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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
  [X]               OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2001

                                      OR

  [_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                     For the transition period from  to
                        Commission File Number 0-18490

                                 K-SWISS INC.
            (Exact name of Registrant as specified in its charter)

               Delaware                              95-4265988
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)             Identification Number)

    31248 Oak Crest Drive, Westlake                     91361
          Village, California                        (Zip Code)
    (Address of principal executive
               offices)

      Registrant's telephone number, including area code: (818) 706-5100

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

<TABLE>
<CAPTION>
                                                           Name of each exchange
             Title of each Class                            on which registered
             -------------------                           ---------------------
<S>                                            <C>
                    None                                            None
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                             Class A Common Stock,
                           par value $.01 per share
                               (Title of class)

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

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

  The aggregate market value of the Class A Common Stock of the Registrant
held by non-affiliates of the Registrant on February 1, 2002 based on the
closing price of the Class A Common Stock on the Nasdaq National Market on
such date was $240,975,509.

  The number of shares of the Registrant's Class A Common Stock outstanding at
February 1, 2002 was 6,344,035 shares. The number of shares of the
Registrant's Class B Common Stock outstanding at February 1, 2002 was
2,903,478 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the proxy statement for the Registrant's 2002 Annual
Stockholders Meeting are incorporated by reference into Part III.

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                                  K-SWISS INC.

                      INDEX TO ANNUAL REPORT ON FORM 10-K

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

<TABLE>
<CAPTION>
            Caption                                                         Page
            -------                                                         ----
 <C>        <S>                                                             <C>
 PART I

 Item 1.    Business.....................................................     3

 Item 2.    Properties...................................................    10

 Item 3.    Legal Proceedings............................................    10

 Item 4.    Submission of Matters to a Vote of Security Holders..........    11

 Item 4(a). Executive Officers of the Registrant.........................    11

 PART II

 Item 5.    Market for Registrant's Common Equity and Related Stockholder
            Matters......................................................    13

 Item 6.    Selected Financial Data......................................    14

 Item 7.    Management's Discussion and Analysis of Financial Condition
            and Results of Operations....................................    15

 Item 8.    Financial Statements and Supplementary Data..................    21

 Item 9.    Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.....................................    43

 PART III

 Item 10.   Directors and Executive Officers of the Registrant...........    43

 Item 11.   Executive Compensation.......................................    43

 Item 12.   Security Ownership of Certain Beneficial Owners and
            Management...................................................    43

 Item 13.   Certain Relationships and Related Transactions...............    43

 PART IV

 Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form
            8-K..........................................................    43
</TABLE>
<PAGE>

                                    PART I

Item 1. Business

Company History and General Strategy

  K-Swiss Inc. designs, develops and markets a growing array of athletic
footwear for high performance sports use, fitness activities and casual wear
under the K-Swiss brand. During 2001, the Company acquired two additional
footwear brands: (1) National Geographic (via license) and (2) Royal Elastics.
Sales of these two brands were insignificant during 2001.

  In May 2001, the Company formed a joint venture with Rugged Shark, a
designer and manufacturer of young, active-oriented footwear, to license,
produce and market a men's, women's and children's collection of National
Geographic outdoor-oriented and casual footwear. The joint venture will launch
a full-scale line of outdoor and casual footwear in fall 2002. Under the terms
of the joint venture, the Company owns 75% of the new company and provides the
infrastructure to design, develop, manufacture, distribute and market the line
of National Geographic footwear. Rugged Shark owns 25% of the venture. The new
joint venture has hired a president and two senior sales executives and has
engaged eight independent sales representatives. The joint venture has been
primarily involved in developing a line of footwear for delivery in fall 2002.

  In November 2001, the Company acquired the worldwide rights and business of
Royal Elastics ("Royal"), an Australian-based designer and manufacturer of
elasticated footwear. The purchase excludes distribution rights in Australia,
which were retained by Royal Management Pty, Ltd. The principal employees of
Royal are co-Presidents and founders, Rodney Adler and Tull Price, who have
relocated to K-Swiss' corporate offices in Westlake Village. Product design,
marketing and positioning of the Royal brand will be managed by Messrs. Adler
and Price, while back office, distribution, product development and production
resources will be provided through K-Swiss' existing infrastructure. Royal has
hired a marketing person, an experienced sales executive, and three product
development personnel. Royal has also engaged six independent sales
representatives. Product will be delivered to the market place during the
first quarter of 2002. Royal's backlog at December 31, 2001 was $1,870,000.

  The discussion during the remainder of this Item 1., other than backlog,
trademarks and patents, and employees, relates solely to the K-Swiss brand.

  The Company was founded in 1966 by two Swiss brothers, who introduced one of
the first leather tennis shoes in the United States. The shoe, the K-Swiss
"Classic", has remained relatively unchanged from its original design, and
accounts for a significant portion of the Company's sales. The Classic has
evolved from a high-performance shoe into a casual, lifestyle shoe. The
Company has emphasized in its marketing the commitment to produce products of
high quality and enduring style. The Company plans to continue to emphasize
the high quality and classic design of its products as it introduces new
models of athletic footwear.

  On December 30, 1986, the Company was purchased by an investment group led
by the Company's current President. The Company thereafter recruited
experienced management and reduced manufacturing costs by increasing offshore
production and entering into new, lower cost purchasing arrangements. The
Company's products are manufactured to its specifications by overseas
suppliers predominately in China. In June 1991 and September 1992, K-Swiss
International Ltd. and K-Swiss B.V. (located in the Netherlands),
respectively, commenced operations to broaden the Company's distribution on a
global scale. In addition, in August 1992, K-Swiss Inc. completed the
acquisition of K-Swiss Europe Limited (renamed to K-Swiss (UK) Ltd.) which
handles distribution in the United Kingdom.

                                       3
<PAGE>

  The Company's product strategy is two pronged. The first combines classic
styling with high quality components and technical features designed to meet
performance requirements of specific sports. The Company endeavors to use
classic styling to reduce the impact of changes in consumer preferences and
believes that this strategy leads to longer product life cycles than are
typical of the products of certain of its competitors. Management believes
that long product life cycles reduce total markdowns over the life of the
products, thereby enhancing their attractiveness to retailers. This strategy
also enables the Company to maintain inventory with less risk of obsolescence
than is typical of more fashion-oriented products. The second product strategy
uses fashion-oriented footwear sold principally on a futures only basis
usually with little or no planned inventory position taken on these products.
This strategy allows the Company to take advantage of trends in the
marketplace that it identifies while attempting to minimize the risk generally
associated with this type of product.

  The Company sells its products in the United States through independent
sales representatives primarily to specialty athletic footwear stores, pro
shops, sporting good stores and department stores. The Company also sells its
products to a number of foreign distributors. The Company now has sales
offices or distributors throughout the world. In 1992, the Company established
sales offices and now has appointed exclusive distributors in much of Europe.
The Company believes that its overseas sales offices and foreign distributors
provide an opportunity for future growth.

  The Company was organized under the laws of the State of Delaware on April
16, 1990. The Company is successor in interest to K-Swiss Inc., a
Massachusetts corporation, which in turn was successor in interest to K-Swiss
Inc., a California corporation. The Company's principal executive offices are
located at 31248 Oak Crest Drive, Westlake Village, California 91361, and its
telephone number is (818) 706-5100. Unless the context otherwise requires, the
term the "Company" as used herein refers to K-Swiss Inc. and its consolidated
subsidiaries.

Products

  The following table summarizes the Company's product lines and sets forth
the approximate contribution to revenues (in dollars and as a percentage of
revenues) attributable to each footwear category for the periods indicated.
All footwear categories come in both men's (approximately 52% of 2001
revenues) and women's (approximately 27% of 2001 revenues). Most styles within
each footwear category are offered in men's, women's and children's.

<TABLE>
<CAPTION>
                                                    Revenues (1)
                                       ----------------------------------------
                                              Year Ended December 31,
                                       ----------------------------------------
                                           2001          2000          1999
                                       ------------  ------------  ------------
   Product Category                       $      %      $      %      $      %
   ----------------                    -------- ---  -------- ---  -------- ---
                                           (Dollar amounts in thousands)
   <S>                                 <C>      <C>  <C>      <C>  <C>      <C>
   Classic............................ $154,988  66% $142,122  64% $186,477  66%
   Tennis/Court.......................   15,916   7    15,383   7    22,107   8
   Training...........................   13,762   6    10,293   5       --  --
   Children's.........................   45,283  19    45,347  21    64,434  22
   Other (2)..........................    4,501   2     7,263   3    11,652   4
                                       -------- ---  -------- ---  -------- ---
   Total.............................. $234,450 100% $220,408 100% $284,670 100%
                                       ======== ===  ======== ===  ======== ===
   Domestic (3)....................... $204,566  87% $196,730  89% $263,728  93%
                                       ======== ===  ======== ===  ======== ===
</TABLE>
--------
(1) For purposes of this table, revenues do not include other domestic income
    and fees earned by the Company on sales by foreign licensees and
    distributors.

