
S-1, Registration No. 33-40907, filed with the Securities and
Exchange Commission on July 10, 1992 ("Amendment No. 1 to the
Form S-1");

3.2 The Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 3.4 to Amendment No. 1 to the Form
S-1.

(10) Material Contracts

10.1 The Little Switzerland, Inc. 1991 Stock Option Plan is
incorporated herein by reference to Exhibit 10.1 to Amendment
No. 1 to the Form S-1;

10.2 Franchise Agreement dated November 1, 1987, among L.S. Wholesale,
Inc., L.S. Holding, Inc. and Solomon Brothers Limited is
incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, Registration No. 33-40907,
filed with the Securities and Exchange Commission on June 4, 1991
("Form S-11");

10.3 L.S. Holding, Inc. Retirement Plan and Trust Agreement is
incorporated herein by reference to Exhibit 10.4 to Form S-1;

10.4 Registration Rights Agreement between Switzerland Holding, Inc.
and the Company is incorporated herein by reference to the
Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on May 29, 1992;

10.5 Manufacturing, Service and Pricing Agreement, dated as of March
1, 1991, between Anju Jewelry Limited and L.S. Wholesale, Inc.
is incorporated herein by reference to Exhibit 10.7 to Amendment
No. 1 to Form S-1;

10.6 Manufacturing, Service and Pricing Agreement dated as of March
1, 1991, between Essex International Company Limited and L.S.
Wholesale, Inc. is incorporated herein by reference to Exhibit
10.8 to Amendment No. 1 to Form S-1;

10.7 Manufacturing, Service and Pricing Agreement dated as of March
1, 1991, between Feature Enterprises, Inc. and L.S. Wholesale,
Inc. is incorporated herein by reference to Exhibit 10.9 to
Amendment No. 1 to Form S-1;

<PAGE>

10.8 Director and Officer Liability Insurance Policy is incorporated
herein by reference to Exhibit 10.11 to Amendment No. 2 to Form
S-1;

10.9 Shareholder Rights Agreement, dated as of July 25, 1991, between
the Company and State Street Bank and Trust Company, as Rights
Agent, is incorporated herein by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on July 26, 1991;

10.10 First Amendment to Shareholder Rights Agreement, dated as of
November 8, 1991, between the Company and State Street Bank and
Trust Company, as Rights Agent, is incorporated herein by
reference to Exhibit 28 to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on
November 15, 1991;

10.11 The Little Switzerland, Inc. 1992 Employee Stock Purchase Plan
is incorporated herein by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on May 29, 1992;

10.12 Purchase Agreement, dated January 23, 1992, between L.S.
Holding, Inc. and A.H. Riise Gift Shop, Inc. is incorporated
herein by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K filed with the Securities and Exchange
Commission on May 29, 1992;

10.13 Purchase Agreement, dated June 4, 1992, between Maria Tohme,
Meli, and Little Switzerland (St. Lucia) Limited is incorporated
herein by reference to Exhibit 10.15 to the Company's Transition
Report on Form 10-K filed with the Securities and Exchange
Commission on August 27, 1992;

10.14 Second Amendment to Shareholder Rights Agreement, dated as of
April 6, 1993, between the Company and State Street Bank and
Trust Company, as Rights Agent, as incorporated by reference to
Exhibit 28 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 22, 1993;

10.15 The Little Switzerland, Inc. 1992 Non-Employee Directors'
Nonqualified Stock Option Plan is incorporated herein by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on
May 26, 1993;

10.16 Employment Agreement between William Canfield and the Company is
incorporated herein by reference to Exhibit 10.16 of the 10-K
Report for the year ended May 31, 1995;

10.17 Form of Income Continuance Agreement between Ronald J. Lataille
and the Company and Denis X. Comment and the Company is
incorporated herein by reference to Exhibit 10.17 of the 10-K
Report for the year ended May 31, 1994;

10.18 Asset Purchase Agreement by and among World Gift Imports
(Barbados) Ltd. as Buyer, Dacosta Mannings Inc., as Seller and
Barbados Shipping & Trading Company Limited dated as of December
28, 1995 is incorporated herein by reference to Item 7(c) of the
8-K report filed February 16, 1996;

10.19 Employment agreement between John E. Toler, Jr. and the Company
is incorporated herein by reference to Exhibit 10.19 of the 10-K
Report for the year ended June 1, 1996.

