<PAGE>



                                   L.A. GEAR, INC.





                                   [L.A. GEAR LOGO]












                                         1996
                                    ANNUAL REPORT




<PAGE>













                                   [L.A. GEAR LOGO]
















<PAGE>

    This Annual Report contains certain forward-looking statements within the
meaning of the federal securities laws.  Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
under LIQUIDITY AND CAPITAL RESOURCES and OUTLOOK FOR FISCAL 1997.  See SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS.





                             A LETTER TO OUR SHAREHOLDERS

    1996 was another very difficult year for the Company. Despite a
reorganization plan that was adopted in September 1995, the Company continued to
register significant declines in both revenues and gross profit margins.
Worldwide sales decreased $100.2 million, or 34%, to $196.4 million, with sales
in the United States falling $56.4 million (29%) and international sales
decreasing $43.7 million (42%). 

    Consequently, in order to generate higher revenues and margins as well as
more closely align operating expenses with the Company's lower sales volume, an
even more extensive restructuring plan was implemented in November 1996.  This
plan necessitated a charge of $28.8 million to the fourth quarter 1996 results
and contributed to a total net loss of $61.7 million for the year. The latest
restructuring affects all aspects of the Company's business worldwide and
includes an operating strategy designed to provide a solid base upon which the
Company can grow. The plan contains several key components including:

    NEW OPERATING MANAGEMENT - In November 1996, Bruce W. MacGregor assumed the
responsibilities of President and Chief Operating Officer.  Mr. MacGregor has
over twelve years of experience in the footwear industry, including senior
marketing and design positions at Avia International.  He also served as
Co-founder, President and Chief Executive Officer of Deja Shoe, an adult casual
footwear company.  In addition, new executives have been appointed to most key
leadership positions of the Company, including:  Vice President-Product (design,
development and sourcing); Vice President-U.S. Sales;  Vice
President-International; and Chief Financial Officer.

    NEW BUSINESS STRATEGY AND PRODUCTS - Beginning with the Fall 1997 product
line, the Company will adopt a definitive product segmentation strategy aimed at
differentiating its products among its various tiers of distribution channels. 
This strategy involves two major components:  (1) introducing new Company brands
to appeal to demographic groups with whom the Company is not currently achieving
significant market share penetration; and (2) differentiating the L.A. Gear
product line by use of sub-brands and co-labeling.

    The first two new brands being introduced for Fall 1997 are Mongo-TM-, a
fashion-forward casual shoe designed to appeal to trend-setting  young adults;
and Digit3-TM-, a performance brand for the extreme sports enthusiast. The
Mongo-TM- brand is similar to Fatmox-TM- by L.A. Gear, a sub-brand which the
Company introduced in Europe in 1996 and which has been well received.

    Within the women's product line, the Company will be refocusing on shoes
with athletic silhouettes and will be adding the co-label ABS+-TM- to its
women's athletic shoes containing new cushioning technology.  This line will
augment updated basic and fitness styles that reflect the Company's heritage.   

    Building off its innovative and successful children's lighted shoes line,
the Company will be using the sub-brand L.A. Lights-Registered Trademark- by
L.A. Gear as the umbrella brand for all four of its children's lighted product
lines.  Included under this sub-brand will be two new technologies in Fall 1997:
Lazerlites-TM-, a fiber optic technology that causes shoe laces to light when
motion activated, and Faderz-TM-, a bottom-lighted shoe that yields a constant
light setting when motion activated, and fades off when motion ceases.  Also
being offered will be two currently available technologies,  Lites-TM-,
bottom-lighted styles, and NEONZ-TM-, lighted side-panel shoes.         

    Successful product differentiation and distribution segmentation are vital
to the Company's attempts to realize revenue growth and margin improvement. 
Accordingly, the Company will offer its newest technologies and brands at higher
tiered distribution channels while continuing to offer its basic lines through
its current channels of distribution.  Our customers will be serviced by a
restructured sales force consisting primarily of independent agents carrying
either the Company's adult or children's full product line.  

                                          1

<PAGE>

    INTERNATIONAL REORGANIZATION - The Company plans to convert certain
subsidiary operations in Europe into independent distributorships and
consolidate functions, where appropriate, in the remaining subsidiaries.  This
strategy will eliminate significant expenses while continuing to allow the
Company to provide products in countries where the L.A. Gear-Registered
Trademark- brand enjoys widespread recognition and acceptance.      

    EXPENSE REDUCTION - The restructuring plan included significant expense
reduction programs, including reduced worldwide staffing and a significant
reduction in leased space requirements at our corporate headquarters and
distribution center in Southern California.  These programs are targeted to
reduce operating expenses by over $30 million on an annualized basis.  In
addition to the restructuring, certain product lines have been narrowed or
discontinued in order to focus the Company's design, development and marketing
efforts more effectively.    

    By implementing these far-reaching changes throughout the Company, we
believe that L.A. Gear is positioned to be more competitive in the fast-changing
environment in which it operates without compromising its full service
philosophy to its customers.  We believe that our new business strategy directly
addresses the Company's continuing challenges of increasing revenues and gross
margins. The ongoing support and patience of our employees, shareholders,
bondholders, customers and suppliers are deeply appreciated.   


Sincerely,





Stanley P. Gold                             Bruce W. MacGregor
Chairman and Chief Executive Officer        President & Chief Operating Officer

                                          2

<PAGE>

 
<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA


                                                                FOR THE FISCAL YEAR ENDED NOVEMBER 30,
                                                                --------------------------------------
                                                    1996           1995          1994           1993           1992  
----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                              <C>            <C>           <C>            <C>            <C>
NET SALES                                         $196,448       $296,551      $415,966       $398,358       $430,194

NET LOSS                                           (61,689)       (51,397)      (22,195)       (32,513)       (71,901)

LOSS APPLICABLE TO COMMON STOCK                    (70,077)       (59,143)      (29,695)       (40,180)       (79,647)

PER COMMON SHARE:

    LOSS BEFORE PREFERRED DIVIDENDS               $  (2.69)      $  (2.24)     $  (0.97)      $  (1.42)      $  (3.39)
         
    LOSS APPLICABLE TO COMMON STOCK                  (3.06)         (2.58)        (1.29)         (1.75)         (3.76)

<CAPTION>
                                                            AT NOVEMBER 30,
                                                            ---------------
              
                                                    1996           1995          1994           1993           1992  
----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

<S>                                              <C>            <C>           <C>            <C>            <C>
CASH AND CASH EQUIVALENTS                         $ 34,239       $ 35,956      $ 49,710       $ 27,790       $ 83,982 (A)

INVENTORIES                                         32,809         51,677        57,597        109,797         61,923

WORKING CAPITAL                                     46,467        103,999       147,848        161,948        168,049

TOTAL ASSETS                                       100,956        159,575       224,463        254,613        250,144

CONVERTIBLE SUBORDINATED DEBENTURES                 50,000         50,000        50,000         50,000             --

MANDATORILY REDEEMABLE SERIES A PREFERRED STOCK
    PLUS ACCRUED AND UNPAID DIVIDENDS                   --        107,746       100,000        100,000        100,000

SHAREHOLDERS' EQUITY (DEFICIT)                       4,504        (40,627)       18,149         46,797         87,451


(A) CASH AND CASH EQUIVALENTS INCLUDED $29.0 MILLION OF COLLATERALIZED CASH.

</TABLE>

                                                                      3

<PAGE>

L.A. GEAR,  INC.  AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALL REFERENCES TO YEARS ARE TO THE FISCAL YEARS ENDED NOVEMBER 30, 1996, 1995
AND 1994 AS APPLICABLE

1996 COMPARED TO 1995

NET SALES  In 1996, the Company's net sales decreased by 33.8% to $196.4 million
from $296.6 million in 1995 primarily due to (i) a 24.5% decrease in the total
number of pairs sold to 13.2 million pairs in 1996 from 17.5 million pairs in
1995 and (ii) a decrease of $2.14 in the overall average selling price per pair.
Domestic net sales decreased by 29.3% from the prior year.  International net
sales, which accounted for approximately 30.7% of the Company's total net sales,
decreased by 42.0% from the previous year.

     The following table sets forth certain information regarding the Company's
net sales:

                                                  NET SALES                 
                                   ------------------------------------------
                                        1996                       1995    
                                   ------------------------------------------
                                       $           %             $         % 
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)   

DOMESTIC FOOTWEAR
          CHILDREN'S                 $ 74,981      38%        $107,570     36%
          WOMEN'S                      38,362      20           46,422     16
          MEN'S                        20,430      10           35,842     12
OTHER                                   2,282       1            2,659      1
-----------------------------------------------------------------------------
          TOTAL DOMESTIC SALES        136,055      69          192,493     65
-----------------------------------------------------------------------------

INTERNATIONAL FOOTWEAR                  
          CHILDREN'S                   32,095      17           57,623     19
          WOMEN'S                      13,879       7           22,500      8
          MEN'S                        10,219       5           18,810      6
OTHER                                   4,200       2            5,125      2
-----------------------------------------------------------------------------
          TOTAL INTERNATIONAL SALES    60,393      31          104,058     35
-----------------------------------------------------------------------------
          TOTAL NET SALES            $196,448     100%        $296,551    100%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

     The following table sets forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during 1996 as
compared to 1995:

                                         CHANGES BETWEEN 1996 AND 1995
                                   ------------------------------------------
VOLUME OF FOOTWEAR SOLD            DOMESTIC    INTERNATIONAL           TOTAL
-----------------------------------------------------------------------------
CHILDREN'S                         (17.9)%        (39.9)%             (24.8)%
WOMEN'S                             (5.2)%        (32.7)%             (12.9)%
MEN'S                              (38.8)%        (45.1)%             (40.8)%

TOTAL VOLUME (DECREASE)            (18.0)%        (39.2)%             (24.5)%

     The decrease in overall net sales in 1996 was primarily attributable to (i)
reduced worldwide demand for the Company's children's lighted footwear and adult
products and (ii) a $2.20 per pair decrease in the average domestic selling
price, primarily with respect to children's lighted footwear and the Wal-Mart
line.  Despite the lower total international sales, the response to the new
adult Fatmox-TM- line in Europe has been positive, generating over half of the
European adult sales for the second half of 1996. 

     Total sales of the Company's children's lighted shoes decreased by $60.8
million to $61.5 million in 1996 from $122.3 million in 1995.  Domestic sales of
children's lighted product decreased by $33.6 million due to a drop in both
volume (to 2.4 million pairs from 4.3 million pairs) and average selling price
(to $15.94 from $16.99) primarily as a result of lower priced lighted shoes
offered by competitors and reduced demand for the Company's lighted product. 
Internationally, children's lighted sales decreased by $27.2 million compared to
1995, primarily due to reduced demand worldwide for the Company's lighted
product.  As a result, sales of children's lighted shoes accounted for only
57.4% of total children's net sales in 1996, down from 74.0% in 1995.

GROSS MARGIN  The consolidated gross margin for 1996 decreased to 24.0% from
29.9% principally due to a decline in international gross margins to 21.2% from
36.0%.  The decrease in the international margin was due to (i) an increase of
approximately $3 million in markdowns issued to customers of the Company's Far
East joint venture with Inchcape Pacific Limited ("Inchcape"), (ii) an increase
in inventory reserves established in the fourth quarter by 

                                          4

<PAGE>

the Company's European subsidiaries, primarily for Graf/x-TM- and (iii) low
margins realized on sales of lighted product and increases in reserves for slow
moving and discontinued lighted inventory.