(2) Other consists of outdoor shoes, apparel, accessories, sport sandals and
    blemished shoes.

(3) Included in totals on previous line.

                                       4
<PAGE>

 Footwear

  The Company's product line through 1987 consisted primarily of the Classic.
The Classic was originally developed in 1966 as a high-performance tennis
shoe. Since that time, the Classic has become a popular casual shoe, by
realizing strong sales as the original Classic shoe. The upper of the Classic
includes only three separate pieces of leather, which allows for a relatively
simple manufacturing process and yields a product with few seams. This simple
construction improves the shoe's comfort, fit and durability. The Company has
from time to time incorporated certain technical advances in materials and
construction, but the Classic has remained relatively unchanged in style since
1966. In 2000, the Company launched Classic Luxury Edition, which sells for
slightly more than the original version.

  The Classic, fueled by new products, has evolved into a category of shoes
referred to as the Classic category. The Classic category is comprised of the
Classic originals as described above, the K-S Collection, the Limited Edition
series and the Davos Collection.

  The Classic originals segment contains shoes that the Company intends to
carry in its product assortment for several years. They generally have shoe
characteristics such as d-rings and five stripes, and, because they are
multiple season shoes, the Company maintains significant inventory positions
of this segment. Significant inventory positions allow for effective EDI
programs with retailers which fits into the Company's strategy of attempting
to become the retailers most profitable vendor. The K-S Collection comprises
shoes offered for several seasons and they generally do not contain d-rings
and have diffused or no stripes. Sometimes inventory is maintained on these
products. The Limited Edition segment is generally meant as a one-season
offering. They are generally fashionable type shoes that are purchased from
factories based only on futures orders received from retailers.

  In 2000, the Company entered a performance category, training. To further
differentiate the line of shoes from the Company's competitors, the Company
created three distinct segments: Speed, Strength and Endurance. The speed
shoes compete with moderately priced running shoes, while strength shoes
compete with moderately priced cross training shoes and endurance shoes are
marketed against trail running shoes.

  Presently, the Company competes in the Classic category (casual), training,
tennis and children's footwear. Each product category has certain styles
designated as core products. The Company's core products offer style
continuity and often include on-going improvement. The Company believes its
core product program is a critical factor in attempting to achieve the
Company's goal of becoming the "retailers' most profitable vendor". The core
program tends to minimize retailers' markdowns and maximizes the effectiveness
of marketing expenditures because of longer product life cycles.

 Apparel and Accessories

  The Company markets a limited line of K-Swiss branded apparel and
accessories. The products are designed with the same classic strategies used
in the footwear line. Classic styling allows the Company to appeal to a
variety of new markets from an urban distribution to an upscale suburban
consumer. The products represent high quality with an exceptional value.

  In 1999, the Company introduced a new 7.0 line of high tech tennis apparel
to complement its performance 7.0 footwear. The product line consists of world
class apparel (skirts, shorts, tops, polo's, dresses and warm-ups) for both
Men and Women. The Company also offers a collection for the casual athletic
consumer consisting of tee shirts, caps, socks and bags.

  The apparel line is distributed through the large chain sporting goods
stores as well as independent shoe and sporting goods dealers nationwide. The
tennis apparel line is sold primarily through tennis specialty and tennis pro
shops. It also offers the Company visible promotional opportunities.

                                       5
<PAGE>

 Sales

  Financial information relating to international and domestic operations is
presented as part of Item 8 of this report. See Note N to the Company's
Consolidated Financial Statements.

Marketing

 Advertising and Promotion

  Management believes that its strategy of designing products with longer life
cycles and introducing fewer new models relative to its competition enhances
the effectiveness of its advertising and promotions.

  In 2001, K-Swiss used television as its largest single marketing
expenditure. The campaign was run primarily on network and cable television,
and was supported by several sports, music and general interest/fashion
magazines. The campaign supported K-Swiss' launch of training products.

  Advertising and promotion efforts in foreign markets are directed by local
distributors. The Company's agreements with foreign distributors generally
require such distributors to spend a certain percentage of their sales of the
Company's products on advertising and promotion. The Company controls the
nature and content of these promotions.

 Domestic Marketing

  The Company's current marketing strategy emphasizes distribution to
retailers whose marketing strategies are consistent with the Company's
reputation for quality and service.

  The Company's footwear products are sold domestically through approximately
42 independent regional sales representatives and seven Company-employed sales
managers. The independent sales representatives are paid on a commission
basis, and are prohibited by contract from representing other brands of
athletic footwear and related products. These representatives sold to
approximately 2,900, 3,000 and 3,100 separate accounts as of December 31,
2001, 2000 and 1999.

  During 2001, the Venator group of stores and affiliates accounted for
approximately 18% of total revenues. See Note L to the Company's Consolidated
Financial Statements. No other domestic customer accounted for more than 10%
of total revenues during this period.

  The Company offers a "futures" program, under which retailers are offered
discounts on orders scheduled for delivery more than five months after the
order is made. There is no guarantee that such orders will not be canceled
prior to acceptance by the customer. This program is similar to programs
offered by other athletic shoe companies. The futures program has a positive
effect on inventory costs, planning and production scheduling. See
"Distribution". In addition, the Company engages in certain marketing programs
from time to time that provide for extended terms on initial domestic orders
of new styles.

  The Company maintains a customer service department consisting of 15 persons
at its Westlake Village, California facility. The customer service department
accepts orders for the Company's products, handles inquiries and notifies
retailers of the status of their orders. The Company has made a substantial
investment in computer equipment for general customer support and service, as
well as for distribution. See "Distribution".

  In 1999, seeking to expand the brand's reach, provide product distribution
to consumers that do not otherwise have the ability to purchase its products
and to take advantage of the new advances in technology and the internet, the
Company initiated an effort to better utilize the internet and the World Wide
Web. The approach was two pronged. The K-Swiss website (www.kswiss.com) was
enhanced

                                       6
<PAGE>

and is visually integrated with the television campaign on training. The
second part of the strategy led to the creation of a new entity called K-Swiss
Direct. K-Swiss Direct's function is to provide the end consumers an alternate
method of acquiring its products when they cannot find the product in their
local retail outlets or do not have reasonable access to retail outlets
carrying the product. Using the internet, consumers can purchase select
footwear and apparel, at prices competitive with the Company's retailers, and
have it shipped directly to them.

 International Marketing

  In 1991, the Company established a sales management team in Asia. The
Company has exclusive distributors in certain Pacific Rim countries. Exclusive
distributors of the Company's products are generally contractually obligated
to spend specific amounts on advertising and promotion of the Company's
products. The Company has also established exclusive distributors in other
international markets.

  To expand the marketing of its products into Europe, the Company opened its
own office in Amsterdam, the Netherlands in 1992.

  By the end of 2001, K-Swiss was working through 5 international subsidiaries
and 22 distributors to market K-Swiss products in potentially 38 countries.

Distribution

  During December 1997, the Company relocated its distribution facility. The
Company now maintains 309,000 square feet of warehouse space at a leased
facility in Mira Loma, California. Approximately 90,000 square feet of this
facility is subleased to a tenant. See "Item 2. Properties".

  The Company purchases footwear from independent manufacturers located
predominantly in China. The time required to fill new orders placed by the
Company with its manufacturers is approximately five months. Such footwear is
generally shipped in ocean containers and delivered to the Company's facility
in California. In some cases, large customers of the Company may receive
containers of footwear directly from the manufacturer. Distribution to
European and certain other distributors is based out of the Netherlands office
public distribution facility. The Company generally arranges shipment of other
international orders directly from its independent manufacturers.

  The Company maintains an open-stock inventory on certain products which
permits it to ship to retailers on an "at once" basis in response to orders
placed by mail, fax or toll-free telephone call. The Company has made a
significant investment in computer equipment that provides on-line capability
to determine open-stock availability for shipment. Additionally, products can
be ordered under the Company's "futures" program. See "Marketing--Domestic
Marketing". The Company ships by package express or truck from California,
depending upon size of order, customer location and availability of inventory.

Product Design and Development

  The Company maintains offices in Westlake Village, California and Taichung,
Taiwan that include a staff of individuals responsible for the design and
development of new styles for all global regions. This staff receives guidance
from the Company's management team in California, who meet regularly to review
sales, consumer and market trends.

Manufacturing

  In 2001, approximately 83% of the Company's footwear products were
manufactured in China, 15% in Thailand, and 2% in Taiwan. Although the Company
has no long-term manufacturing

                                       7
<PAGE>

agreements and competes with other athletic shoe companies for production
facilities (including companies that are much larger than the Company),
management believes that the Company's relationships with its footwear
producers are satisfactory and that it has the ability to develop, over time,
alternative sources for its footwear. The Company's operations, however, could
be materially and adversely affected if a substantial delay occurred in
locating and obtaining alternative producers.