10.20 Consulting Agreement between C. William Carey and the Company is
filed herewith as Exhibit 10.20.

(21) Subsidiaries of Registrant: A list of Subsidiaries of the Company is
filed herewith as Exhibit 21.

(23) Consent of Experts and Counsel: Consent of Arthur Andersen LLP is filed
herewith as Exhibit 23.

(b) Report on Form 8-K. No Form 8-K was issued by the registrant during the
three month period ended May 31, 1997.

<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 8th day of
October, 1997.

Little Switzerland, Inc.

By: /s/ John E. Toler, Jr.
--------------------------
John E. Toler, Jr.
Chief Executive Officer
and Director

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

Signatures Title Date Signed
- ---------- ----- -----------
<S> <C> <C>
/s/ Ronald J. Lataille
_______________________ Chief Financial Officer, October 8, 1997
Ronald J. Lataille Vice President and
Treasurer (Principal Financial
and Accounting Officer)

/s/ C. William Carey
________________________ Chairman of the Board and October 8, 1997
C. William Carey Director

/s/ Francis X. Correra
________________________ Director October 8, 1997
Francis X. Correra

/s/ Timothy B. Donaldson
________________________ Director October 8, 1997
Timothy B. Donaldson

/s/ Ilene B. Jacobs
________________________ Director October 8, 1997
Ilene B. Jacobs

/s/ Kenneth W. Watson
________________________ Director October 8, 1997
Kenneth W. Watson

/s/ John E. Toler, Jr.
________________________
John E. Toler, Jr. Chief Executive Officer October 8, 1997
and Director

</TABLE>

EXHIBIT 10.20

CONSULTING AGREEMENT

AGREEMENT made as of June 2, 1996 by and between Little Switzerland,
Inc., a Delaware corporation (the "Company"), and Mr. C. William Carey (the
"Consultant").

WITNESSETH

In consideration of the Consultant's past experience with and advice to
the Company, this engagement by the Company of the Consultant and of other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Consultant represents and warrants to, and agrees with, the
Company as follows:

1. ENGAGEMENT. The Company hereby agrees to engage the Consultant and
the Consultant hereby agrees to accept such engagement by the Company on the
terms and conditions set forth herein.

2. CONSULTATION AND TERM. For a period of three (3) years commencing on
June 2, 1996, the Consultant shall make himself available to the Company to
provide consulting services to the Company, which shall include, but shall not
be limited to, providing advice with respect to the operations, business and
strategic development of the Company. The Consultant agrees to serve the Company
faithfully and to the best of his ability and to use his best efforts in the
promotion and advancement of the Company and its welfare. The Consultant's
consultation hereunder shall be performed at such locations and during such time
periods as shall be mutually agreed to by the parties from time to time.

3. CONSULTING FEES AND FRINGE BENEFITS.

(a) Salary and Consulting Fee. The Company agrees to pay the
Consultant for the services to be rendered by him hereunder a consulting fee at
the annual rate of $150,000.00, payable in monthly installments of $12,500 (the
"Consulting Fee"). The Consulting Fee shall be pro-rated for any period of
service which is less than one (1) month.

(b) Expenses. During the term of his engagement hereunder, the
Consultant shall be entitled to receive reimbursement for all reasonable
expenses incurred by him on behalf of the Company in connection with the
performance of his obligations hereunder in accordance with the usual practice
of the Company; provided, however, that the Consultant shall comply with such
reasonable policies and procedures relating to expenses as may be established
from time by time by the Company.

4. TERMINATION. Notwithstanding the provisions of Sections 1, 2 and 3
hereof, and except as set forth in Section 5 hereof, the Consultant's engagement
hereunder shall terminate without any further liability on the part of the
Company, including, without limitation, any further liability for payments of
the Consulting Fee and benefits provided in Section 3 hereof, under the

<PAGE>

following circumstances:

(a) Death. The Consultant's engagement hereunder shall
terminate upon his death.

(b) Termination by the Consultant. The Consultant may
terminate this Agreement upon ninety (90) days' prior written notice to the
Company.

(c) Termination by the Company. The Company may terminate the
Consultant's engagement hereunder with or without cause upon ninety (90) days'
prior written notice to the Consultant.