     Domestically, the gross margin decreased to 25.3% from 26.7% in the prior
year. The domestic margin was negatively impacted by $6.1 million in markdown
and obsolescence reserves in the fourth quarter, primarily associated with the
discontinuance of the Graf/x-TM- line, an increase in reserves due to
significant reductions in the women's casual product line and obsolescence
reserves for certain NEONZ-TM- products, partially offset by the settlement of a
number of outstanding claims against factories for defective product, net of
liabilities to such factories for unamortized molds and tooling in the second
and third quarters.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND RESTRUCTURING CHARGES  In
November 1996, the Company adopted a reorganization plan which included a cost
reduction program aimed at bringing the Company's operating expenses in line
with its anticipated sales base.  The plan resulted in a restructuring charge of
$28.8 million in 1996 and primarily consisted of the following key elements: (i)
an approximate 52% reduction in the Company's full-time domestic workforce (from
approximately 314 to 150 employees); (ii) reduction of corporate overhead
through space consolidation at the Company's Santa Monica, California
headquarters and Ontario, California distribution center; and (iii) a
consolidation and restructuring of the Company's European operations (including
an $8.3 million write-off of goodwill), providing for, where appropriate,
distribution to the Company's European customers through independent
distributors rather than through direct subsidiaries.

     In September 1995, the Company announced a corporate reorganization plan
designed to reengineer key business processes, streamline the Company's
organizational structure and substantially reduce operating expenses which
resulted in a restructuring charge of $5.1 million.  In addition, the Company
incurred non-recurring charges of $5.6 million in fiscal 1995.  Exclusive of
restructuring and non-recurring charges of $28.8 million and $10.7 million in
1996 and 1995, respectively, total selling, general and administrative expenses
decreased by $44.1 million or 33.7% to $86.8 million in 1996 from $130.9 million
in 1995.

     Domestic selling, general and administrative expenses (exclusive of
restructuring and non-recurring charges of $10.6 million and $10.2 million in
1996 and 1995, respectively) decreased by $32.9 million or 35.0% in 1996.  The
reduction in domestic expenses was primarily due to the benefits realized from
the implementation of the Company's 1995 corporate reorganization plan which
reduced (i) advertising and promotional expenses by $12.2 million, (ii)
compensation and benefit expenses by $5.2 million, (iii) professional and
consulting fees by $3.0 million, (iv) depreciation by $2.8 million and (v) other
net expenses by $4.9 million.  In addition, bad debt expense decreased by $2.6
million as a result of lower sales, a reduced level of bad debt write-offs and a
$0.9 million recovery of bad debt in the first quarter of 1996.  Sales
commissions also decreased by $2.2 million due to reduced sales in 1996 compared
to 1995. Approximately $2.6 million in restructuring costs incurred in 1996 was
applied against the restructuring reserve established in fiscal 1995.    

     International selling, general and administrative expenses (exclusive of
restructuring charges of $18.2 million in 1996 and $0.5 million in 1995)
decreased by $11.2 million, or 30.3%, to $25.8 million compared to $37.0 
million in 1995 primarily due to lower advertising and promotional expenses,
compensation and benefits and bad debt expense.

     Total selling, general and administrative expenses, exclusive of
restructuring and non-recurring charges, as a percentage of net sales, remained
constant at approximately 44% in 1996 as in 1995.  Changes in the Company's
selling, general and administrative expenses cannot be directly related to
fluctuations in sales volume as a substantial portion of such expenses are
incurred to benefit future periods, such as media, advertising and trade show
expenses. The benefits of the 1996 cost reduction plan are expected to be
realized in fiscal 1997.

LITIGATION SETTLEMENTS, NET   Fiscal 1996 results include net settlement income
of $1.9 million, primarily in connection with the settlement of an environmental
compliance matter.  Fiscal 1995 results include net settlement income of $2.3
million, substantially all of which was in connection with the settlement of
certain patent and trademark infringement actions.  See NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, NOTE 15 - LITIGATION.

INTEREST EXPENSE/INCOME  Interest expense of $4.1 million and $4.2 million in
1996 and 1995, respectively, was primarily related to interest costs on the $50
million, 73/4% convertible subordinated debentures due 2002 (the "Debentures")
issued in December 1992.  Interest income amounted to $2.0 million in both 1996
and in 1995.

                                          5

<PAGE>

MINORITY INTEREST  Minority interest increased to $7.0 million in 1996 from $1.3
million in 1995.  This increase relates to losses incurred by the Company's Far
East joint venture with Inchcape primarily as a result of markdowns given to its
customers and reduced sales of children's lighted product.  Minority interest
represents the share of the joint venture's losses allocated to Inchcape
pursuant to the terms of the joint venture agreement.
     
     In September 1996, L.A. Gear (Far East) Limited, the Company's Far East
joint venture with Inchcape, ceased operations as the exclusive marketer,
distributor and seller of L.A. Gear branded footwear, apparel and accessories in
select Far East markets.  The Company anticipates receiving approximately $1.0
million in proceeds upon the dissolution of the joint venture to be recognized
as income upon receipt.  See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, NOTE 4
- BUSINESS ACQUISITIONS AND DISPOSITIONS.

     The Company is currently reviewing alternative means of distributing L.A.
Gear branded products in the Far East markets previously serviced by the joint
venture.  Separately, the Company entered into agreements with Itochu
Corporation in July 1996 and Daiwa Corporation in September 1996 to distribute
L.A. Gear branded footwear and L.A. Gear branded apparel and accessories,
respectively, in Japan, a market not previously serviced by the joint venture.

MANAGEMENT  In June 1996, David Gatto, Executive Vice President, resigned from
the Company.  In August 1996, James Moodhe, Senior Vice President-Marketing,
Design and Development, left the Company to pursue other career opportunities. 
Also in August 1996, Bruce MacGregor joined the Company as Senior Vice President
- Product and Marketing.  Prior to joining the Company, Mr. MacGregor served as
Vice President - Marketing at Avia International and Co-founder, President and
Chief Executive Officer at Deja Shoe.

     In November 1996, the Company announced that William L. Benford, President
and Chief Operating Officer, was resigning as an officer of the Company to join
Shamrock Capital Advisors, Inc.  ("SCA"), in early February 1997.  SCA is the
financial advisor to Trefoil Capital Investors, L.P. ("Trefoil"), the largest
beneficial owner of the Company's stock.  Mr. MacGregor has been named as the
Company's new President and Chief Operating Officer. Mr. Benford will continue
to serve on the Company's Board of Directors.  Also in November 1996, Victor
Trippetti was promoted from Vice President and Treasurer to Senior Vice
President and Chief Financial Officer of the Company. 

     As part of the Company's cost reduction plan adopted in November 1996,
Tracey Doi, former Vice President and Controller, left the Company in January
1997 to pursue other opportunities, and Thomas Larkins, Senior Vice President
and Chief Administrative Officer, will be leaving the Company during fiscal 1997
following his completion of certain projects.

DOMESTIC AND INTERNATIONAL INDUSTRY SEGMENTS  For information concerning the
Company's industry segments, see NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
NOTE 17 - SEGMENT REPORTING. 
               
1995 COMPARED TO 1994

NET SALES  In 1995, the Company's net sales decreased by 28.7% to $296.6 million
from $416.0 million in 1994 primarily due to (i) a 23.8% decrease in the total
number of pairs sold to 17.5 million pairs in 1995 from 22.9 million pairs in
1994 and (ii) a decrease of $1.36 in the overall average selling price per pair.
Domestic net sales decreased by 35.3% from the prior year.  International net
sales, which accounted for approximately 35.1% of the Company's total net sales,
decreased by 12.1% from the previous year.

                                          6

<PAGE>

     The following table sets forth certain information regarding the Company's
net sales:

                                             NET SALES 
                              -----------------------------------------------
                                            1995                   1994
                              -----------------------------------------------
                                         $         %           $           %
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)

DOMESTIC FOOTWEAR
          CHILDREN'S                  $107,570     36%      $165,460       40%
          WOMEN'S                       46,422     16         63,218       15
          MEN'S                         35,842     12         67,186       16
OTHER                                    2,659      1          1,721        1
-----------------------------------------------------------------------------
          TOTAL DOMESTIC SALES         192,493     65        297,585       72
-----------------------------------------------------------------------------
INTERNATIONAL FOOTWEAR                  
          CHILDREN'S                    57,623     19         48,340       11
          WOMEN'S                       22,500      8         25,431        6
          MEN'S                         18,810      6         40,643       10
OTHER                                    5,125      2          3,967        1
-----------------------------------------------------------------------------
          TOTAL INTERNATIONAL SALES    104,058     35        118,381       28
-----------------------------------------------------------------------------
          TOTAL NET SALES             $296,551    100%      $415,966      100%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

     The following table sets forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during 1995 as
compared to 1994:

                                         CHANGES BETWEEN 1995 AND 1994
                                   ------------------------------------------
VOLUME OF FOOTWEAR SOLD            DOMESTIC         INTERNATIONAL      TOTAL
-----------------------------------------------------------------------------
CHILDREN'S                         (26.2)%              14.1%         (17.0)%
WOMEN'S                            (19.5)%             (28.4)%        (22.2)%
MEN'S                              (35.4)%             (51.1)%        (41.4)%

TOTAL VOLUME (DECREASE)            (26.3)%             (17.6)%        (23.8)%

     The decrease in 1995 domestic net sales principally represents (i) a 26.2%
drop in the number of pairs of children's shoes sold primarily due to a $49.4
million decrease in domestic sales of children's lighted product, (ii) a 35.4%
decrease in the number of pairs of men's shoes sold in 1995 compared to 1994
primarily due to sales of approximately $12.0 million of a newly introduced
men's lighted LEAP GEAR-TM- product line in the first quarter of 1994 without a
comparable introduction in the first quarter of 1995 and lower sales of the
FLAK-TM- product line in 1995 compared to 1994, (iii) a 19.5% decrease in the
number of pairs of women's shoes sold in 1995 compared to 1994 primarily due to
overall reduced demand and (iv) a decrease of $2.33 in the average selling price
per pair to $15.65 in 1995 from $17.98 in 1994.  Due to the long lead times
required to introduce new footwear products to market, the Company was unable to
offer more women's shoe styles in 1995 despite its refocused efforts on the
women's and children's markets.  The decrease in the average selling price per
pair was principally due to the Company's focus on offering more value-priced
products for men and women, a reduced emphasis on more expensive performance
athletic footwear and sales of a product line developed for Wal-Mart.  Sales to
Wal-Mart amounted to $45.3 million and $39.6 million in 1995 and 1994,
respectively.

     Total sales of the Company's children's lighted shoes decreased by $36.4
million to $122.3 million in 1995 from $158.7 million in 1994.  Sales of
children's lighted shoes accounted for 74.0% and 74.2% of total children's net
sales in 1995 and 1994, respectively.  Domestic sales of children's lighted
product decreased by $49.4 million in 1995 compared to 1994 primarily due to a
drop in both volume (to 4.3 million pairs from 6.2 million pairs) and average
selling price per pair (to $16.99 from $19.73) as a result of excess inventory
at retailers, lower priced lighted shoes offered by competitors and the possible
effect of adverse publicity regarding selected styles of its children's lighted
shoes manufactured prior to May 1994 which utilized motion-activated switches
containing mercury.  Internationally, sales of children's lighted product grew
by $13.0 million in 1995 compared to 1994, particularly in Europe and Asia.

     Sales by the Company's European subsidiaries and Far East joint venture
increased by 23.7% compared to 1994 principally due to increased demand for
children's lighted products.  Overall, the average selling price per pair
internationally increased by $0.87 from $17.71 in 1994 to $18.58 in 1995.  Total
international net sales in 1995 decreased by approximately $14.3 million from
the prior year primarily due to reduced sales in Mexico, Central and South
America and Poland.  Sales in Mexico, Central and South America were adversely
affected by poor economic conditions in those regions.  In 1994, the Company
sold approximately $6.5 million in excess inventory into Poland with no
corresponding sales in 1995.  The number of pairs of men's shoes sold
internationally decreased by 51.1% from 

                                          7

<PAGE>

the prior year primarily due to lower sales of the FLAK-TM- product line in
Germany and the impact of the lower sales in Mexico, Central and South America
and Poland.  The number of pairs of women's shoes sold internationally decreased
by 28.4% primarily due to overall reduced demand.