  All manufacturing of footwear is performed in accordance with detailed
specifications furnished by the Company and is subject to quality control
standards, with the Company retaining the right to reject products that do not
meet specifications. The bulk of all raw materials used in such production is
purchased by manufacturers at the Company's direction. The Company's
inspectors at the manufacturing facilities conduct testing and inspection of
footwear products prior to shipment from those facilities.

  During 2001, the Company's apparel and accessory products were manufactured
in Macau, China, Thailand, Taiwan, Korea and the United States by certain
manufacturers selected by the Company.

  The Company's operations are subject to compliance with relevant laws and
regulations enforced by the United States Customs Service and to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, increases in customs duties and related fees resulting from
position changes by the United States Customs Service, import controls and
trade barriers (including the unilateral imposition of import quotas),
restrictions on the transfer of funds, work stoppages and, in certain parts of
the world, political instability causing disruption of trade. These factors
have not had a material adverse impact upon the Company's operations to date.
Imports into the United States are also affected by the cost of
transportation, the imposition of import duties, and increased competition
from greater production demands abroad. The United States or the countries in
which the Company's products are manufactured may, from time to time, impose
new quotas, duties, tariffs or other restrictions, or adjust presently
prevailing quotas, duty or tariff levels, which could affect the Company's
operations and its ability to import products at current or increased levels.
The Company cannot predict the likelihood or frequency of any such events
occurring. A change in any such duties, quotas or restrictions could result in
increases in the costs of such products generally and might adversely affect
the sales or profitability of the Company and the athletic footwear industry
as a whole.

  The Company's use of common elements in raw materials, lasts and dies gives
the Company flexibility to duplicate sourcing in various countries in order to
reduce the risk that the Company may not be able to obtain products from a
particular country.

  The Company's footwear products are subject to the United States customs
duties which range from 8.5% to 10.0% on footwear made principally of leather
to duties on synthetic shoes ranging from 6.0% to 37.5% plus, for certain
styles, $.90 per pair and moderately priced textile shoes of 20.0% to 37.5%
plus, for certain styles, $.90 per pair. Currently, approximately 89% of the
Company's footwear volume is derived from sales of leather footwear and
approximately 11% of the Company's footwear volume is derived from sales of
synthetic and textile footwear.

  A large portion of the Company's imported products are manufactured in the
People's Republic of China ("China"). As a result of a previous dispute with
China over the protection of intellectual property rights, the United States
Trade Representative ("USTR") is currently monitoring China's adherence to an
agreement to enforce intellectual property protections, and the failure of
China to meet its obligations could result in the imposition of trade
sanctions by USTR. Any such sanctions could affect the ability of the Company
to continue to import products from China.

                                       8
<PAGE>

Backlog

  At December 31, 2001 and 2000, domestic futures orders with start ship dates
from January through June 2002 and 2001 were approximately $103,329,000 and
$93,364,000, respectively, an increase of 11%. At December 31, 2001 and 2000,
international futures orders with start ship dates from January through June
2002 and 2001 were approximately $14,823,000 and $10,514,000, respectively, an
increase of 41%. At December 31, 2001 and 2000 total futures orders with start
ship dates from January through June 2002 and 2001 were approximately
$118,152,000 and $103,878,000, respectively, an increase of 14%. The 14%
increase in total futures orders is comprised of an 18% increase in the first
quarter 2002 futures orders and a 6% increase in the second quarter 2002
futures orders. "Backlog", as of any date, represents orders scheduled to be
shipped within the next six months. Backlog does not include orders scheduled
to be shipped on or prior to the date of determination of backlog.

  The mix of "futures" and "at once" orders can vary significantly from
quarter to quarter and year to year and therefore "futures" are not
necessarily indicative of revenues for subsequent periods. Orders generally
may be canceled by customers without financial penalty. The Company believes
its rate of net customer cancellations of domestic orders approximates
industry averages for similar companies. Customers may also reject
nonconforming goods. To date, the Company believes it has not experienced
returns of its products or bad debts of customers materially in excess of
industry averages for similar companies.

Competition

  The athletic footwear industry is highly competitive, and sales growth of
athletic and athletic-style leisure footwear slowed considerably in 2001,
increasing competition. The largest domestic marketers of footwear are Nike
and adidas, while the international market is dominated by Nike, adidas and
Reebok. Each of these companies has substantially greater financial,
distribution and marketing resources as well as greater brand awareness than
the Company.

  The Company has recently increased its emphasis on product lines beyond the
Company's Classic tennis model. In the past, the Company has introduced
products in such highly competitive categories such as court, boating, outdoor
and children's shoes. See "Products". There can be no assurance that the
Company will penetrate these or other new markets or increase the market share
it has established to date.

  The principal elements of competition in the athletic footwear market
include brand awareness, product quality, design, pricing, fashion appeal,
marketing, distribution, performance and brand positioning. The Company's
products compete primarily on the basis of technological innovations, quality,
style, and brand awareness among consumers. While the Company believes that
its competitive strategy has resulted in increased brand awareness and market
share, there can be no assurance that the Company will be able to retain or
increase its market share or respond to changing consumer preferences.

Trademarks and Patents

  The Company utilizes trademarks on all of its products and believes that its
products are more marketable on a long-term basis when identified with
distinctive markings. K-Swiss(R) is a registered trademark in the United
States and certain other countries. The Company's name is not registered as a
trademark in certain countries because of restrictions on registering names
having geographic connotations. However, since K-Swiss is not a geographic
name, the Company has often secured registrations despite such objections. The
Company's shield emblem and the five-stripe design are also registered in the
United States and certain foreign countries. The five-stripe design is not
presently

                                       9
<PAGE>

registered in some countries because it has been deemed ornamental by
regulatory authorities. The five-stripe design has not been registered in
Germany because of a possible conflict with adidas' three-stripe design mark.
The Company selectively seeks to register the names of its shoes, its logos
and the names given to certain of its technical and performance innovations,
including Aosta(R) rubber and Silicone Formula 18(R). The ROYAL ELASTICS and
Fleur de Lis trademarks used on ROYAL ELASTICS products are registered in many
countries. The Fleur de Lis mark is registered in the United States, and the
Company believes the ROYAL ELASTICS mark would already have been registered in
the United States but for a clerical error in the Patent and Trademark Office
that is in process of correction. The National Geographic Society ("NGS") is
responsible for registering the marks that it has licensed E.R.E. Footwear,
the Company's joint venture, to use in manufacture and sale of NATIONAL
GEOGRAPHIC footwear. Those marks are registered in many countries, and the NGS
has filed applications for registration in all major markets where the marks
are not already registered. The Company has obtained patents in the United
States regarding the Bio Feedback(R) ankle support system, the Shock Spring(R)
cushioning system incorporated into K-Swiss' 7.0 System(R) performance tennis
shoes and training line, the D.R. Cinch System(R), the stability design
incorporated in the Si-18(R) tennis shoe, and other features. The Company
vigorously defends its trademarks and patent rights against infringement
worldwide and employs independent security consultants to assist in such
protection. To date, the Company is not aware of any significant
counterfeiting problems regarding its products.

Employees

  At December 31, 2001, the Company employed 180 persons in the United States,
126 persons in Taiwan, China and Thailand, 40 persons in England and the
Netherlands and 6 persons elsewhere.

Item 2. Properties

  In August 1998, the Company moved into its new headquarters facility in
Westlake Village, California. This facility, which is owned by the Company, is
approximately 50,000 square feet. The Company occupies approximately one-half
of this facility and leases the remaining portion.

  The Company leases a 309,000 square foot distribution facility in Mira Loma,
California. This lease expires in January 2003, subject to two options, each
of which would extend the term of the lease for three years. Approximately
90,000 square feet of this facility is subleased to a tenant through January
2003. The Company uses the Mira Loma facility as its main distribution center.
The effective monthly commitment for the Mira Loma facility is approximately
$78,000.

Item 3. Legal Proceedings

  In June 2001, the Company was notified by counsel representing the trustee
appointed to oversee the liquidation of assets of a previous customer of the
Company, which filed for bankruptcy protection in 1999, that they are seeking
reimbursement of all payments made to the Company during the 90 day period
prior to the bankruptcy filing. The aggregate amount of these payments, which
the trustee's counsel is claiming to be preferential transfers, is
approximately $4,315,000. The Company believes these payments were received in
the ordinary course of business and that it has a meritorious defense against
the trustee's claims. In November 2001, the trustee filed suit against K-Swiss
(and other creditors) to recover payments made to K-Swiss during the 90 days
prior to the customer's bankruptcy filing. The Company continues to believe
that it has a meritorious "ordinary course of business" defense against these
claims and will assert that defense in detail at the appropriate time in the
litigation. No provision for this claim has been made in the Company's
financial statements as of December 31, 2001.

                                      10
<PAGE>

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

  None.