5. CHANGE IN CONTROL.

(a) Notwithstanding anything to the contrary contained herein,
in the event of a Terminating Event (as defined below) within twelve (12) months
from the date of a Change in Control (as defined below) of the Company, as of
the date of such Terminating Event (i) the Consultant shall be entitled to
received a lump sum payment in the amount of one hundred fifty thousand dollars
($150,000.00); provided, however, that if less than one (1) year remains under
the term of this Agreement as set forth in Section 2 hereof, the Consultant
shall only be entitled to receive a lump sum payment in an amount equal to the
remaining portion of the Consulting Fee that would be paid to the Consultant
pursuant to Section 3(a) hereof if this Agreement were not terminated prior to
expiration of its term; and (ii) the Consultant shall be reimbursed for any and
all expenses incurred by him on behalf of the Company in connection with the
performance of his obligations under this Agreement.

(b) For purposes of this Agreement, a "Terminating Event"
shall mean (i) termination of this Agreement by the Company or its successor
entity for any reason other than death pursuant to section 5(a) above or (ii)
termination of this Agreement by the Consultant upon (a) the occurrence of a
significant change in the nature or scope of the Consultant's responsibilities,
authorities, powers, functions or duties from the responsibilities, authorities,
powers, functions or duties exercised by the Consultant immediately prior to the
Change in Control; (b) a reasonable determination by the Consultant in good
faith that there has been a significant change in the nature or scope of the
Consultant's responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by the
Consultant immediately prior to a Change in Control; (c) a reasonable
determination by the Consultant in good faith that, as a result of a Significant
Event, the Consultant is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Consultant immediately prior to
such Change in Control; or (d) a material reduction in the compensation paid to
the Consultant.

<PAGE>

(c) For purposes of this Agreement, a "Change in Control" shall be
deemed to have occurred in the following instances: (i) if there has occurred a
change in control which the Company would be required to report in response to
Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), or, if such regulation is no longer in effect, any
regulations promulgated by the Securities and Exchange Commission pursuant to
the 1934 Act which are intended to serve similar purposes; (ii) if there has
occurred a change in control which the Company would be required to report in
response to Item 6(e) of Schedule 14A promulgated under the 1934 Act, or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission pursuant to the 1934 Act which are intended
to serve similar purposes; (iii) when any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total number of votes that may be cast for the election of Directors
of the Company; (iv) the sale, transfer or other disposition of all or
substantially all of the assets of the Company to another person or entity; (v)
the election of Directors of the Company equal to one-third or more of the total
number of Directors then in office who have not been nominated by the Company's
Board of Directors or a committee thereof as constituted on the date hereof; or
(vi) the signing of an agreement, contract or other arrangement providing for
any of the transactions described above in this definition of Change in Control;
provided, however, that a "Change in Control" shall not be deemed to have
occurred as a result of the beneficial ownership of the Company's common stock
by any person who is a "Grandfathered Person" under the Company's Shareholder
Rights Agreement dated July 17, 1991, as amended (the "Rights Agreement"), so
long as such Grandfathered Person's beneficial ownership of the Company's common
stock does not exceed such Grandfathered Person's "Grandfathered Percentage" (as
defined in the Rights Agreement).

6. GENERAL RELATIONSHIP. The Consultant shall, in all matters relating
to this Agreement, act as an independent contractor. In all such matters, the
Consultant shall not act as an employee of the Company.

7. CONFLICTING AGREEMENTS. The Consultant hereby represents and
warrants that the execution of this Agreement and the performance of his duties
and obligations hereunder will not breach or be in conflict with any other
agreement to which he is a party or is bound, and that he is not now subject to
any covenants against competition or similar covenants which would affect the
performance of his obligations hereunder.

8. BINDING AGREEMENT. This Agreement and all rights of the Consultant
hereunder shall inure to the benefit of and be enforceable by the Consultant's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. If the Consultant should die while any
amounts would still be payable to him hereunder all amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Consultant's devisee, legatee or other designee of whom the Consultant has
notified the Company in writing prior to his death or, if there be no designee,
to the Consultant's estate.

<PAGE>

9. NOTICES. For purposes of this Agreement, notices and all other
communications to either party hereunder shall be in writing and shall be deemed
to have been duly given when delivered or mailed by United States certified or
registered mail, return receipt requested, postage prepaid, to the respective
addresses of the Company and the Consultant set forth below, or to such other
address as either party shall designate by giving written notice of such change
to the other party.