GROSS MARGIN  Gross margin increased to 29.9% for 1995 from 29.7% in 1994
primarily due to the improvement in the international gross margin to 36.0% from
30.0% in the prior year as a result of the increased demand for children's
lighted products and reduced international sales of excess inventory in 1995. 
The increase in the international margin was partially offset by a decrease in
the domestic gross margin to 26.7% in 1995 from 29.5% in 1994 primarily as a
result of domestic sales of selected discontinued men's styles in 1995 and an
increase in inventory obsolescence reserves in the fourth quarter.  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND RESTRUCTURING CHARGES  In
September 1995, the Company announced a corporate reorganization plan designed
to reengineer key business processes, streamline the Company's organizational
structure and substantially reduce operating expenses.  The reorganization plan
resulted in a restructuring charge of $5.1 million in 1995 primarily relating to
the elimination of approximately 160 full time jobs, the closure of the
Company's retail outlet division and office space consolidation at the corporate
headquarters.  In addition, during the fourth quarter of 1995 the Company
incurred non-recurring charges of $5.6 million in connection with (i) a $4.6
million increase in the reserve for unused barter credits and (ii) a $1.0
million write off of goodwill related to the acquisition of certain assets of
the Company's exclusive distributor (and one of its affiliates) in Mexico in
June 1994.  In 1994, the Company incurred non-recurring charges of $2.5 million
for payments due under contractual obligations to certain individuals upon
realignment of senior management.  Exclusive of restructuring and non-recurring
charges of $10.7 million and $2.5 million in 1995 and 1994, respectively, total
selling, general and administrative expenses decreased by $10.5 million or 7.4%
to $130.9 million during 1995 from $141.4 million during 1994.

     Domestic selling, general and administrative expenses (exclusive of
restructuring and non-recurring charges of $10.2 million) decreased by $15.4
million or 14.1% in 1995.  This decrease include reductions in (i) compensation
expenses of $4.1 million, (ii) sourcing fees of $3.1 million, (iii) depreciation
of $2.0 million, (iv) advertising and promotional expenses of $1.9 million, (v)
legal fees of $1.5 million, (vi) sales commissions of $1.3 million and (vii)
other net variable expenses of $3.9 million.  These overall expense reductions
were offset by an increase of $2.4 million in bad debt expense primarily due to
increased reserves to cover the Company's exposure to its customers importing
product into Mexico and a general deterioration in the retail environment.  

     International selling, general and administrative expenses, exclusive of
restructuring charges of $0.5 million in 1995, increased by $4.9 million
primarily due to higher expenses of the European subsidiaries and Far East joint
venture as a result of the increase in volume of their business.  The joint
venture, which was formed in December 1993 with Inchcape to engage in marketing,
sales and distribution of L.A. Gear-Registered Trademark- branded footwear,
apparel and accessories in selected Far East markets, was still in the start-up
phase in 1994.  

     As a result of the devaluation of the peso in fiscal 1995, the Company's
Mexican subsidiary incurred a foreign exchange loss of $0.5 million related to
the partial repayment of intercompany indebtedness. There were no other
significant exchange gains or losses in 1995 or 1994.

     As a percentage of net sales, selling, general and administrative expenses
(exclusive of restructuring and non-recurring charges) increased to
approximately 44% in 1995 from approximately 34% in 1994. Changes in the
Company's selling, general and administrative expenses cannot be directly
related to fluctuations in sales volume as a substantial portion of expenses are
incurred to benefit future periods, such as media, advertising and trade show
expenses.

LITIGATION SETTLEMENTS, NET  Fiscal 1995 results include net settlement income
of $2.3 million, substantially all of which was in connection with the
settlement of certain patent and trademark infringement actions.  Fiscal 1994
results included a net credit of $1.3 million representing settlement income
primarily in connection with trademark and patent infringement lawsuits
partially offset by expenses relating to the settlement of employment litigation
and a dispute with a former distributor.

                                          8

<PAGE>

INTEREST EXPENSE/INCOME  Interest expense of $4.2 million and $4.4 million in
1995 and 1994, respectively, primarily related to interest costs on the $50
million Debentures. 

     Interest income increased to $2.0 million in 1995 from $1.4 million in 1994
primarily as a result of higher interest rates on approximately the same average
cash balances.

DOMESTIC AND INTERNATIONAL INDUSTRY SEGMENTS  For information concerning the
Company's industry segments, see NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
NOTE 17 - SEGMENT REPORTING.

LIQUIDITY AND CAPITAL RESOURCES

     The following table sets forth certain data with respect to the Company's
liquidity and capital resources. 

                                                       YEAR ENDED NOVEMBER 30,
                                                   -----------------------------
                                                      1996     1995      1994 
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT INTEREST RATES)

CASH AND CASH EQUIVALENTS                           $34,239  $ 35,956  $ 49,710
WORKING CAPITAL                                      46,467   103,999   147,848
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES         618   (11,212)   28,369
CASH USED IN INVESTING ACTIVITIES                      (710)   (3,256)   (4,448)
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES      (1,877)      622    (1,016)
OUTSTANDING LETTERS OF CREDIT                        26,467    24,440    36,699
BORROWINGS UNDER INTERNATIONAL CREDIT FACILITIES         --     1,233       557
CONVERTIBLE SUBORDINATED DEBENTURES                  50,000    50,000    50,000
MANDATORILY REDEEMABLE PREFERRED STOCK 
  PLUS ACCRUED AND UNPAID DIVIDENDS                      --   107,746   100,000
WEIGHTED AVERAGE INTEREST RATES ON CREDIT FACILITIES     --      8.2%      8.3%


CASH AND CASH EQUIVALENTS  Cash and cash equivalent balances decreased by $1.7
million from November 30, 1995 to a balance of $34.2 million at November 30,
1996 primarily due to cash used to fund operating losses offset by reduced
working capital requirements.  However, a substantial portion of the cash
expenditures associated with the Company's 1996 cost reduction plan are being
incurred after the end of fiscal 1996, although such costs have been reflected
as a charge to earnings in the consolidated statement of operations for fiscal
1996.  These cash expenditures (including severance payments), together with a
seasonal need for cash outlays in the first quarter of fiscal 1997, have
significantly reduced the Company's cash balances from that shown at the end of
fiscal 1996.  However, the Company believes that it has sufficient funding under
the Revolving Facility to meet its short term liquidity needs.  See BORROWING
FACILITIES AND LIQUIDITY.   

ACCOUNTS RECEIVABLE, NET  Net accounts receivable at November 30, 1996 decreased
by $22.7 million from the prior year primarily due to reduced sales in October
and November 1996 (including an $8.2 million reduction in sales to Wal-Mart)
compared to the same period in 1995.

INVENTORY  Inventory decreased by $18.9 million from $51.7 million at November
30, 1995 to $32.8 million at November 30, 1996, due to planned inventory
management resulting from lower sales volume, the shipment of 0.6 million pairs
to Wal-Mart in the first half of 1996 from the November 30, 1995 inventory and
the Company's continuing efforts to effectively manage inventory levels.
 
ACCOUNTS PAYABLES AND ACCRUED LIABILITIES  Accounts payable and accrued
liabilities at November 30, 1996 increased by $13.6 million from the prior year
primarily due to an increase in accrued restructuring charges.

BORROWING FACILITIES AND LIQUIDITY  Effective as of August 31, 1996, the Company
entered into an amendment to its existing revolving credit facility with
BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit (the
"Revolving Facility"). The amendment provided for, among other things, (i) an
extension of the term of the Revolving Facility for an additional three years to
November 30, 1999, (ii) a reduction in the maximum amount available for
aggregate loans and letters of credit at any time from $75 million to $50
million, (iii) an increase in the maximum amount of aggregate loans permitted to
be outstanding at any time from $10 million to $20 million and (iv) a reduction
in the minimum Adjusted Tangible Net Worth (as defined in the Revolving
Facility) required to be maintained under the Revolving Facility, with a
restriction on the payment of cash dividends on the Company's 

                                          9

<PAGE>

Series B Cumulative Convertible Preferred Stock and a reduction in the amount of
the available Borrowing Base (as defined in the Revolving Facility) if the
Company's Adjusted Tangible Net Worth falls below certain thresholds.  

    Effective November 30, 1996, the Company entered into a further amendment
to its Revolving Facility with BABC (the "November 30 Amendment").  The
amendment provides for, among other things, (i) a reduction in the term of the
Revolving Facility from November 30, 1999 to May 31, 1998, (ii) a reduction in
the maximum amount available for aggregate loans and letters of credit at any
time from $50 million to $25 million, (iii) a reduction in the maximum amount of
aggregate loans permitted to be outstanding at any time from $20 million to $10
million, (iv) certain revisions to the borrowing availability calculation
including the elimination of a reserve against availability, (v) a reduction in
the minimum Adjusted Tangible Net Worth required to be maintained under the
Revolving Facility and (vi) an increase in bank fees.  The Company is currently
negotiating with various lenders to secure borrowing facilities beyond May 31,
1998.

    The Revolving Facility is secured primarily by the Company's domestic
assets and is subject to certain financial covenants.  Cash borrowings under the
Revolving Facility bear interest at a rate equal to Bank of America's publicly
announced reference rate plus one and one-half percent.  There were no domestic
cash borrowings under the Revolving Facility at any time during the year ended
November 30, 1996 and, as of that date, approximately $26.5 million of domestic
letters of credit were outstanding under the Revolving Facility and $10 million
was available for borrowing.  In connection with the execution of the November
30 Amendment, BABC granted a waiver through December 31, 1996 of the $25 million
limit on aggregate loans and letters of credit.  

    The Company's liquidity is contingent primarily on attaining forecast sales
levels, gross margins and operating expenses and securing financing beyond May
31, 1998.  The Company believes that, based on its current forecast, its present
funding sources are sufficient to meet its liquidity needs through fiscal 1997. 
However, the Company can make no assurances that it will meet its current
forecast.  Factors influencing the Company's ability to sustain adequate
liquidity levels include the reduced size of the business and related working
capital needs, the timing of the sale or closure of certain of the Company's
European subsidiaries and the level of domestic operating costs.  In the event
that the Company's future operating results fall below management's
expectations, the Company will consider other available alternatives.

CONVERTIBLE DEBENTURES  The $50 million Debentures are convertible into shares
of the Company's Common Stock at a conversion rate of $12.30 per share, and are
redeemable by the Company at any time, initially at a specified premium to par,
declining to par for redemptions on or after November 30, 2000.

SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/SHARE EXCHANGE TRANSACTION  On
April 9, 1996, the Company's shareholders approved the exchange (the "Share
Exchange Transaction") of all of the issued and outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock, stated value $100 per
share ("Series A Preferred Stock"), and all accrued and unpaid dividends thereon
for (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B Cumulative Convertible Preferred Stock, stated value
$100 per share ("Series B Preferred Stock"), plus (ii) an additional number of
shares of Series B Preferred Stock equal to the dollar amount of accrued and
unpaid dividends in respect to the Series A Preferred Stock through the closing
of the Share Exchange Transaction.  The Share Exchange Transaction was completed
on April 12, 1996 and, as a result, Trefoil, the holder of all the Series A
Preferred Stock, was issued 1,107,902 shares of Series B Preferred Stock and the
Series A Preferred Stock was retired.  