Item 4(a). Executive Officers of the Registrant

  The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
                     Age at
                  December 31,
       Name           2001                     Position
       ----       ------------                 --------
 <C>              <C>          <S>
 Steven Nichols        59      Chairman of the Board and President
 Preston Davis         57      Vice President--Sales
 Edward Flora          50      Vice President--Operations
 Lee Green             48      Corporate Counsel
 Thomas Harrison       59      Senior Vice President
 Deborah Mitchell      40      Vice President--Marketing
 George Powlick        57      Vice President--Finance, Chief Financial
                                Officer, Secretary and Director
 Janice Smith          40      Corporate Controller
 Brian Sullivan        48      Vice President--National Accounts
 Peter Worley          41      Vice President--Product Development
</TABLE>

  Officers are appointed by and serve at the discretion of the Board of
Directors.

  Steven Nichols has been President and Chairman of the Board of the Company
since 1987. From 1980 to 1986, Mr. Nichols was a director and Vice President--
Merchandise of Stride Rite Corp., a footwear manufacturer and holding company.
In addition, Mr. Nichols was President of Stride Rite Footwear from 1982 to
1986. From 1979 to 1982, Mr. Nichols served as an officer and President of
Stride Rite Retail Corp., the largest retailer of branded children's shoes in
the United States. From 1962 through 1979, he was an officer of Nichols Foot
Form Corp., which operated a chain of New York retail footwear stores.

  Preston Davis, Vice President--Sales, joined the Company in March 1987 as a
consultant and served as Vice President--Sales from June 1987 to January 1989
and Vice President--Marketing from February 1989 to February 1991. Prior to
joining the Company, Mr. Davis owned and managed Preston Davis Associates, a
marketing and sales consulting firm, specializing in sporting goods. From June
1982 through December 1985, Mr. Davis was Vice President--Sales for Kaepa,
Inc., another athletic shoe company.

  Edward Flora, Vice President--Operations, joined the Company as a consultant
in June 1990 and served as Director--Administration from October 1990 to
February 1994. Prior to joining the Company, Mr. Flora was Vice President--
Distribution for Bugle Boy Industries, a manufacturer and distributor of
Men's, Women's, and Children's apparel, from 1987 through May 1990.

  Lee Green, Corporate Counsel, joined the Company in December 1992. Mr. Green
was formerly a partner in the international law firm of Baker & McKenzie. He
worked in the firm's Taipei office from 1985 to 1988 and its Palo Alto office
from 1988 to 1992.

  Thomas Harrison, Senior Vice President, joined the Company in January 1989.
From 1987 through 1988, Mr. Harrison was President of Osh Kosh Footwear, a
manufacturer and wholesaler of casual footwear. From 1985 to 1987, Mr.
Harrison was President of Keds Corp., a division of Stride Rite Corp. From
1984 to 1985, Mr. Harrison was national account representative for Osh Kosh
Footwear. From 1977 through 1984, Mr. Harrison was manager of the consumer
products division of

                                      11
<PAGE>

Uniroyal, Inc., which included the footwear lines of Keds, Pro-Keds and Sperry
Topsider. Mr. Harrison joined Uniroyal in 1967 as a sales representative for
its Keds Division.

  Deborah Mitchell, Vice President--Marketing, joined the Company in October
1994. Ms. Mitchell served as Director of Marketing for Fruit of the Loom, the
largest manufacturer of men's underwear, from December 1993 through October
1994. Ms. Mitchell worked at Procter and Gamble in various positions ending in
brand management from 1984 through 1993 except while she was earning her
degree from Harvard Business School.

  George Powlick, Director, Vice President--Finance, Chief Financial Officer
and Secretary, joined the Company in January 1988. Mr. Powlick is a certified
public accountant and was an audit partner in the independent public
accounting firm of Grant Thornton from 1975 to 1987.

  Janice Smith, Corporate Controller, joined the Company in August 1987. Ms.
Smith is a certified public accountant. From 1984 to July 1987, Ms. Smith was
an auditor with the independent public accounting firm of Grant Thornton.

  Brian Sullivan, Vice President--National Accounts, joined the Company in
December 1989. From 1986 to 1989, he was Vice-President and General Manager of
Tretorn, Inc., a manufacturer and distributor of tennis shoes. From 1984
through 1985, Mr. Sullivan was Vice-President of Sales of Bancroft/Tretorn, a
tennis shoe manufacturer and distributor and predecessor to Tretorn. From 1978
to 1984, Mr. Sullivan held various positions at Bancroft/Tretorn, including
Field Salesperson, Marketing and Sales Planning Manager and National Sales
Manager.

  Peter Worley, Vice President--Product Development, joined the Company in May
1996. Mr. Worley worked for Reebok International, Ltd. from May 1986 through
October 1989, and again from July 1991 through April 1996 in various
merchandising and product line management positions, including Director of
Classic, Director of Cross Training and Director of Tennis. From October 1989
through July 1991, Mr. Worley was Sport Product Manager of Bausch & Lomb's
Ray-ban Sunglass Division.

                                      12
<PAGE>

                                    PART II

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

  The Company's Class A Common Stock began trading June 4, 1990 on the
National Market System maintained by the National Association of Securities
Dealers (now the Nasdaq National Market) upon completion of the Company's
initial public offering. Per share high and low sales prices (in dollars) for
the quarterly periods during 2001 and 2000 as reported by Nasdaq were as
follows:

<TABLE>
<CAPTION>
                                   March 31, June 30, September 30, December 31,
                                   --------- -------- ------------- ------------
     <S>                           <C>       <C>      <C>           <C>
     2001
       Low........................   20.00    21.00       21.96        22.64
       High.......................   34.56    29.65       35.60        35.89
     2000
       Low........................   10.00    11.75       15.38        21.38
       High                          18.75    16.06       23.88        28.50
</TABLE>

  The Company announced on February 8, 1999 that the Company's Board of
Directors approved a two-for-one stock split for both Class A and Class B
common stock. This stock split was in the form of a 100 percent stock dividend
that was distributed on March 26, 1999 to stockholders of record at the close
of business on March 15, 1999.

  The Class A Common Stock is listed on the Nasdaq National Market under the
symbol KSWS.

  The number of stockholders of record of the Class A Common Stock on December
31, 2001 was 84. However, based on available information, the Company believes
that the total number of Class A Common stockholders, including beneficial
stockholders, is approximately 4,000.

  There is currently no established public trading market for the Company's
Class B Common Stock. The number of stockholders of record of the Class B
Common Stock on December 31, 2001 was 11.

Dividend Policy

  The Company announced on February 16, 1994 that the Company's Board of
Directors was initiating a cash dividend program payable at an annual rate of
4 cents per common share. On February 8, 1999, the Company announced an
increase in the cash dividend per share to an annual rate of 6 cents per
common share. The Board declared quarterly dividends of 1.5 cents per share to
stockholders of record as of the close of business on the last day of each
quarter in 2001 and 2000, respectively. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements,
the general financial condition of the Company and general business
conditions. The Company is currently limited in the extent to which it is able
to pay dividends under the Company's revolving credit agreement. See Note D to
the Company's Consolidated Financial Statements.

                                      13
<PAGE>

Item 6. Selected Financial Data

  The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 2001 have been derived from
audited financial statements which for the most recent three years appear
elsewhere herein. The data presented below should be read in conjunction with
such financial statements, including the related notes thereto and the other
information included herein.

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                    --------------------------------------------
                                      2001     2000     1999     1998     1997
                                    -------- -------- -------- -------- --------
                                       (In thousands, except per share data)
<S>                                 <C>      <C>      <C>      <C>      <C>
Income Statement Data
Revenues..........................  $236,073 $221,629 $285,497 $161,540 $116,213
Cost of goods sold................   138,371  132,888  162,658   90,925   70,769
                                    -------- -------- -------- -------- --------
  Gross Profit....................    97,702   88,741  122,839   70,615   45,444
Selling, general and
 administrative expenses..........    60,757   57,300   67,885   51,220   40,074
                                    -------- -------- -------- -------- --------
  Operating profit................    36,945   31,441   54,954   19,395    5,370
Interest income, net..............     1,804    3,597    1,784    1,853    1,823
                                    -------- -------- -------- -------- --------
  Earnings before income taxes....    38,749   35,038   56,738   21,248    7,193
Income tax expense................    15,440   13,979   22,454    8,702    3,020
                                    -------- -------- -------- -------- --------
  Net earnings....................  $ 23,309 $ 21,059 $ 34,284 $ 12,546 $  4,173
                                    ======== ======== ======== ======== ========
Earnings per share
Basic.............................  $   2.42 $   2.05 $   3.12 $   1.15 $    .36
                                    ======== ======== ======== ======== ========
Diluted...........................  $   2.28 $   1.96 $   2.99 $   1.10 $    .35
                                    ======== ======== ======== ======== ========
Weighted average number of shares
 outstanding
Basic.............................     9,648   10,283   10,972   10,914   11,688
Diluted (1).......................    10,237   10,750   11,452   11,432   11,927
Balance Sheet Data (at period end)
Current assets....................  $140,888 $142,677 $131,230 $102,002 $ 91,053
Current liabilities...............    21,934   22,109   17,442   18,703   14,662
Total assets......................   160,799  157,427  146,772  115,465  101,195
Total debt (2)....................         0    1,046      853      655    1,142
Stockholders' equity..............   124,359  120,219  112,030   83,268   75,865
</TABLE>
--------
(1) Includes common stock and dilutive potential common stock (options).