In the case of the Company, to: Little Switzerland, Inc.
161-B Crown Bay Cruise Ship Port
St. Thomas, U.S.V.I. 00804
Attention: John Toler, Chief Executive
Officer, or Ronald Lataille,
Chief Financial Officer

In the case of the Consultant, to: C. William Carey
c/o Town & Country Corporation
25 Union Street
Chelsea, MA 02150

</TABLE>

10. WITHHOLDING. All payments made by the Company under this Agreement
shall be net of any tax or other amounts required to be withheld by the Company
under applicable law.

11. AMENDMENTS. This Agreement shall not be modified or discharged in
whole or in part except by an agreement in writing signed by the parties hereto.

12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings between them as to such subject matter.

13. WAIVERS AND FURTHER AGREEMENTS. The failure of the Company to
require the performance of any term or obligation provided for hereunder, or the
waiver by the Company of a breach of any provision of this Agreement shall not
prevent enforcement of such term or obligation or operate or be construed as a
waiver of any subsequent breach of that provision or of any other provision
hereof. Each of the parties hereto agrees to execute all such further
instruments and documents and to take all such further action as the other party
may reasonably require in order to effectuate the terms and purposes of this
Agreement.

14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

<PAGE>

15. SECTION HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.

16. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the state of Delaware.

17. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.

[END OF TEXT]

<PAGE>

IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company, by its duly authorized officer, and by the Consultant
as of the date and year first above written.

COMPANY:
--------

LITTLE SWITZERLAND, INC.

By: /s/ John E. Toler, Jr.
----------------------------
Name: John E. Toler, Jr.
Title: President and Chief
Executive Officer

CONSULTANT:
-----------

/s/ C. William Carey
--------------------------------
C. William Carey

EXHIBIT 21

Subsidiaries of Little Switzerland, Inc.
----------------------------------------

Subsidiaries of Little Switzerland, Inc. include the following:

A. L.S. Wholesale, Inc., a Massachusetts corporation

B. L.S. Holding, Inc., a U.S. Virgin Islands corporation and the following
subsidiaries thereof:

1. Little Switzerland (Antigua) Limited, an Antigua and Bermuda
corporation

2. L.S. Holding N.V., an Aruba corporation and the following
subsidiary thereof:

(a) Little Switzerland N.V., an Aruba corporation

3. L.S. Holding N.V., a Curacao corporation

4. Montres et Bijoux, S.A.R.L., a St. Martin corporation

5. World Gifts Imports N.V., a St. Maarten corporation

6. Little Switzerland St. Kitts-Nevis Limited, a St. Kitts-Nevis
corporation

7. Little Switzerland (St. Lucia) Limited, a St. Lucia corporation

8. Little Switzerland (British Virgin Islands) Limited, a British
Virgin Islands Corporation

9. L.S. Holding (USA), Inc., an Alaska corporation

10. World Gift Imports (Barbados) Limited, a Barbados Corporation

EXHIBIT 23

ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated September 25, 1997, included in Little
Switzerland, Inc.'s Report on Form 10-K for the year ended May 31, 1997, into
the Company's previously filed Registration Statement on Form S-8 No. 33-46654
(filed on March 25, 1992), Registration Statement on Form S-8 No. 33-46656
(filed on March 25, 1992) and Registration Statement on Form S-8 No. 33-73056
(filed on December 17, 1993).

/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP

Boston, Massachusetts
October 7, 1997

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-2-1996
<PERIOD-END> MAY-31-1997
<CASH> 1,710
<SECURITIES> 0
<RECEIVABLES> 2,083
<ALLOWANCES> 0
<INVENTORY> 44,728
<CURRENT-ASSETS> 50,693
<PP&E> 38,565
<DEPRECIATION> 15,201
<TOTAL-ASSETS> 77,391
<CURRENT-LIABILITIES> 20,187
<BONDS> 6,119
0
0
<COMMON> 85
<OTHER-SE> 49,195
<TOTAL-LIABILITY-AND-EQUITY> 77,391
<SALES> 88,314
<TOTAL-REVENUES> 88,314
<CGS> 49,721
<TOTAL-COSTS> 49,721
<OTHER-EXPENSES> 35,932
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,502
<INCOME-PRETAX> 1,159
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,159
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14

</TABLE>