    The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
which was due in August 1996), (ii) a reduction in the conversion price from
$10.00 to $6.75 per share and (iii) the voting of shares of Series B Preferred
Stock (on an as converted basis) together with shares of the Company's Common
Stock on all matters, including the election of directors.  The coupon rate of
7.5% per annum for dividends with respect to the Series B Preferred Stock
remains unchanged from that of the Series A Preferred Stock.  During the fiscal
year ended November 30, 1996, the Company was entitled, at its option, to pay
dividends on the Series B Preferred Stock in either additional shares of Series
B Preferred Stock or in cash. Thereafter, dividends on the Series B Preferred
Stock are payable only in cash.  The Company elected to pay the dividends of
$1.1 million, $2.1 million and $2.1 million due on May 31, August 31 and
November 30, 1996, respectively, in additional shares of Series B Preferred
Stock.  The holders of the Series B shares are entitled to receive, when, as and
if declared by the Board of Directors out of assets of the Company legally
available therefor, cumulative cash dividends at an annual rate of 7.5% (if in
arrears, compounded quarterly at a rate of 8.625% 

                                          10

<PAGE>

per annum with respect to dividends in arrears, through the date of payment of
such arrearages), payable quarterly in arrears on the last business day of
February, May, August and November.  

    The Company's Board of Directors has approved the non-payment of the cash
dividend required on the Series B Preferred Stock (see NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, NOTE 12 - SERIES A CUMULATIVE CONVERTIBLE PREFERRED
STOCK/SHARE EXCHANGE TRANSACTION) due February 28, 1997.  As a result of such
default, future dividends will accrue at a rate of 8.625% per annum compounded
quarterly with respect to dividends in arrears.

INVESTMENT POLICIES  The Company's cash investment policy allows the investment
of available cash in accordance with certain quality, maturity and
diversification parameters.  The basic objectives of this policy are (i) safety
and preservation of capital, (ii) liquidity of investments sufficient to meet
cash flow requirements and (iii) attainment of an optimal market rate of return
on invested funds consistent with the stated objectives.

FORWARD EXCHANGE CONTRACTS  The Company enters into forward exchange contracts,
with terms of less than one year, to offset the effects of exchange rate changes
on cash flow exposures denominated in foreign currencies.  These exposures are
primarily repayments of U.S. dollar denominated liabilities by the Company's
foreign subsidiaries. These contracts are marked to market and realized and
unrealized gains and losses  are recognized in the consolidated statement of
operations.

COMMITMENTS  In the normal course of business the Company enters into various
agreements for obtaining footwear technology and product sourcing.  In addition,
the Company occupies certain facilities, including corporate offices and
distribution centers and rents certain equipment under operating leases. 
Agreements and lease commitments with terms extending through the year 2002
contain provisions for future guaranteed minimum payments aggregating
approximately $21.0 million.  There were no commitments for any material capital
expenditures at November 30, 1996.

INCOME TAXES  At November 30, 1996, the Company had a federal tax net operating
loss ("NOL") carryforward of approximately $101.4 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2011. The Company also
has a federal alternative minimum tax credit carryforward of approximately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely.  California franchise tax NOL carryforwards of
approximately $88.3 million will, if unused, expire primarily in fiscal year
1998.  In addition, the Company has other state and foreign NOL carryforwards
with varying limitations on future utilization.  The Company's NOL carryforwards
may be restricted upon a change in control.

BACKLOG  The Company had a combined domestic and international order backlog of
$46.5 million and $88.0 million at December 31, 1996 and 1995, respectively. 
The lower backlog at December 31, 1996 is primarily due to (i) the inclusion in
the December 31, 1995 backlog of the then-remaining balance ($29.5 million) of
Wal-Mart's $80 million minimum purchase commitment for fiscal 1995 and (ii) an
approximate $12.0 million decrease in orders for children's lighted product. 
Children's lights as a percentage of the total December 31, 1996 and 1995
backlog, excluding Wal-Mart orders, were 28.0% and 40.2%, respectively.  The
Company's agreement with Wal-Mart does not provide for the sale of L.A. Gear
lighted footwear products to Wal-Mart.  Wal-Mart was not subject to any minimum
purchase commitment for fiscal 1996 and is not subject to any minimum purchase
commitment for fiscal 1997.  The combined backlog at December 31, 1996 includes
$5.5 million for Wal-Mart.  Shipments and sales for future periods depend on,
among other things, the combination of "futures" and "at once" orders. 
Accordingly, the comparison of backlog from period to period may not be
indicative of eventual actual shipments.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

    In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.  SFAS No. 121
is required to be implemented by the Company for the fiscal year beginning
December 1, 1996 and is not expected to have a material impact on the Company's
financial position or results of operations.

    In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION.  The Company will adopt the
disclosure-only provisions of SFAS No. 123 for the year ending November 30,
1997.  The adoption of SFAS No. 123 will not have a material impact on the
Company's financial position or results of operations.

                                          11

<PAGE>

OUTLOOK FOR FISCAL 1997

    As part of the Company's November 1996 restructuring plan, in addition to
introducing a cost reduction plan designed to reduce operating expenses by over
$30 million on an annualized basis, management adopted a new strategy regarding
its product offerings, distribution channels and sales force utilization.  The
Company will apply this new strategy to generate increased sales and margins,
rejuvenate brand identity in fiscal 1997 and bring operating expenses in line
with the Company's anticipated sales base.  

    For fiscal 1997, the Company has developed a branding, sub-branding and
co-labeling strategy aimed at (i) building on brand success of products such as
its children's lights and elevating the integrity of its women's athletic
product and (ii) introducing new brands to penetrate additional market segments.

    As a result of the success of its children's lighted technology, the
Company has consolidated all of its lighted product offerings under the L.A.
Lights-Registered Trademark- sub-brand umbrella.  In addition to Lites-TM- by
L.A. Gear and NEONZ-TM-, the Company will introduce two new technologies under
the L.A. Lights-Registered Trademark- umbrella for Fall 1997, including
Lazerlites-TM-, utilizing fiber optic technology in the form of motion sensitive
shoe laces, and, Faderz-TM-, optimizing diode lights that feature a fading
system on the bottoms.  

    The Company believes that it has a viable market niche for women's
technology-aided athletic shoes and will introduce ABS+-TM- in Fall 1997 as a
co-label brand for women featuring functional, technically enhanced athletic
footwear.

    In addition, the Company will launch two new brands in Fall 1997, Digit
3-TM- and Mongo-TM-.  Digit 3-TM- is a performance brand for the extreme sports
enthusiast.  Digit 3-TM- will have a suggested retail price point of $55 and
will be marketed to the 13 to 24 year old fashion conscious male and female. 
Mongo-TM- is an aggressive, hard-core style shoe featuring fat
snowboard-inspired outsoles marketed to young adults.  Mongo-TM- is currently
distributed in Europe under the name Fatmox-TM- by L.A. Gear and, in the second
half of fiscal 1996, accounted for over 50% of adult sales in Europe.

    For the Fall 1997 product line, the Company will implement its strategy of
segmenting its products between its tiers of distribution.  The Company will
offer it newest technologies and brands at upper tier distribution channels
while continuing to offer its basic lines to all distribution outlets.  Products
will be sold through a combination of the Company's sales management team and
independent agents, divided into separate adult and children's representatives. 
The new sales force structure is expected to increase effectiveness in the
marketplace and reduce overall selling expenses.

    The Company has implemented numerous measures in fiscal 1995 and 1996 in an
effort to reorganize its production and distribution structures and to reduce
its overhead and other costs.  The Company's success in capitalizing on these
measures will depend in large part on its ability to predict and quickly exploit
fashion trends in the footwear market and thereby attain its revenue and margin
goals.  The Company believes that its business strategy for fiscal 1997 will
better position it to address changes in the marketplace and to build on its
past successes in offering branded footwear in the children's and women's
markets.  However, if sales margins and operating expense savings in fiscal 1997
fall below management's expectations, additional sources of working capital may
be necessary and difficult to obtain.  There can be no assurances that the
Company will be able to successfully exploit its strategy or that the strategy
will have the desired effect.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    Certain statements in this Annual Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.  Such 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 be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.  Such factors include, among others, those described
under LIQUIDITY AND CAPITAL RESOURCES and OUTLOOK FOR FISCAL 1997 and the
following: general economic and business conditions; competition; success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or adherence to development
schedules; the existence or absence of adverse publicity; availability, location
and terms of product distribution channels; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; business abilities and judgment of personnel; 

                                          12

<PAGE>

availability of qualified personnel; labor and employee benefit costs; changes
in, or the failure to comply with, governmental regulations; the ability to
reverse recent trends that have caused reductions in market share and
substantial losses; continued access to licensed intellectual property rights;
continued access to adequate sources of product supply; risks associated with
unaffiliated manufacturers and international operations; and other factors
referenced in this Annual Report.

                                          13

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                             Consolidated Balance Sheets
                          (in thousands, except share data)


                                                                 NOVEMBER 30,
                                                             -------------------
                                                                1996      1995
                                                             -------------------

ASSETS

Current assets:
 Cash and cash equivalents                                   $ 34,239  $ 35,956
 Accounts receivable, net                                      23,938    46,630
 Inventories                                                   32,809    51,677
 Prepaid expenses and other current assets                      1,933     3,773
                                                              -------   -------

       Total current assets                                    92,919   138,036

Property and equipment, net                                     4,445     8,290
Goodwill, net                                                   1,538    11,191
Other assets                                                    2,054     2,058
                                                              -------   -------

                                                             $100,956  $159,575
                                                              =======   =======

 LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
 STOCK AND SHAREHOLDERS' EQUITY  (DEFICIT)

Current liabilities:
 Accounts payable and accrued liabilities                    $ 46,452    32,804
 Borrowings under international credit facilities                  --     1,233
                                                              -------   -------
                                                   
       Total current liabilities                               46,452    34,037
                                                              -------   -------

73/4% convertible subordinated debentures due 2002             50,000    50,000
                                                              -------   -------

Minority interest                                                  --     8,419
                                                              -------   -------

Mandatorily redeemable preferred stock:
 7.5% Series A Cumulative Convertible Preferred Stock,
 $100 stated value; 1,000,000 shares authorized, issued
 and outstanding; redemption value of $100 per share
 plus accrued and unpaid dividends                                 --   107,746
                                                              -------   -------

Shareholders' equity (deficit):
 7.5% Series B Cumulative Convertible Preferred Stock,
 $100 stated value; 1,161,822 shares authorized; 1,161,337
 issued and outstanding at November 30, 1996; no shares
 issued at November 30, 1995                                  115,473        --
 Preferred stock, no stated value; 8,838,178 authorized and
 unissued at November 30, 1996; 9,000,000 shares
 authorized and unissued at November 30, 1995                      --        --
 Common stock, no par value; 80,000,000 shares authorized;
 22,936,433 shares issued and outstanding at 
 November 30, 1996 and 1995                                   128,093   128,093
 Cumulative currency translation adjustment                       296       561
 Accumulated deficit                                         (239,358) (169,281)
                                                              -------   -------
       Total shareholders' equity (deficit)                     4,504   (40,627)
                                                              -------   -------
Commitments and contingencies                                      --        --
                                                              -------   -------
                                                             $100,956  $159,575
                                                              =======   =======

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                          14

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                        Consolidated Statements of Operations
                        (in thousands, except per share data)
                                           
                                           
                                                     YEAR ENDED NOVEMBER 30,
                                                --------------------------------
                                                   1996       1995       1994 
                                                --------------------------------

Net sales                                       $ 196,448   $296,551   $415,966
Cost of sales                                     149,213    207,802    292,629
                                                 --------    -------    -------
 Gross profit                                      47,235     88,749    123,337

Selling, general and administrative expenses       86,838    136,504    141,427
Restructuring charges                              28,829      5,099      2,486
Litigation settlements, net                        (1,905)    (2,323)    (1,268)
Interest expense                                    4,112      4,174      4,437
Interest income                                    (1,964)    (1,984)    (1,444)
                                                 --------    -------    -------

 Loss before income taxes and minority interest   (68,675)   (52,721)   (22,301)

Income tax benefit                                     --         --         --
Minority interest                                   6,986      1,324        106
                                                 --------    -------    -------

 Net loss                                         (61,689)   (51,397)   (22,195)

Dividends on mandatorily redeemable Series A 
 Cumulative Convertible Preferred Stock            (3,044)    (7,746)    (7,500)
Dividends on Series B Cumulative Convertible
 Preferred Stock                                   (5,344)        --         --
                                                 --------    -------    -------