(2) Includes all interest-bearing debt and capital lease obligations, but
    excludes outstanding letters of credit ($3,517,000, $5,021,000,
    $8,765,000, $7,703,000 and $12,156,000 as of December 31, 2001, 2000,
    1999, 1998 and 1997).

                                      14
<PAGE>

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

Note Regarding Forward-Looking Statements and Analyst Reports

  "Forward-looking statements", within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"), include certain written and oral
statements made, or incorporated by reference, by the Company or its
representatives in this report, other reports, filings with the Securities and
Exchange Commission ("the S.E.C."), press releases, conferences, or otherwise.
Such forward-looking statements include, without limitation, any statement
that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe", "anticipate", "expect",
"estimate", "intend", "plan", "project", "will be", "will continue", "will
likely result", or any variations of such words with similar meaning. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results may differ materially from those expressed or forecasted in any
such forward-looking statements. Investors should carefully review the risk
factors set forth in other reports or documents the Company files with the
S.E.C., including Forms 10-Q, 10-K and 8-K. Some of the other risks and
uncertainties that should be considered include, but are not limited to, the
following: international, national and local general economic and market
conditions; the size and growth of the overall athletic footwear and apparel
markets; the size of the Company's competitors; intense competition among
designers, marketers, distributors and sellers of athletic footwear and
apparel for consumers and endorsers; market acceptance of the Company's
training shoe line; market acceptance of new Limited Edition product; market
acceptance of non-performance product in Europe; market acceptance of National
Geographic footwear; market acceptance of Royal Elastics footwear; demographic
changes; changes in consumer preferences; popularity of particular designs,
categories of products, and sports; seasonal and geographic demand for the
Company's products; the size, timing and mix of purchases of the Company's
products; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; potential cancellation of future orders; the ability of the
Company to continue, manage or forecast its growth and inventories; new
product development and commercialization; the ability to secure and protect
trademarks, patents, and other intellectual property; performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; the effects of terrorist actions on business activities, customer
orders and cancellations, and the United States and international governments'
responses to these terrorist actions; changes in business strategy or
development plans; general risks associated with doing business outside the
United States, including, without limitation, import duties, tariffs, quotas
and political and economic instability; changes in government regulations;
liability and other claims asserted against the Company; the ability to
attract and retain qualified personnel; and other factors referenced or
incorporated by reference in this report and other reports.

  The Company operates in a very competitive and rapidly changing environment.
New risk factors can arise and it is not possible for management to predict
all such risk factors, nor can it assess the impact of all such risk factors
on the Company's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results.

  Investors should also be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the Company has a
policy against issuing or confirming financial

                                      15
<PAGE>

forecasts or projections issued by others. Thus, to the extent that reports
issued by securities analysts contain any projections, forecasts or opinions,
such reports are not the responsibility of the Company.

Results of Operations

  The following table sets forth, for the periods indicated, the percentage of
certain items in the consolidated statements of earnings relative to revenues.
<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                      -------------------------
                                                       2001     2000     1999
                                                      -------  -------  -------
     <S>                                              <C>      <C>      <C>
     Revenues........................................   100.0%   100.0%   100.0%
     Cost of goods sold..............................    58.6     60.0     57.0
     Gross profit....................................    41.4     40.0     43.0
     Selling, general and administrative expenses....    25.7     25.8     23.7
     Interest income, net............................     0.7      1.6      0.6
     Earnings before income taxes....................    16.4     15.8     19.9
     Income tax expense..............................     6.5      6.3      7.9
     Net Earnings....................................     9.9      9.5     12.0
</TABLE>

2001 Compared to 2000

  Total revenues increased 6.5% to $236,073,000 in 2001 from $221,629,000 in
2000. This increase was attributable to an increase in the volume of footwear
sold partially offset by a slight decrease in the average underlying wholesale
price per pair. The volume of footwear sold increased 8.2% to 8,821,000 pair
in 2001 from 8,156,000 pair in 2000. The average wholesale price per pair was
$26.09 in 2001 and $26.21 in 2000. The major changes in volume for footwear
categories are as follows: Classics and training categories increased 9% and
42%, respectively.

  Domestic revenues increased 4.0% to $205,237,000 in 2001 from $197,262,000
in 2000. International product revenues increased 26.2% in 2001 to $29,884,000
from $23,679,000 in 2000. Fees earned by the Company on sales by foreign
licensees and distributors were $952,000 for 2001 and $688,000 for 2000.
International revenues, as a percentage of total revenues, increased to 13.1%
in 2001 from 11.0% in 2000.

  The Company believes that the athletic and casual footwear industry
experiences seasonal fluctuations, due to increased domestic sales during
certain selling seasons, including Easter, back-to-school and the year-end
holiday seasons. The Company presents full-line offerings for the Easter and
back-to-school seasons, for delivery during the first and third quarters,
respectively, but not for the year-end holiday season.

  At December 31, 2001 domestic and international futures orders with start
ship dates from January through June 2002 were approximately $103,329,000 and
$14,823,000, respectively, 11% and 41% higher, respectively, than such orders
were at December 31, 2000 for start ship dates of the comparable period of the
prior year. These orders are not necessarily indicative of revenues for
subsequent periods because: (1) the mix of "future" and "at-once" orders can
vary significantly from quarter to quarter and year to year and (2) the rate
of customer order cancellations can also vary from quarter to quarter and year
to year.

  Gross profit margins increased, as a percentage of revenues, to 41.4% in
2001 from 40.0% in 2000. Gross profit margins increased primarily due to
changes in the product mix of sales.

  Selling, general and administrative expenses increased 6.0% to $60,757,000
(25.7% of revenues) in 2001 from $57,300,000 (25.8% of revenues) in 2000. The
increase in the amounts for the year

                                      16
<PAGE>

ended December 31, 2001 compared to the year ended December 31, 2000 was
primarily the result of an increase in payroll and related expenses, partially
the result of the decrease in the expense related to an employee incentive
bonus during 2000 that did not also occur in 2001. In 2000, there was a
reduction of employee incentive bonus accruals due to diminished financial
performance in that year compared to the previous year. The decrease in
selling, general and administrative expenses, as a percentage of revenues, was
due primarily to these expenses increasing at a slower rate than revenues
during 2001.

  Net interest income was $1,804,000 (0.7% of revenues) in 2001 compared to
$3,597,000 (1.6% of revenues) in 2000, a decrease of $1,793,000 or 49.8%. This
decrease in net interest income was the result of decreased rates earned on
commercial paper investments partially offset by higher average balances on
commercial paper investments. Also, during 2001 the Company recorded interest
expense related to the 1993, 1995 and 1996 Internal Revenue Service
examinations. The Company has agreed to certain adjustments for these tax
years, none of which will require the Company to record additional income tax
expense, as the Company has recorded deferred taxes on the untaxed portion of
unremitted earnings of a foreign subsidiary.

  The Company's effective tax rate decreased to 39.8% in 2001 from 39.9% in
2000. The $529,000 and $197,000 income tax benefit of options exercised during
2001 and 2000, respectively, were credited to additional paid-in capital and
therefore did not impact the effective tax rate.

  Net earnings increased 10.7% to $23,309,000 or $2.28 per share (diluted
earnings per share) in 2001 from $21,059,000 or $1.96 per share (diluted
earnings per share) in 2000.

2000 Compared to 1999

  Total revenues decreased 22.4% to $221,629,000 in 2000 from $285,497,000 in
1999. This decrease was attributable to a decrease in the volume of footwear
sold partially offset by a slight increase in the average underlying wholesale
price per pair. The volume of footwear sold decreased 22.2% to 8,156,000 pair
in 2000 from 10,490,000 pair in 1999. The average wholesale price per pair was
$26.21 in 2000 and $26.16 in 1999. The major changes in volume for footwear
categories are as follows: Classics, children's and tennis/court categories
decreased 23%, 26% and 35%, respectively, partially offset by sales in the
training category, a new category for the Company.

  Domestic revenues decreased 25.3% to $197,262,000 in 2000 from $264,054,000
in 1999. International product revenues increased 13.1% in 2000 to $23,679,000
from $20,943,000 in 1999. International revenues, as a percentage of total
revenues, increased to 11.0% in 2000 from 7.5% in 1999. Fees earned by the
Company on sales by foreign licensees and distributors were $688,000 for 2000
and $500,000 for 1999.

  Gross profit margins decreased, as a percentage of revenues, to 40.0% in
2000 from 43.0% in 1999. Gross profit margins decreased primarily due to
changes in the domestic/international and product mix of sales.

  Selling, general and administrative expenses decreased 15.6% to $57,300,000
(25.8% of revenues) in 2000 from $67,885,000 (23.7% of revenues) in 1999. The
decrease in the amounts for the year ended December 31, 2000 compared to the
year ended December 31, 1999 was primarily the result of a decrease in direct
advertising costs, commissions and bonus expense. Also there was additional
bad debt expense recorded in 1999 due to the bankruptcy of one of the
Company's larger customers. The Company believes the somewhat reduced level of
direct advertising and promotion will not have a material impact on future
sales levels. The increase in selling, general and administrative expenses, as
a percentage of revenues, was due primarily to these expenses decreasing at a
slower rate than revenues during 2000.

                                      17
<PAGE>

  Net interest income was $3,597,000 (1.6% of revenues) in 2000 compared to
$1,784,000 (0.6% of revenues) in 1999, an increase of $1,813,000 or 101.6%.
This increase in net interest income was the result of increased rates earned
on commercial paper investments and higher average balances on commercial
paper investments.

  The Company's effective tax rate increased to 39.9% in 2000 from 39.6% in
1999. The $197,000 and $8,410,000 income tax benefit of options exercised
during 2000 and 1999, respectively, were credited to additional paid-in
capital and therefore did not impact the effective tax rate.

  Net earnings decreased 38.6% to $21,059,000 or $1.96 per share (diluted
earnings per share) in 2000 from $34,284,000 or $2.99 per share (diluted
earnings per share) in 1999.

Liquidity and Capital Resources

  The Company experienced a net cash inflow of approximately $21,041,000,
$27,235,000 and $31,536,000 from its operating activities during 2001, 2000
and 1999, respectively. Cash provided by operations in 2001 decreased from
2000, due primarily to differences in the amounts of changes in accounts
receivable and accounts payable and accrued liabilities, partially offset by
an increase in net earnings. Cash provided by operating activities for the
year ended 2000 as compared to 1999 varied primarily due to a decrease in net
earnings, as well as differences in the amounts of changes in accounts
receivable, inventories, deferred income taxes, prepaid expenses and other
assets, and accounts payable and accrued liabilities.

  The Company had a net outflow of cash from its investing activities during
2001 due to a cash payment for the acquisition of Royal Elastics, a cash
payment for interest in a licensing agreement and the net purchase of
property, plant and equipment. The Company had a net outflow of cash from its
investing activities during 2000 from the net purchase of property, plant and
equipment, partially offset by the cash received in the acquisition of 1166789
Ontario Inc.

  In 2001 and 2000, the net cash provided by operating activities was used for
the purchase of treasury stock and to pay cash dividends. Also, in 2001, cash
provided by operating activities was used for the repayment of borrowings
under bank lines of credit and subordinated debentures along with a payment to
a minority member.

  The Company anticipates future cash needs for principal repayments required
pursuant to any borrowings under its lines of credit facilities. In addition,
depending on the Company's future growth rate, additional funds may be
required by operating activities. Finally, at December 31, 2001, approximately
$24,642,000 of foreign subsidiary earnings which are not considered
indefinitely invested may eventually be remitted to the parent company as
circumstances warrant. Upon receipt of these funds, the Company will use
approximately $9,596,000 in cash to pay income taxes previously accrued on
these foreign subsidiary earnings. The Company's intention is to repatriate
earnings of foreign operations as cash needs and other circumstances require.
No other material capital commitments exist at December 31, 2001. With
continued use of its revolving credit facility (as discussed below), the
Company believes its present and currently anticipated sources of capital are
sufficient to sustain its anticipated capital needs for the remainder of 2002.

  In September 2001, the Company announced the completion of its October 1999
$25 million stock repurchase program and a new authorization by the Board of
Directors for the Company to repurchase through December 2006 up to an
additional $25 million of its Class A Common Stock from time to time on the
open market, as market conditions warrant. The Company adopted this program
because it believes repurchasing its shares can be a good use of excess cash
depending on the Company's array of alternatives. Currently, the Company has
made purchases under all stock repurchase programs from August 1996 through
February 6, 2002 (the day prior to the filing of the Form 10-K) of 4,887,532
shares at an aggregate cost totaling approximately $68,804,000.

                                      18
<PAGE>

  In June 2001, the Company was notified by counsel representing the trustee
appointed to oversee the liquidation of assets of a previous customer of the
Company, which filed for bankruptcy protection in 1999, that they are seeking
reimbursement of all payments made to the Company during the 90 day period
prior to the bankruptcy filing. The aggregate amount of these payments, which
the trustee's counsel is claiming to be preferential transfers, is
approximately $4,315,000. The Company believes these payments were received in
the ordinary course of business and that it has a meritorious defense against
the trustee's claims. In November 2001, the trustee filed suit against K-Swiss
(and other creditors) to recover payments made to K-Swiss during the 90 days
prior to the customer's bankruptcy filing. The Company continues to believe
that it has a meritorious "ordinary course of business" defense against these
claims and will assert that defense in detail at the appropriate time in the
litigation. No provision for this claim has been made in the Company's
financial statements as of December 31, 2001.

  In July 2001, the Company signed a new agreement with a bank whereby the
Company may borrow, in the form of an unsecured revolving credit facility, up
to $15,000,000. The unused portion of this credit facility, which includes
letters of credit and bankers acceptances, was $12,074,000 at December 31,
2001. This facility currently expires in July 2003. The credit facility
provides for interest to be paid at the prime rate less 3/4% or, at the
Company's discretion and with certain restrictions, other market based rates.
The Company pays a commitment fee of 1/8% of the unused line for availability
of the credit facility. The Company must meet certain restrictive financial
covenants as agreed upon in the facility.

  The Company's European offices have agreements with a bank whereby they can
borrow up to $6,000,000 in the form of secured revolving credit facilities.
The unused portion of these credit facilities was $5,409,000 at December 31,
2001. These facilities are made available until terminated by either party.

  There was no debt at December 31, 2001 compared to total debt of $1,046,000
at December 31, 2000 (excluding outstanding letters of credit of $3,517,000
and $5,021,000 at December 31, 2001 and 2000, respectively). The decrease was
due to reduced borrowings under bank lines of credit under the Company's
credit facilities and repayment of subordinated debentures.

  The Company's working capital decreased $1,614,000 to $118,954,000 at
December 31, 2001 from $120,568,000 at December 31, 2000.

  The Company has historically maintained higher levels of inventory relative
to sales compared to its competitors because (1) it does not ship directly to
its major domestic customers from its foreign contract manufacturers to the
same extent as its larger competitors, which would reduce inventory levels and
increase inventory turns, and (2) unlike many of its competitors, the Company
designates certain shoes as core products whereby the Company commits to its
retail customers that it will carry core products from season to season and,
therefore, the Company attempts to maintain open-stock positions on its core
products in the Company's Mira Loma, California distribution center to meet
at-once orders.

  The federal income tax returns of the Company for the years ended 1993,
1995, 1996 and 1998 are currently under examination by the Internal Revenue
Service ("IRS"). See Note H to the Company's Consolidated Financial
Statements. In August 2000, the IRS issued its final report proposing
additional taxes for the years ended 1993, 1995 and 1996 of an aggregate of
approximately $4,985,000 plus penalties and interest for these years. Through
September 2001, the Company has agreed to certain adjustments for the years
ended 1993, 1995 and 1996 resulting in approximately $976,000 of taxes. These
tax adjustments did not require the Company to record additional income tax
expense as the Company had recorded deferred income taxes on the untaxed
portion of unremitted earnings of a foreign subsidiary. Of the remaining
balance of the proposed assessments,

                                      19
<PAGE>

the Company believes that approximately $1,222,000 of taxes which might become
payable as a result of these examinations would not result in additional
expense recognized in the financial statements other than interest and
penalties, if any, as the Company has recorded deferred income taxes on the
untaxed portion of the unremitted earnings of a foreign subsidiary. For the
remaining assessed taxes of approximately $2,787,000, for which the Company
has not provided deferred income taxes, the Company believes it has
meritorious defenses to the IRS challenges although no assurance can be given
that the final results of such IRS challenges will not have a material adverse
impact on the Company's financial position and results of operations.

Quantitative and Qualitative Disclosures About Market Risk

 Market Risk

  Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposure is the risk of unfavorable movements in exchange
rates between the U.S. dollar and the Euro. Monitoring and managing these
risks is a continual process carried out by senior management, which reviews
and approves the Company's risk management policies. Market risk is managed
based on an ongoing assessment of trends in foreign exchange rates and
economic developments, giving consideration to possible effects on both total
return and reported earnings.

 Foreign Exchange Rate Risk

  Sales denominated in currencies other than the U.S. dollar, which are
primarily sales to customers in Europe, expose the Company to market risk from
unfavorable movements in foreign exchange rates between the U.S. dollar and
the foreign currency. The Company's historical primary risk exposures have
been from changes in the rates between the U.S. dollar and each of the
following: the British pound, the Dutch guilder, the Euro and the German mark.
This trend is expected to continue for the Euro. To fix the U.S. dollar amount
it will receive on sales denominated in Euros, the Company enters into forward
exchange contracts to sell the foreign currency denominated in that currency.
The extent to which forward exchange contracts are used is modified
periodically in response to management's estimate of market conditions and the
terms and length of specific sales contracts.