 Loss applicable to common stock                $ (70,077)  $(59,143)  $(29,695)
                                                 ========    =======    =======

Loss per common share                           $   (3.06)  $  (2.58)  $  (1.29)
                                                 ========    =======    =======

Weighted average common shares outstanding         22,937     22,937     22,937
                                                 ========    =======    =======


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                          15

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
              Consolidated Statements of Shareholders' Equity (Deficit)
                                    (in thousands)

<TABLE>
<CAPTION>

                                                            YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994 
                                        ---------------------------------------------------------------------------------
                                        SERIES B
                                        CUMULATIVE                              CUMULATIVE
                                        CONVERTIBLE                             CURRENCY  
                                        PREFERRED STOCK       COMMON STOCK      TRANSLATION    ACCUMULATED
                                        SHARES    AMOUNT    SHARES    AMOUNT    ADJUSTMENT       DEFICIT          TOTAL
                                        ---------------------------------------------------------------------------------

<S>                                     <C>    <C>         <C>      <C>        <C>            <C>              <C>
BALANCE, NOVEMBER 30, 1993                --   $     --     22,935   $128,076   $    (836)     $ (80,443)       $ 46,797
 
Exercise of stock options                 --         --          2         17          --             --              17

Currency translation adjustment           --         --         --         --       1,030             --           1,030

Dividends on mandatorily redeemable
  Series A Cumulative Convertible
  Preferred Stock                         --         --         --         --          --         (7,500)         (7,500)

Net loss                                  --         --         --         --          --        (22,195)        (22,195)
                                       -----    -------     ------    -------    --------       --------         -------

BALANCE, NOVEMBER 30, 1994                --         --     22,937    128,093         194       (110,138)         18,149

Currency translation adjustment           --         --         --         --         367             --             367

Dividends on mandatorily redeemable
  Series A Cumulative Convertible
  Preferred Stock                         --         --         --         --          --         (7,746)         (7,746)

Net loss                                  --         --         --         --          --        (51,397)        (51,397)
                                       -----    -------     ------    -------    --------       --------         -------

BALANCE, NOVEMBER 30, 1995                --         --     22,937    128,093         561       (169,281)        (40,627)

Exchange of Series A Cumulative
  Convertible Preferred Stock, plus
  accrued and unpaid dividends, for 
  Series B Cumulative Convertible
  Preferred Stock, net of costs of
  issuance                             1,161    110,129         --         --          --         (3,044)        107,085

Currency translation adjustment           --         --         --         --        (265)            --            (265)

Dividends on Series B Cumulative
  Convertible Preferred Stock             --      5,344         --         --          --         (5,344)             --

Net loss                                  --         --         --         --          --        (61,689)        (61,689)
                                       -----    -------     ------    -------    --------       --------         -------

BALANCE, NOVEMBER 30, 1996             1,161   $115,473     22,937   $128,093   $     296      $(239,358)       $  4,504
                                       =====    =======     ======    =======    ========       ========         =======

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                     16

<PAGE>

<TABLE>
<CAPTION>

                                                      L.A. GEAR, INC. AND SUBSIDIARIES
                                                    Consolidated Statements of Cash Flows
                                                                (in thousands)

                                                                          YEAR ENDED NOVEMBER 30,
                                                                -----------------------------------------
                                                                   1996            1995           1994
                                                                -----------------------------------------

<S>                                                             <C>             <C>            <C>
Operating activities:    
  Net loss                                                       $(61,689)       $(51,397)      $(22,195)
  Adjustments to reconcile net loss to net cash
     provided by (used in) operating activities:
     Depreciation and amortization                                  4,555           7,266          8,818
     Minority interest in net loss of joint venture                (6,986)         (1,324)          (106)
     Loss on sale or abandonment of property
      and equipment                                                    77             417             72
     Increase in reserve for unused barter credits                     --           4,568             --
     Write-off of goodwill                                          8,324           1,012             --
     Unrealized exchange gain                                          --            (570)            --
     (Increase) decrease, net of effects of acquisitions, in:
          Accounts receivable, net                                 20,581          30,603         (4,676)
          Inventories                                              18,095           6,100         53,587
          Prepaid expenses and other current assets                 1,507           3,320             58
          Other assets                                                (12)          1,624             --
     Increase (decrease), net of effects of acquisitions, in:
          Accounts payable and accrued liabilities                 16,166         (12,831)        (6,180)
  Costs related to discontinued operations                             --              --         (1,009)
                                                                  -------         -------        -------
             Net cash provided by (used in) operating
               activities                                             618         (11,212)        28,369
                                                                  -------         -------        -------
Investing activities:
  Capital expenditures                                               (710)         (3,256)        (3,969)
  Cash paid for acquisition of subsidiaries, net of 
     cash acquired                                                     --              --           (479)
                                                                  -------         -------        -------
             Net cash used in investing activities                   (710)         (3,256)        (4,448)
                                                                  -------         -------        -------
Financing activities:
  Payment of dividends on mandatorily redeemable
    preferred stock                                                    --              --         (7,500)
  Proceeds from minority's investment in joint venture                 --              --          9,850
  Exercise of stock options and warrants                               --              --             17
  Costs related to issuance of Series B Shares                       (661)             --             --
  Net (repayments) borrowings under international
    credit facilities                                              (1,216)            622         (3,383)
                                                                  -------         -------        -------
     
             Net cash  (used in) provided by                          
               financing activities                                (1,877)            622         (1,016)
                                                                  -------         -------        -------
Effect of exchange rate changes on cash and cash 
  equivalents                                                         252              92           (985) 
                                                                  -------         -------        -------

             Net (decrease) increase in cash and
               cash equivalents                                    (1,717)        (13,754)        21,920
Cash and cash equivalents at beginning of year                     35,956          49,710         27,790
                                                                  -------         -------        -------

Cash and cash equivalents at end of year                         $ 34,239        $ 35,956       $ 49,710
                                                                  =======         =======        =======

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                     17



<PAGE>

 

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 1.   BACKGROUND AND ORGANIZATION

     L.A. Gear, Inc., incorporated on February 7, 1979 in the State of
California, designs, develops and markets a broad range of quality athletic and
lifestyle footwear for adults and children.

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION  The consolidated financial statements include the
accounts of L.A. Gear, Inc. and its majority-owned subsidiaries (collectively
referred to as the "Company").  All significant intercompany balances and
transactions have been eliminated in consolidation.

     Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and judgments 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.
     
REVENUE RECOGNITION  Revenues are recognized when title passes based on the
terms of the sale.  Sales are recorded net of returns, discounts and allowances.

CASH AND CASH EQUIVALENTS  Cash equivalents are all highly liquid, temporary
cash investments, primarily institutional money market funds.

BARTER TRANSACTIONS  The Company records barter transactions based on the fair
value of nonmonetary assets, primarily inventory, surrendered.  Fair market
value is presumed to be the asset's carrying value, adjusted for any impairment,
so that no gain is recognized on the barter transaction.  Impairment losses on
the barter credits are recognized when the fair value of remaining barter
credits is less than the carrying amount or it is probable that the barter
credits will not be used.

INVENTORIES  Inventories, substantially all of which consist of purchased
finished goods, are stated at the lower of first-in, first-out (FIFO) cost or
market.  The Company establishes inventory obsolescence reserves adjusting the
inventory for any impairment in carrying cost to the estimated net realizable
value.

PROPERTY AND EQUIPMENT  Property and equipment are recorded at cost and include
improvements that significantly add to the productive capacity or extend the
useful life of the asset.  The costs of major remodeling and improvements
relating to leased facilities are capitalized as leasehold improvements.  Upon
retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less any
proceeds, is charged or credited to operations.  Costs of maintenance and
repairs are expensed when incurred.  Depreciation and amortization are computed
over the estimated useful lives of depreciable assets (three to seven years) on
the straight-line method.  Leasehold improvements are amortized using the
straight-line method over the shorter of the remaining term of the applicable
lease or the life of the asset.

GOODWILL  The excess of the acquisition cost over the fair value of the net
assets of businesses acquired in purchase transactions has been included in
goodwill and is amortized, using the straight-line method, over the period of
expected benefit of fifteen years. 

     The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying businesses.  Adjustments are made if the sum of 
the expected future net cash flows is less than carrying value.  Statement of
Financial Accounting Standard ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. SFAS No. 121 is required to be implemented by the Company for the
fiscal year beginning December 1, 1996 and is not expected to have a significant
impact on the Company's financial position or results of operations.

                                          18

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

FOREIGN CURRENCY TRANSLATION  The U.S. dollar is the functional currency for the
Company's consolidated operations except for its foreign subsidiaries which use
the currency of their respective countries.  Adjustments resulting from
translating foreign functional currency financial statements into U.S. dollars
are recorded in a separate component of shareholders' equity.

FORWARD EXCHANGE CONTRACTS  The Company enters into forward exchange contracts,
with terms of less than one year, to offset the effects of exchange rate changes
on cash flow exposures denominated in foreign currencies.  These exposures are
primarily repayments of U.S. dollar denominated liabilities by the Company's
foreign subsidiaries. These contracts are marked to market and realized and
unrealized gains and losses are recognized in the consolidated statement of
operations.

ADVERTISING AND PROMOTIONAL EXPENDITURES     The Company recognizes advertising
and promotional expenses as incurred or, in the case of endorsement contracts,
on the straight-line amortization basis over the term of the contract.

LOSS PER COMMON SHARE  Loss per common share has been computed based on the loss
applicable to common stock (net loss plus dividends on the Series A Cumulative
Convertible Preferred Stock and Series B Cumulative Convertible Preferred Stock)
divided by the weighted average number of common shares outstanding during each
period.

INCOME TAXES  The Company accounts for income taxes under the liability method. 
Deferred tax liabilities are recognized for taxable temporary differences and
deferred tax assets are recognized for deductible temporary differences and tax
loss and credit carryforwards.  A valuation allowance is established to reduce
deferred tax assets if some, or all, of such deferred tax assets are not likely
to be realized.

CONCENTRATION OF CREDIT RISK  The Company sells its products to retailers and
other customers and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral.  Exposure to losses
on receivables is principally dependent on each customer's financial condition. 
The Company closely monitors its exposure to credit risk and maintains
allowances for anticipated losses.  See NOTE 6 - ACCOUNTS RECEIVABLE.

STOCK OPTIONS  In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company will adopt
the disclosure-only provisions of SFAS No. 123 in the fiscal year ending
November 30, 1997 and the adoption of SFAS No. 123 will not have a material
impact on the Company's financial position or results of operations.

RECLASSIFICATIONS  Certain reclassifications have been made to 1995 and 1994
amounts in order to conform to the 1996 presentation.

NOTE 3.   RESTRUCTURING CHARGES AND LIQUIDITY

     During the fourth quarter of fiscal 1996, management committed to a
restructuring plan aimed at bringing the Company's operating expenses in line
with its anticipated sales base.  Due to this action the Company incurred
restructuring charges of $28.8 million in fiscal 1996.  These charges include
(i) $18.2 million related to a consolidation and restructuring of the Company's
European operations (including an $8.3 million write-off of goodwill) which will
result in certain of the Company's European customers being serviced through
independent distributors rather than through direct subsidiaries, (ii) $4.4
million related to space consolidation at the Company's Santa Monica, California
headquarters and Ontario, California distribution center, (iii) $3.4 million in
connection with an approximately 52% reduction in the Company's full-time
domestic work force (from approximately 314 to 150 employees), (iv) $1.6 million
related to the early termination of underutilized sponsorships and (v) $1.2
million of other costs. 