  The Company enters into foreign exchange contracts in order to reduce the
impact of foreign currency fluctuations and not to engage in currency
speculation. The use of derivative financial instruments allows the Company to
reduce its exposure to the risk that the eventual dollar net cash inflow
resulting from the sale of products to foreign customers will be adversely
affected by changes in exchange rates. The Company does not hold or issue
financial instruments for trading purposes. The foreign exchange contracts are
designated for firmly committed or forecasted sales. These contracts are
generally expected to occur in less than one year. Gains and losses of foreign
exchange contracts that are designated for forecasted transactions are
recognized as the exchange rates change.

  The forward exchange contracts generally require the Company to exchange
foreign currencies for U.S. dollars at maturity, at rates agreed at the
inception of the contracts. The counter party to derivative transactions is a
major financial institution with investment grade or better credit rating;
however, the Company is exposed to credit risk with this institution. The
credit risk is limited to the unrealized gains in such contracts should this
counter party fail to perform as contracted.

                                      20
<PAGE>

  The table below provides information as of December 31, 2001 and 2000 about
the Company's foreign currency forward exchange contracts by currency. The
information is presented in U.S. dollars:

<TABLE>
<CAPTION>
                                                            December 31,
                                                      -------------------------
                                                         2001         2000
                                                      ---------- --------------
<S>                                                   <C>        <C>
Europe (Euro)
  Notional amount.................................... $2,000,000 $    2,500,000
  Fair value.........................................        --             --
  Average contractual exchange rate.................. $ .84/Euro $     .93/Euro
Netherlands (Dutch guilder)
  Notional amount....................................        --  $    2,000,000
  Fair value.........................................        --             --
  Average contractual exchange rate..................        --  $      .40/Dfl
United Kingdom (Pound Sterling)
  Notional amount....................................        --  $      300,000
  Fair value.........................................        --           5,000
  Average contractual exchange rate .................        --  $1.52/UK pound
</TABLE>

  The Company does not anticipate any material adverse effect on its results
of operations or financial position relating to these foreign currency forward
exchange contracts. Based on the Company's overall currency rate exposure at
December 31, 2001, a 10% change in currency rates would not have had a
material effect on the financial position, results of operations and cash
flows of the Company.

Inflation

  The Company believes that distributors of footwear in the higher priced end
of the footwear market, including the Company, are able to adjust their prices
in response to an increase in direct and general and administrative expenses,
without a significant loss in sales. Accordingly, to date, inflation and
changing prices have not had a material adverse effect on the Company's
revenues or earnings.

Item 8. Financial Statements and Supplementary Data

  The Consolidated Financial Statements required in response to this section
are submitted as part of Item 14(a) of this Report.

                                      21
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
K-Swiss Inc.

  We have audited the consolidated balance sheets of K-Swiss Inc. as of
December 31, 2001 and 2000, and the related consolidated statements of
earnings and comprehensive earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of K-Swiss Inc.
as of December 31, 2001 and 2000, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

  We have also audited Schedule II of K-Swiss Inc. for each of the three years
in the period ended December 31, 2001. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.

/s/ GRANT THORNTON LLP

Los Angeles, California
January 29, 2002

                                      22
<PAGE>

                                  K-SWISS INC.

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
CURRENT ASSETS
  Cash and cash equivalents (Note A4)...................... $ 61,579  $ 67,350
  Accounts receivable, less allowance for doubtful accounts
   of $993 and $852 for 2001 and 2000, respectively (Note
   L)......................................................   30,478    25,489
  Inventories (Note A5)....................................   43,995    43,815
  Prepaid expenses and other...............................    3,014     4,452
  Deferred taxes (Notes A8 and H)..........................    1,822     1,571
                                                            --------  --------
    Total current assets...................................  140,888   142,677

PROPERTY, PLANT AND EQUIPMENT, net (Notes A6 and B)........    8,140     8,358
OTHER ASSETS
  Intangible assets (Notes A7, A15, C and M)...............    8,362     3,973
  Other....................................................    3,409     2,419
                                                            --------  --------
                                                              11,771     6,392
                                                            --------  --------
                                                            $160,799  $157,427
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
CURRENT LIABILITIES
  Bank lines of credit (Note D)............................ $    --   $    546
  Current maturities of subordinated debentures (Note E)...      --        500
  Trade accounts payable...................................   10,728     9,763
  Accrued liabilities (Note F).............................   11,206    11,300
                                                            --------  --------
    Total current liabilities..............................   21,934    22,109

OTHER LIABILITIES (Note G).................................    6,794     7,590
DEFERRED TAXES (Notes A8 and H)............................    7,712     7,509

COMMITMENTS AND CONTINGENCIES (Notes H and I)..............      --        --

STOCKHOLDERS' EQUITY (Notes D and K)
  Preferred Stock--authorized 2,000,000 shares of $.01 par
   value; none issued and outstanding......................      --        --
  Common Stock:
  Class A--authorized 18,000,000 shares of $.01 par value;
   11,228,397 shares issued, 6,344,365 shares outstanding
   and 4,884,032 shares held in treasury at December 31,
   2001 and 11,080,299 shares issued, 6,992,467 shares
   outstanding and 4,087,832 shares held in treasury at
   December 31, 2000.......................................      112       111
  Class B--authorized 10,000,000 shares of $.01 par value;
   issued and outstanding 2,903,478 shares at December 31,
   2001 and 2,983,478 shares at December 31, 2000..........       29        30
  Additional paid-in capital...............................   41,364    40,444
  Treasury Stock...........................................  (68,686)  (49,348)
  Retained earnings........................................  152,308   129,570
  Accumulated other comprehensive earnings--
   Foreign currency translation (Note A9)..................     (768)     (588)
                                                            --------  --------
                                                             124,359   120,219
                                                            --------  --------
                                                            $160,799  $157,427
                                                            ========  ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       23
<PAGE>

                                  K-SWISS INC.

                      CONSOLIDATED STATEMENTS OF EARNINGS
                           AND COMPREHENSIVE EARNINGS

                            Year Ended December 31,

            (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    2001      2000      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues (Notes A12, L and N).................... $236,073  $221,629  $285,497
Cost of goods sold...............................  138,371   132,888   162,658
                                                  --------  --------  --------
  Gross profit...................................   97,702    88,741   122,839
Selling, general and administrative expenses
 (Note A13)......................................   60,757    57,300    67,885
                                                  --------  --------  --------
  Operating profit...............................   36,945    31,441    54,954
Interest income, net.............................    1,804     3,597     1,784
                                                  --------  --------  --------
  Earnings before income taxes...................   38,749    35,038    56,738
Income tax expense (Notes A8 and H)..............   15,440    13,979    22,454
                                                  --------  --------  --------
  NET EARNINGS................................... $ 23,309  $ 21,059  $ 34,284
                                                  ========  ========  ========

Earnings per common share (Note A14)
  Basic.......................................... $   2.42  $   2.05  $   3.12
                                                  ========  ========  ========
  Diluted........................................ $   2.28  $   1.96  $   2.99
                                                  ========  ========  ========

Net Earnings..................................... $ 23,309  $ 21,059  $ 34,284
Other comprehensive loss, net of tax--Foreign
 currency
  translation adjustments........................     (180)     (105)      (49)
                                                  --------  --------  --------
Comprehensive earnings........................... $ 23,129  $ 20,954  $ 34,235
                                                  ========  ========  ========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       24
<PAGE>

                                  K-SWISS INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      Three years ended December 31, 2001