     In September 1995, the Company announced a corporate reorganization plan 
designed to reengineer key business processes, streamline the Company's 
organizational structure and substantially reduce operating expenses. The 
reorganization plan resulted in a restructuring charge of $5.1 million in 
1995 primarily related to the elimination of approximately 160 full time 
jobs, the closure of the Company's retail outlet division and office space 
consolidation at the corporate headquarters.  In addition, in 1995, the 
Company incurred non-recurring charges of 

                                          19

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

$5.6 million in connection with (i) a $4.6 million increase in the reserve for
unused barter credits and (ii) a $1.0 million write-off of goodwill related to
the acquisition of the Company's Mexican business.  At November 30, 1996, the
1995 accrual had been substantially utilized for the type and amount of charges
included in the provision.

     A substantial portion of the cash expenditures associated with the
Company's 1996 cost reduction plan will be incurred after the end of fiscal
1996, although such costs have been reflected as a charge to earnings in the
consolidated statement of operations for fiscal 1996.  These cash expenditures
(including severance payments), together with a seasonal need for cash outlays
in the first quarter of fiscal 1997, have significantly reduced the Company's
cash balances from that shown at the end of fiscal 1996.  However, the Company
believes that it has sufficient funding under the Revolving Facility (as defined
in Note 8) to meet its short term liquidity needs.
     
     The Company's liquidity is contingent primarily on attaining forecast sales
levels, gross margins and operating expenses and securing financing beyond May
31, 1998.  The Company believes that, based on its current forecast, its present
funding sources are sufficient to meet its liquidity needs through fiscal 1997. 
However, the Company can make no assurances that it will meet its current
forecast.  Factors influencing the Company's ability to sustain adequate
liquidity levels include the reduced size of the business and related working
capital needs, the timing of the sale or closure of certain of the Company's
European subsidiaries and the level of domestic operating costs.  In the event
that the Company's future operating results fall below management's
expectations, the Company will consider other available alternatives.
     
NOTE 4.   BUSINESS ACQUISITIONS AND DISPOSITIONS

     In December 1993, a joint venture was formed with Inchcape Pacific Limited
("Inchcape"), a wholly owned subsidiary of Inchcape plc, to engage in the
marketing, distribution and sales of L.A. Gear-Registered Trademark- branded
footwear, apparel and accessories in selected Far East markets.  The Company
contributed the rights to distribute L.A. Gear branded products for a 50% share
in the joint venture.  Profits and losses have been allocated based on specific
terms of the joint venture agreement.  In September 1996, the joint venture
ceased operations.  The Company has netted the assets, liabilities and minority
interest of the joint venture, the net impact of which is not material to its
consolidated balance sheet at November 30, 1996.  The Company anticipates
receiving approximately $1.0 million in proceeds upon dissolution of the joint
venture to be recognized as income upon receipt.

     Effective June 8, 1994, the Company acquired for $2.0 million certain
assets of the Company's exclusive distributor (and one of its affiliates) in
Mexico.  The excess of the purchase price over the estimated fair value of net
assets acquired in such transaction, amounting to $1.1 million, was recorded as
goodwill. The purchase price for the acquisition was settled by reducing the
balance on outstanding amounts owed by the distributor to the Company.  The
acquisition was accounted for under the purchase method and, accordingly, the
acquired assets have been recorded at their estimated fair value at the
effective date of the acquisition.

     In 1995, the goodwill balance of approximately $1.0 million related to the
acquisition of the Company's Mexican business was written off as a result of the
economic crisis and the devaluation of the peso.

     Pro forma results of operations have not been presented as they would not
be materially different from the historical amounts reported.


                                          20

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 5.   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>

                                                                     1996             1995         1994    
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

<S>                                                               <C>               <C>         <C>
     CASH PAID (RECEIVED) DURING THE YEAR FOR:
          INTEREST PAID                                            $  2,189          $ 4,186     $  4,433
                                                                    =======           ======      =======
          INTEREST RECEIVED                                        $ (1,964)         $(1,984)    $ (1,444)
                                                                    =======           ======      =======
     INCOME TAXES, NET                                             $     --          $    --     $     --
                                                                    =======           ======      =======
     NONCASH INVESTING ACTIVITIES:
          ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS              $     --          $    --     $  1,953
               
     NONCASH FINANCING ACTIVITIES:
          DIVIDENDS ACCRUED  AND UNPAID ON MANDATORILY
          REDEEMABLE SERIES A CUMULATIVE CONVERTIBLE
          PREFERRED STOCK                                          $     --          $ 7,746     $     --
                                                                    =======           ======      =======

          EXCHANGE OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED
          STOCK PLUS ACCRUED AND UNPAID DIVIDENDS FOR SERIES B
          CUMULATIVE CONVERTIBLE PREFERRED STOCK                   $110,790          $    --     $     --
                                                                    =======           ======      =======
               
     SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK ISSUED 
          IN PAYMENT OF DIVIDENDS DUE ON SERIES B CUMULATIVE
          CONVERTIBLE PREFERRED STOCK                              $  5,344          $    --     $     --
                                                                    =======           ======      =======

</TABLE>

NOTE 6.   ACCOUNTS RECEIVABLE

          Accounts receivable, net of allowance for doubtful accounts and
merchandise returns, consist of the following:

                                                            NOVEMBER 30,
                                                         1996         1995
-----------------------------------------------------------------------------
(IN THOUSANDS)

TRADE RECEIVABLES   
     DOMESTIC                                          $ 12,581     $ 23,125
     INTERNATIONAL                                       14,216       28,291
                                                        -------      -------
                                                         26,797       51,416
OTHER RECEIVABLES                                         1,280        2,767
                                                        -------      -------
                                                         28,077       54,183
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
  MERCHANDISE RETURNS                                    (4,139)      (7,553)
                                                        -------      -------
                                                       $ 23,938     $ 46,630
                                                        =======      =======

NOTE 7.   PROPERTY AND EQUIPMENT

     Property and equipment, net of accumulated depreciation and amortization,
consist of the following:

                                                            NOVEMBER 30,
                                                         1996         1995
-----------------------------------------------------------------------------
(IN THOUSANDS)

COMPUTER SOFTWARE AND EQUIPMENT                        $  5,978     $ 15,949
FURNITURE AND EQUIPMENT                                   4,303        6,384
LEASEHOLD IMPROVEMENTS                                    2,700        3,683
                                                        -------      -------
                                                         12,981       26,016
LESS ACCUMULATED DEPRECIATION
  AND AMORTIZATION                                       (8,536)     (17,726)
                                                        -------      -------
                                                       $  4,445     $  8,290
                                                        =======      =======

                                          21

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 8.   BANK BORROWINGS

     Effective as of August 31, 1996, the Company entered into an amendment to
its existing revolving credit facility with BankAmerica Business Credit, Inc.
("BABC") for loans and letters of credit (the "Revolving Facility"). The
amendment provided for, among other things, (i) an extension of the term of the
Revolving Facility for an additional three years to November 30, 1999, (ii) a
reduction in the maximum amount available for aggregate loans and letters of
credit at any time from $75 million to $50 million, (iii) an increase in the
maximum amount of aggregate loans permitted to be outstanding at any time from
$10 million to $20 million and (iv) a reduction in the minimum Adjusted Tangible
Net Worth (as defined in the Revolving Facility) required to be maintained under
the Revolving Facility, with a restriction on the payment of cash dividends on
the Company's Series B Cumulative Convertible Preferred Stock and a reduction in
the amount of the available Borrowing Base (as defined in the Revolving
Facility) if the Company's Adjusted Tangible Net Worth falls below certain
thresholds.  


     Effective November 30, 1996, the Company entered into a further amendment
to its Revolving Facility with BABC (the "November 30 Amendment").  The
amendment provides for, among other things, (i) a reduction in the term of the
Revolving Facility from November 30, 1999 to May 31, 1998, (ii) a reduction in
the maximum amount available for aggregate loans and letters of credit at any
time from $50 million to $25 million, (iii) a reduction in the maximum amount of
aggregate loans permitted to be outstanding at any time from $20 million to $10
million, (iv) certain revisions to the borrowing availability calculation
including the elimination of a reserve against availability, (v) a reduction in
the minimum Adjusted Tangible Net Worth required to be maintained under the
Revolving Facility and (vi) an increase in bank fees.  The Company is currently
negotiating with various lenders to secure borrowing facilities beyond May 31,
1998.

     The Revolving Facility is secured primarily by the Company's domestic
assets and is subject to certain financial covenants.  Cash borrowings under the
Revolving Facility bear interest at a rate equal to Bank of America's publicly
announced reference rate plus one and one-half percent.  There were no domestic
cash borrowings under the Revolving Facility at any time during the year ended
November 30, 1996 and, as of that date, approximately $26.5 million of domestic
letters of credit were outstanding under the Revolving Facility and $10 million
was available for borrowing.  In connection with the execution of the November
30 Amendment, BABC granted a waiver through December 31, 1996 of the $25 million
limit on maximum aggregate loans and letters of credit.
     
NOTE 9.  FINANCIAL INSTRUMENTS 

     The Company enters into forward contracts, with terms of less than one
year, to offset the effects of exchange rate changes on cash flow exposures
denominated in foreign currencies.

     The Company's foreign currency forward contracts at November 30, 1996 are
listed below.  All of the contracts mature no later than June 1997.  The
currencies listed are in relation to the U.S. dollar and are converted at
year-end market exchange rates.

FOREIGN CURRENCY CONTRACTS                      SOLD                   BOUGHT
-----------------------------------------------------------------------------
(IN MILLIONS)

GERMAN MARK                                   $  2.1                    $  --
FRENCH FRANC                                     1.6                       --
BRITISH POUND                                    2.5                       --
DUTCH GUILDER                                    0.5                       --
ITALIAN LIRA                                     1.0                       --
                                              ------                    -----
                                              $  7.7                    $  --
                                              ======                    =====

                                          22

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     Accounts payable and accrued liabilities consist of the following:

                                                            NOVEMBER 30,
                                                         1996         1995
-----------------------------------------------------------------------------
(IN THOUSANDS)

ACCOUNTS  PAYABLE                                      $ 3,558      $ 5,249
OTHER ACCRUED LIABILITIES                               14,081       15,388
ACCRUED INVENTORY PURCHASES                              8,417        7,111
ACCRUED  RESTRUCTURING AND NON-RECURRING CHARGES        20,166        2,755
ACCRUED ADVERTISING                                        230        2,301
                                                        ------       ------
                                                       $46,452      $32,804
                                                        ======       ======

     Accounts payable include issued but uncleared checks of $1.3 million at
November 30, 1996.

NOTE 11.  CONVERTIBLE SUBORDINATED DEBENTURES

     On December 24, 1992, the Company completed a private sale of $50 million
aggregate principal amount of 73/4% convertible subordinated debentures due 2002
("the Debentures").  On June 18, 1993, the Debentures were registered under the
Securities Act of 1933, as amended. 

     The fair market value of the Debentures at November 30, 1996 was $26.5
million.  The Debentures are convertible into shares of the Company's Common
Stock (the "Common Stock") at a conversion rate of $12.30 per share, subject to
certain antidilution adjustments, and are redeemable by the Company at any time
initially at a specified premium to par, declining to par for redemptions on or
after November 30, 2000.  Interest is payable semi-annually on May 31 and
November 30.

     The Debentures were delisted from the NASDAQ Small Cap Market, effective
November 21, 1995, as a result of the Company's failure to comply with NASDAQ's
capital and surplus requirements.  The Company's $100 million of Series A
mandatorily redeemable Cumulative Convertible Preferred Stock was not included
in the NASDAQ calculation of capital and surplus.  Subsequent to the completion
of the Share Exchange Transaction (see NOTE 12 - SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK/SHARE EXCHANGE TRANSACTION), the Company exceeded NASDAQ's
capital and surplus requirements and the Debentures were reinstated on the Small
Cap Market in April 1996.

NOTE 12.  SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/ SHARE EXCHANGE
          TRANSACTION

     On April 9, 1996, the Company's shareholders approved the exchange (the
"Share Exchange Transaction") of all of the issued and outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock, stated value $100 per
share ("Series A Preferred Stock"), and all accrued and unpaid dividends thereon
for (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B Cumulative Convertible Preferred Stock, stated value
$100 per share ("Series B Preferred Stock"), plus (ii) an additional number of
shares of Series B Preferred Stock equal to the dollar amount of accrued and
unpaid dividends in respect to the Series A Preferred Stock through the closing
of the Share Exchange Transaction.  The Share Exchange Transaction was completed
on April 12, 1996 and, as a result, Trefoil Capital Investors, L.P. ("Trefoil"),
the holder of all the Series A Preferred Stock, was issued 1,107,902 shares of
Series B Preferred Stock and the Series A Preferred Stock was retired.  
     
     The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
which was due in August 1996), (ii) a reduction in the conversion price from
$10.00 to $6.75 per share and (iii) the voting of shares of Series B Preferred
Stock (on an as converted basis) together with shares of the Company's Common
Stock on all matters, including the election of directors. The coupon rate of
7.5% per annum for dividends with respect to the Series B Preferred Stock
remains unchanged from that of the Series A Preferred Stock.  During the fiscal
year ending November 30, 1996, the Company was entitled, at its option, to pay
dividends on the Series B Preferred Stock in either additional shares of Series
B Preferred Stock or in cash. 

                                          23

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

Thereafter, dividends on the Series B Preferred Stock will be payable only in
cash.  The Company elected to pay the dividends of $1.1 million, $2.1 million
and $2.1 million due on May 31, August 31 and November 30, 1996, respectively,
in additional shares of Series B Preferred Stock. Subsequent to the year ended
November 30, 1996, the holders of the Series B shares are entitled to receive,
when, as and if declared by the Board of Directors out of assets of the Company
legally available therefor, cumulative cash dividends at an annual rate of 7.5%
(arrearages of dividends will bear additional dividends compounded quarterly at
a rate of 8.625% per annum through the date of payment of such arrearages),
payable quarterly in arrears on the last business day of February, May, August
and November.  

     The Company's Board of Directors has approved the non-payment of the cash
dividend required on the Series B Preferred Stock due February 28, 1997.  As a
result of such default, future dividends will accrue at a rate of 8.625% per
annum compounded quarterly with respect to dividends in arrears.

NOTE 13.  STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

     In April 1992, an affiliate of Pentland Group plc purchased 1,244,445
shares of the Company's Common Stock for $14 million in cash.  Such affiliate
held an option to purchase 400,000 shares of Common Stock (200,000 at $13.50 per
share and 200,000 at $16.125 per share), which expired on April 28, 1996.

1986 STOCK OPTION PLAN  The Company has adopted a noncompensatory stock option
plan (the "1986 Plan"), which was approved by the Company's shareholders, for
eligible employees, directors and consultants of the Company.  Incentive stock
options and nonqualified stock options issued under this stock option plan are
exercisable for a period of up to ten years from the date of grant.  Options
have been granted at prices equal to the fair market value of the Common Stock
at the grant date.

     A summary of stock option activities under the 1986 Plan is as follows:

                                            NUMBER OF
                                             SHARES            OPTION PRICES
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993           1,971,891         $ 6.13 TO $33.63

     GRANTED                                 131,000         $ 5.63 TO $11.38
     EXERCISED                                (1,810)             $ 6.13
     CANCELED                               (361,983)        $ 6.13 TO $24.63
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994           1,739,098         $ 5.63 TO $33.63

     GRANTED                                 293,500         $ 2.60 TO $ 5.38
     EXERCISED                                  --                  --
     CANCELED                               (522,080)        $ 4.38 TO $23.38
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995           1,510,518         $ 2.60 TO $33.63

     GRANTED                                 803,883              $ 1.75
     EXERCISED                                  --                  --
     CANCELED                               (958,194)        $ 1.75 TO $23.38

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

OUTSTANDING AT NOVEMBER 30, 1996           1,356,207         $ 1.75 TO $33.63
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     At November 30, 1996, 1,356,207 common shares were reserved for the
exercise of outstanding options, options to purchase 592,570 shares were
exercisable and no shares were available for grant as the 1986 plan expired in
May 1996 (options to purchase 1,096,348 shares were exercisable and 591,910
shares were available for grant at November 30, 1995).

1992 STOCK OPTION PLAN  In June 1992, the Company adopted, and the 
shareholders approved, a separate stock option plan for Eligible Non-Employee 
Directors (the "1992 Plan").  The 1992 Plan provides that upon election or 
appointment to the Company's Board of Directors, each Eligible Non-Employee 
Director (as defined in the 1992 Plan) shall receive a one-time grant of an 
option to purchase 20,000 shares of Common Stock at a price equal to the Fair 
Market Value (as defined in the 1992 Plan) of the Common Stock on the date 
the option is granted.  In fiscal 1996, the 1992 Plan was amended to allow 
for the granting of stock options to non-employee Directors, as well as the 
Chief Executive Officer of the Company if he is a director and is not paid a 
salary, in lieu of cash compensation for fiscal years during which the 
Company's income applicable to Common Stock is less than $1 million.  Up to 
1,000,000 shares of Common Stock may be issued or transferred pursuant to the 
1992 plan.

                                          24

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

A summary of stock option activities under the 1992 Plan is as follows:

                                       NUMBER OF
                                        SHARES           OPTION PRICES
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993         80,000           $ 9.75 TO $14.00

     GRANTED                               --                    --
     EXERCISED                             --                    --
     CANCELED                              --                    --
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994   80,000    $ 9.75 TO $14.00

     GRANTED                               --                    --
     EXERCISED                             --                    --
     CANCELED                              --                    --
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995   80,000    $ 9.75 TO $14.00

     GRANTED                            180,000                $3.62
     EXERCISED                             --                    --
     CANCELED                              --                    --

--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1996        260,000           $ 3.62 TO $14.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

At November 30, 1996, 260,000 shares were reserved for the exercise of
outstanding options, options to purchase 260,000 shares were exercisable and
740,000 shares were available for grant (options to purchase 70,000 shares were
exercisable and 320,000 shares were available for grant at November 30, 1995).

1993 STOCK INCENTIVE PLAN  In April 1993, the Company adopted, and the
shareholders approved, a stock incentive plan (the "1993 Plan") for eligible
employees, directors, officers and consultants of the Company.  Incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock, performance units and performance shares may be granted under the 1993
Plan.  Up to 2,500,000 shares of Common Stock may be issued or transferred
pursuant to the 1993 Plan.  Options granted under this plan may be exercisable
for a period of up to ten years from the date of grant. Options granted to date
under the 1993 Plan have been granted at an exercise price equal to the average
closing price of the Common Stock on the New York Stock Exchange composite tape
for each of the five consecutive trading days immediately preceding the grant
date.

     A summary of stock option activities under the 1993 Plan is as follows:

                                          NUMBER OF
                                           SHARES            OPTION PRICES
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993            750,000           $ 11.55

     GRANTED                              1,423,178       $ 5.75 TO $11.38
     EXERCISED                                 --                --
     CANCELED                              (144,403)      $ 6.00 TO $ 7.78    
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994          2,028,775       $ 5.75 TO $11.55

     GRANTED                                367,387       $ 2.66 TO $ 5.83
     EXERCISED                                 --                --
     CANCELED                              (340,700)      $ 5.18 TO $11.38    
--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995          2,055,462       $ 2.66 TO $11.55

     GRANTED                                157,000       $ 1.65 TO $3.58
     EXERCISED                                 --                --   
     CANCELED                              (539,464)      $ 2.66 TO $11.38     

--------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1996   1,672,998      $1.65 TO $11.55     
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     At November 30, 1996, 1,672,998 shares were reserved for the exercise of
outstanding options, options to purchase 1,302,327 shares were exercisable and
827,002 shares were available for grant (options to purchase 1,333,198 shares
were exercisable and 444,538 shares were available for grant at November 30,
1995).    

EMPLOYEE STOCK SAVINGS PLAN  The Company has a defined contribution employee
stock savings plan covering 

                                          25

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

substantially all employees who are at least 21 years of age and have completed
at least thirty days of employment.  The Company made matching contributions of
$317,000, $289,000 and $397,000 for 1996, 1995 and 1994, respectively, in
respect to employee contributions to such plan.

     NOTE 14.  INCOME TAXES

     Domestic and foreign components of loss before income taxes and minority
interest are as follows:



                            YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
(IN THOUSANDS)          1996          1995           1994 
                    ----------------------------------------

DOMESTIC            $ (29,183)     $ (43,466)     $ (12,093)  
FOREIGN               (39,492)        (9,255)       (10,208)
                    $ (68,675)     $ (52,721)     $ (22,301)  

     No income tax benefit has been recorded in 1996, 1995 and 1994.  The
difference between the tax benefit computed based on applying the U.S. statutory
income tax rate to the loss before income taxes and minority interest and the
recorded benefit was primarily due to the nonrecognition of tax benefits for
operating losses.

     Temporary differences and carryforwards which give rise to deferred tax
assets, net of valuation allowance, at November 30, 1996 and 1995 are as
follows:

                         NOVEMBER 30,              
-------------------------------------------------------------
(IN THOUSANDS)                        1996            1995
                                    -------------------------
     
LOSS CARRYFORWARDS                  $ 67,700        $ 46,011
TAX CREDIT CARRYFORWARDS               3,226           3,226
RESERVES AND ACCRUED EXPENSES         12,688           8,520
DEPRECIATION AND AMORTIZATION          4,451           5,444
OTHER                                  1,898             907
                                    --------         -------
TOTAL DEFERRED TAX ASSETS             89,963          64,108
LESS VALUATION ALLOWANCE             (89,963)        (64,108)
                                     -------         -------
     NET DEFERRED TAX ASSETS        $     --        $     --
                                     =======         =======

     At November 30, 1996, the Company had a federal tax net operating loss
("NOL") carryforward of approximately $101.4 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2011. The Company also
has a federal alternative minimum tax credit carryforward of approximately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely.  California franchise tax NOL carryforwards of
approximately $88.3 million will, if unused, expire primarily in fiscal year
1998.  In addition, the Company has other state and foreign NOL carryforwards
with varying limitations on future utilization.  The Company's NOL carryforwards
may be restricted upon a change in control.  In the event that there is a change
in ownership as defined by Section 382 of the Internal Revenue Code a
significant limitation may be imposed on the availability of the NOL and credit
carryforwards.

NOTE 15.  LITIGATION

SETTLEMENTS  Fiscal 1996 results include net settlement income of $1.9 million,
primarily in connection with the settlement of an environmental compliance
matter.  In 1995, the Company recorded net settlement income of $2.3
million, substantially all of which was in connection with the settlement of
certain patent and trademark infringement actions.  Results for 1994 include net
settlement income of $1.3 million in connection with trademark and patent
infringement lawsuits partially offset by expenses relating to the settlement of
employee litigation and a dispute with a former distributor.

PENDING LITIGATION  The Company is a defendant in certain legal actions.  In the
opinion of management, the disposition of these actions is not expected to have
a material adverse effect upon the Company's financial position or results of
operations.


                                          26

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 16.  COMMITMENTS AND CONTINGENCIES

     The Company has entered into various agreements for the purpose of
obtaining footwear technology and product sourcing.  Such agreements provide
for, among other things, fees and royalties to be paid.  At November 
30, 1996, the aggregate amount of future commitments under such contracts
totaled $4.9 million and are to be paid as follows:  $4.5 million in 1997 and 
$0.4 million in 1998.   

     As part of a change in its marketing emphasis, the Company has allowed
sponsorships and endorsement contracts with professional athletes and others to
expire and in some cases, including Universal Studios Hollywood, contracts have
been terminated.  The Company's remaining commitments, including termination
fees, at November 30, 1996 totaled $2.1 million and are to be paid as follows:
$1.7 million in 1997, $0.2 million in 1998 and  $0.2 million in 1999.

     In September 1994, the Company entered into a new one year management and
consulting agreement with Shamrock Capital Advisors, Inc. ("SCA"), a company
which provides management and consulting services to Trefoil.  Selling, general
and administrative expenses included $0.4 million and $0.7 million,
respectively, in 1995 and  1994 for fees to SCA.  The agreement was not renewed
and expired according to its terms in September 1995.  

     In June 1996, the Company entered into a one-year agreement with SCA to
assist in the identification, negotiation and/or structuring of acquisition
opportunities.  If the Company acquires a controlling interest in any company or
business during the term of this agreement or for six months thereafter, if the
transaction involves parties introduced by SCA, then the Company shall pay a fee
equal to (i) 11/2% of the aggregate value of the transaction up to $50 million
plus 1% of the aggregate value in excess of $50 million, if SCA has acted as the
sole financial advisor to the Company with respect to the transaction, or (ii)
1% of the aggregate value of the transaction up to $50 million, plus 1/2% of the
aggregate value in excess of $50 million, if another financial or investment
advisor or valuation firm has advised the Company, in addition to or instead of
SCA, with respect to the transaction.  L.A. Gear also agreed to reimburse SCA
for all of its out-of-pocket expenses payable to third parties incurred in
connection with SCA's services under the agreement.  

     The Company occupies certain facilities, including corporate offices and
distribution centers, and rents certain equipment under operating leases.  The
Company is in the process of trying to sublease excess space at its corporate
facility and at its distribution center.  Rental expense for 1996, 1995 and 1994
amounted to approximately $6.3 million, $8.7 million and $8.4 million,
respectively.

     At November 30, 1996, the minimum rental commitments, net of sublease
income, under noncancelable operating leases with an initial or remaining term
in excess of one year were as follows:

YEAR ENDING NOVEMBER 30       
-------------------------------------------------------
(IN THOUSANDS)

 1997                                           $ 3,742
 1998                                             3,183
 1999                                             2,459
 2000                                             1,633
 2001                                             1,576
 THEREAFTER                                       1,481
                                                 ------

                                                $14,074
                                                 ======

     The Company is subject to inquiries and audits from various taxing
authorities.  In the opinion of management, any assessments are not expected to
have a material adverse effect on the Company's financial position or results of
operations.

                                          27

<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 17.  SEGMENT REPORTING      

     The Company's principal business is the design, development and marketing
of quality athletic and lifestyle footwear.  The Company is a multinational
corporation with subsidiaries operating in 10 countries at November 30, 1996. 
Transfers between geographic areas primarily represent intercompany export sales
from the United States and are accounted for based upon established sales prices
between the related companies.  In computing results from operations for foreign
subsidiaries, no allocation of general corporate expenses, interest or income
taxes has been made.  

                                        1996            1995         1994 
-----------------------------------------------------------------------------
(IN THOUSANDS)

NET SALES
     UNITED STATES       
      DOMESTIC                        $136,055        $192,493     $298,489
      EXPORT CUSTOMERS                  18,427          33,656       59,240
      SALES TO OVERSEAS SUBSIDIARIES    26,349          37,848       29,020
-----------------------------------------------------------------------------
     TOTAL UNITED STATES               180,831         263,997      386,749   
     EUROPE                             37,134          59,996       50,104    
     OTHER                               4,832          10,406        8,133
     ELIMINATIONS                      (26,349)        (37,848)     (29,020)  
-----------------------------------------------------------------------------
     TOTAL                            $196,448        $296,551     $415,966   
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------


                                        1996            1995         1994 
-----------------------------------------------------------------------------
(IN THOUSANDS)

OPERATING PROFIT (LOSS)  
     UNITED STATES                     (35,666)        (50,537)     (18,428)  
     EUROPE                            (24,709)          3,161         (726)  
     OTHER                              (7,639)         (2,990)      (1,174)
     ELIMINATIONS                        1,487            (165)       1,020     
-----------------------------------------------------------------------------
                                       (66,527)        (50,531)     (19,308)
     INTEREST  EXPENSE, NET             (2,148)         (2,190)      (2,993)   
-----------------------------------------------------------------------------
     TOTAL                            $(68,675)       $(52,721)    $(22,301)  
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------


                                        1996            1995         1994 
-----------------------------------------------------------------------------
(IN THOUSANDS)

IDENTIFIABLE ASSETS
     UNITED STATES                      79,335         111,656      176,321
     EUROPE                             19,802          38,389       36,134
     OTHER                               2,235          11,433       13,745
     ELIMINATIONS                         (416)         (1,903)      (1,737)
-----------------------------------------------------------------------------
     TOTAL                            $100,956        $159,575     $224,463 
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

     The Company's domestic customers consist primarily of department, shoe,
sporting goods and athletic footwear stores and wholesale distributors.  In 1996
and 1995, sales to Wal-Mart accounted for 17.1% and 15.3%, respectively, of the
Company's net sales.  In 1994,  none of the Company's customers individually
accounted for 10% or more of the Company's net sales.  The Company's five
largest customers worldwide, in the aggregate, accounted for approximately
31.6%, 27.8% and 26.8% of the Company's net sales in 1996, 1995 and 1994,
respectively.

                                          28


<PAGE>

                           L.A. GEAR, INC. AND SUBSIDIARIES
                      Notes to Consolidated Financial Statements

NOTE 18.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
          MATTERS; SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "LA".  The following table presents summarized unaudited quarterly
results and the range of high and low closing sales prices on the New York Stock
Exchange for the indicated fiscal quarters.

<TABLE>
<CAPTION>

                                   FIRST QUARTER             SECOND QUARTER          THIRD QUARTER           FOURTH QUARTER
                                  1996        1995        1996(2)     1995 (2)      1996        1995       1996(1)     1995(1)
-------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                            <C>         <C>          <C>          <C>         <C>         <C>         <C>         <C>
NET SALES                       $ 78,666    $ 69,392     $ 38,472     $ 79,014    $ 53,431    $ 94,354    $ 25,879    $ 53,791
GROSS PROFIT (LOSS)             $ 24,554    $ 20,740     $  9,698     $ 24,970    $ 14,222    $ 32,542    $ (1,239)   $ 10,497
NET INCOME (LOSS)               $  1,099    $(11,642)    $ (7,480)    $ (5,911)   $ (4,848)   $    416    $(50,460)   $(34,260)
INCOME (LOSS) PER
    COMMON SHARE:
      PRIMARY                   $   0.04    $  (0.59)    $  (0.42)    $  (0.34)   $  (0.30)   $  (0.07)   $  (2.29)   $  (1.58)
                                 =======     =======      =======      =======     =======     =======     =======     =======
      FULLY DILUTED             $   0.04    $  (0.59)    $  (0.42)    $  (0.34)   $  (0.30)   $  (0.07)   $  (2.29)   $  (1.58)
                                 =======     =======      =======      =======     =======     =======     =======     =======

PRICE RANGE OF
    COMMON STOCK:
      HIGH                      $   3.12    $   5.87     $   3.75     $   4.37    $   3.75    $   4.12    $   3.25    $   3.12
      LOW                       $   1.62    $   3.87     $   2.12     $   3.00    $   2.37    $   2.25    $   2.25    $   1.62

</TABLE>

(1)  IN THE FOURTH QUARTER OF 1996, A RESTRUCTURING CHARGE OF $28.8 MILLION WAS
     RECORDED.  IN ADDITION, THE FOURTH QUARTER RESULTS WERE ADVERSELY AFFECTED
     BY INCREASES IN INVENTORY RESERVES DOMESTICALLY AND AT THE COMPANY'S
     EUROPEAN SUBSIDIARIES AND LOW MARGINS REALIZED ON SALES OF LIGHTED PRODUCT
     WORLDWIDE.  IN THE FOURTH QUARTER OF 1995, A RESTRUCTURING CHARGE OF $5.1
     MILLION AND NON-RECURRING CHARGES OF $5.6 MILLION WERE RECORDED.  SEE NOTE
     3 - RESTRUCTURING CHARGES AND LIQUIDITY.

(2)  IN THE SECOND QUARTER OF 1996, THE COMPANY RECORDED NET LITIGATION
     SETTLEMENT INCOME OF $1.9 MILLION PRIMARILY IN CONNECTION WITH THE
     SETTLEMENT OF AN ENVIRONMENTAL COMPLIANCE MATTER.  IN THE SECOND QUARTER OF
     1995, THE COMPANY RECORDED NET LITIGATION SETTLEMENT INCOME OF $1.9 MILLION
     AS PART OF A SETTLEMENT AGREEMENT IN CONNECTION WITH PATENT INFRINGEMENT
     LITIGATION. SEE NOTE 15 - LITIGATION.

     At February 14, 1997, the Company had approximately 12,050 holders of
record of its Common Stock.  To date, the Company has not paid cash dividends on
its Common Stock.  The terms of the Series B Preferred Stock place restrictions
on the ability of the Company to pay dividends on the Common Stock.  The Company
does not anticipate paying any dividends on the Common Stock in the foreseeable
future.



                                          29

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF L.A. GEAR, INC.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of L.A.
Gear, Inc. and its subsidiaries at November 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended November 30, 1996, in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for the opinion expressed
above.



/s/ Price Waterhouse

Los Angeles, California

February 21, 1997

                                          30

<PAGE>


DIRECTORS

STANLEY P. GOLD
Chairman of the Board and Chief Executive Officer
L.A. Gear, Inc.
President and Managing Director
Trefoil Investors, Inc. and Shamrock Capital Advisors, Inc.
Director
Walt Disney Company (NYSE-DIS) 
Chairman and a Director
Koor Industries Ltd. (NYSE- KOR)

WILLIAM L. BENFORD
Managing Director
Shamrock Capital Advisors, Inc.

WALTER C. BLADSTROM
Private Investor

ALLAN E. DALSHAUG
Chairman of the Board and Chief Executive Officer
Sterling West Bancorp.

WILLIE D. DAVIS 
President and Chief Executive Officer
All-Pro Broadcasting, Inc.

STEPHEN A. KOFFLER
President
Koffler & Company
An investment banking firm

ANN E. MEYERS
Sports Commentator

CLIFFORD MILLER
Chairman
The Clifford Group, Inc.
A business consultancy company

ROBERT G. MOSKOWITZ
Managing Director
Trefoil Investors, Inc. and Shamrock Capital Advisors, Inc.

VAPPALAK A. RAVINDRAN
President
Paracor Finance, Inc.
A merchant banking company 
 
OFFICERS

STANLEY P. GOLD
Chairman of the Board and Chief Executive Officer

BRUCE W. MacGREGOR
President and Chief Operating Officer

VICTOR J. TRIPPETTI
Senior Vice President and Chief Financial Officer

RON D. CARPENTER
Vice President of International

MARK A. KIBLER
Vice President of Distribution

ROBERT S. LANDERMAN
Vice President of Sales

ROBERT L. PETERSON
Vice President of Product

NEIL P. EDWARDS
Corporate Controller

GARY L. ESHLEMAN
Treasurer

WILLIAM R. SHERMAN
Secretary and Senior Legal Counsel

DON C. LAWRENCE
Assistant Secretary

INDEPENDENT ACCOUNTANTS

PRICE WATERHOUSE LLP
400 South Hope Street
Los Angeles, California 90071

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005

INVESTOR RELATIONS

L.A. GEAR, INC.
Office of Investor Relations
c/o Victor J. Trippetti
2850 Ocean Park Boulevard
Santa Monica, California 90405

CORPORATE HEADQUARTERS

L.A. GEAR, INC.
2850 Ocean Park Boulevard
Santa Monica, California 90405

FORM 10-K

A copy of the Company's Form 10-K Annual 
Report for the year ended November 30, 1996 
filed with the Securities and Exchange
Commission is available without charge to any
shareholder.

Requests should be sent to the attention of
the Office of Investor Relations at the 
Corporate Headquarters.


<PAGE>


                          [ARTWORK & L.A. GEAR LOGO]


<PAGE>


                               [L.A. GEAR LOGO]