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                 Common Stock                          Treasury Stock
                      -----------------------------------            ------------------             Accumulated
                           Class A          Class B       Additional      Class A                      other
                      ----------------- -----------------  paid-in   ------------------  Retained  comprehensive
                        Shares   Amount  Shares    Amount  capital    Shares    Amount   earnings    earnings     Total
                      ---------- ------ ---------  ------ ---------- --------- --------  --------  ------------- --------
<S>                   <C>        <C>    <C>        <C>    <C>        <C>       <C>       <C>       <C>           <C>
Balance at January
 1, 1999............   9,832,728  $ 98  3,426,556   $34    $25,830   2,518,932 $(17,760) $ 75,500      $(434)    $ 83,268
Conversion of shares
 (Note K)...........     412,578     4   (412,578)   (4)       --          --       --        --         --           --
Proceeds from
 exercise of options
 (Note K)...........     760,849     8        --     --      5,777         --       --        --         --         5,785
Income tax benefit
 of options
 exercised..........         --    --         --     --      8,410         --       --        --         --         8,410
Purchase of treasury
 stock..............         --    --         --     --        --      760,000  (19,006)      --         --       (19,006)
Dividends paid ($.06
 per share)(Note D).         --    --         --     --        --          --       --       (662)       --          (662)
Net earnings for the
 year...............         --    --         --     --        --          --       --     34,284        --        34,284
Foreign currency
 translation (Note
 A9)................         --    --         --     --        --          --       --        --         (49)         (49)
                      ----------  ----  ---------   ---    -------   --------- --------  --------      -----     --------
Balance at December
 31, 1999...........  11,006,155   110  3,013,978    30     40,017   3,278,932  (36,766)  109,122       (483)     112,030
Conversion of shares
 (Note K)...........      30,500   --     (30,500)   --        --          --       --        --         --           --
Proceeds from
 exercise of options
 (Note K)...........      43,644     1        --     --        230         --       --        --         --           231
Income tax benefit
 of options
 exercised..........         --    --         --     --        197         --       --        --         --           197
Purchase of treasury
 stock..............         --    --         --     --        --      808,900  (12,582)      --         --       (12,582)
Dividends paid ($.06
 per share)(Note D).         --    --         --     --        --          --       --       (611)       --          (611)
Net earnings for the
 year...............         --    --         --     --        --          --       --     21,059        --        21,059
Foreign currency
 translation (Note
 A9)................         --    --         --     --        --          --       --        --        (105)        (105)
                      ----------  ----  ---------   ---    -------   --------- --------  --------      -----     --------
Balance at December
 31, 2000...........  11,080,299   111  2,983,478    30     40,444   4,087,832  (49,348)  129,570       (588)     120,219
Conversion of shares
 (Note K)...........      80,000     1    (80,000)   (1)       --          --       --        --         --           --
Proceeds from
 exercise of options
 (Note K)...........      68,098   --         --     --        391         --       --        --         --           391
Income tax benefit
 of options
 exercised..........         --    --         --     --        529         --       --        --         --           529
Purchase of treasury
 stock..............         --    --         --     --        --      796,200  (19,338)      --         --       (19,338)
Dividends paid ($.06
 per share)(Note D).         --    --         --     --        --          --       --       (571)       --          (571)
Net earnings for the
 year...............         --    --         --     --        --          --       --     23,309        --        23,309
Foreign currency
 translation (Note
 A9)................         --    --         --     --        --          --       --        --        (180)        (180)
                      ----------  ----  ---------   ---    -------   --------- --------  --------      -----     --------
Balance at December
 31, 2001...........  11,228,397  $112  2,903,478   $29    $41,364   4,884,032 $(68,686) $152,308      $(768)    $124,359
                      ==========  ====  =========   ===    =======   ========= ========  ========      =====     ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       25
<PAGE>

                                  K-SWISS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                     2001      2000      1999
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Cash flows from operating activities:
 Net earnings....................................  $ 23,309  $ 21,059  $ 34,284
 Adjustments to reconcile net earnings to net
  cash provided by operating activities:
   Depreciation and amortization.................     1,809     1,531     1,374
   Net loss (gain) on disposal of property, plant
    and equipment................................         4        (9)       66
   Deferred income taxes.........................       (48)      780    (1,323)
   Minority interest in loss of consolidated
    subsidiary...................................      (333)      --        --
   (Increase) decrease in accounts receivable....    (5,010)    1,663    (1,511)
   Decrease (increase) in inventories............        90       671   (10,636)
   Decrease (increase) in prepaid expenses and
    other assets.................................       534      (309)   (2,662)
   Increase in accounts payable and accrued
    liabilities..................................       686     1,849    11,944
                                                   --------  --------  --------
 Net cash provided by operating activities.......    21,041    27,235    31,536

Cash flows from investing activities:
 Cash paid for acquisition of Royal Elastics.....    (3,889)      --        --
 Cash paid for interest in licensing agreement...    (1,000)      --        --
 Cash received in acquisition of 1166789 Ontario
  Inc. net of cash paid..........................       --        361       --
 Purchase of property, plant and equipment.......    (1,152)     (864)   (2,086)
 Proceeds from disposal of property, plant and
  equipment......................................         8        22        29
                                                   --------  --------  --------
 Net cash used in investing activities...........    (6,033)     (481)   (2,057)

Cash flows from financing activities:
 Net (repayments) borrowings under bank lines of
  credit and subordinated debentures.............    (1,006)      216       207
 Purchase of treasury stock......................   (19,338)  (12,582)  (19,006)
 Payment of dividends............................      (571)     (611)     (662)
 Proceeds from stock options exercised...........       315       231     5,785
                                                   --------  --------  --------
 Net cash used in financing activities...........   (20,600)  (12,746)  (13,676)
Effect of exchange rate changes on cash..........      (179)      223       (44)
                                                   --------  --------  --------
     Net (decrease) increase in cash and cash
      equivalents................................    (5,771)   14,231    15,759

Cash and cash equivalents at beginning of year...    67,350    53,119    37,360
                                                   --------  --------  --------
Cash and cash equivalents at end of year.........  $ 61,579  $ 67,350  $ 53,119
                                                   ========  ========  ========


Supplemental disclosure of cash flow information:
 Non-cash investing activities:
   In December 2000, the Company purchased the
    capital stock of 1166789 Ontario Inc. for one
    dollar. In connection with the acquisition,
    liabilities were assumed as follows:
    Fair value of assets acquired................            $  1,576
    Cash paid for capital stock..................                 --
                                                             --------
     Liabilities assumed.........................            $  1,576


Non-cash financing activities:
 Contribution of assets by minority member.......  $    333       --        --
 Income tax benefit of options exercised.........  $    529  $    197  $  8,410
 Cash paid during the year for:
   Interest......................................  $  1,045  $    102  $     98
   Income taxes..................................  $ 13,345  $ 13,509  $ 16,302
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       26
<PAGE>

                                 K-SWISS INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2001, 2000 and 1999

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

  The Company designs, develops and markets footwear for high performance use,
fitness and casual activities. The Company operates in an industry dominated
by a small number of very large competitors. The size of these competitors
enables them to lead the product direction of the industry, and therefore,
potentially diminish the value of the Company's products. In addition to
generally greater resources, these competitors spend substantially more money
on advertising and promotion than the Company and therefore dominate market
share. The Company's market share is estimated at approximately two percent.
Lastly, the retail environment forecasted for the near term is difficult,
which could put additional pressure on the Company's ability to maintain
margins.

  The Company purchases a significant portion of its products from a small
number of contract manufacturers in China and Thailand. This concentration of
suppliers in these locations subjects the Company to the risk of interruptions
of product flow for various reasons and possible loss of sales, which would
adversely affect operating results.

  The United States Trade Representative ("USTR") has expressed concern about
the protection of intellectual property rights within China. The failure of
the Chinese government to make substantial progress with respect to these
concerns could result in the imposition of retaliatory duties on imports from
China, including footwear, which could affect the cost of products purchased
and sold by the Company.

2. Estimates in Financial Statements

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

3. Basis of Consolidation

  The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made in the 2000
presentation to conform to the 2001 presentation.

4. Cash Equivalents

  For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.

5. Inventories

  Inventories, consisting of merchandise held for resale, are stated at the
lower of cost (first-in, first-out method) or market. Management continually
evaluates its inventory position and implements promotional or other plans to
reduce inventories to appropriate levels relative to its sales estimates for
particular product styles or lines. Estimated losses are recorded when such
plans are implemented. It

                                      27
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

is at least reasonably possible that management's plans to reduce inventory
levels will be less than fully successful, and that such an outcome would
result in a change in the inventory reserve in the near-term.

6. Property, Plant and Equipment

  Property, plant and equipment are carried at cost. For financial reporting
and tax purposes, depreciation and amortization are calculated using straight-
line and accelerated methods over the estimated service lives of the
depreciable assets. The service lives of the Company's building and related
improvements are 30 and 5 years, respectively. Equipment is depreciated from 3
to 10 years and leasehold improvements are amortized over the lives of the
respective leases.

7. Intangible Assets

  Intangible assets are being amortized using the straight-line method over
their estimated economic useful lives at the time of acquisition. The
intangible assets principally include trademarks and contingent purchase
payments and are amortized over 30 to 35 years.

8. Income Taxes

  The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Provision is made for appropriate United States income taxes on
earnings of subsidiary companies which are intended to be remitted to the
parent company.

9. Foreign Currency Translation

  Assets and liabilities of certain foreign operations are translated into
U.S. dollars at current exchange rates. Income and expenses are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are taken directly to a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in income.

10. Fair Value of Financial Instruments

  For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, outstanding borrowings under the line of
credit, accounts payable and other accrued liabilities, the carrying amounts
approximate fair value due to their short maturities.

11. Financial Risk Management and Derivatives

  The Company enters into foreign exchange contracts in order to reduce the
impact of foreign currency fluctuations (Euro) and not to engage in currency
speculation. The use of derivative financial instruments allows the Company to
reduce its exposure to the risk that the eventual dollar net

                                      28
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

cash inflow resulting from the sale of products to foreign customers and
purchases from foreign suppliers will be adversely affected by changes in
exchange rates. The Company does not hold or issue financial instruments for
trading purposes. The foreign exchange contracts are designated for firmly
committed or forecasted sales. These transactions are generally expected to
occur in less than one year. Gains and losses of foreign exchange contracts
that are designated for forecasted transactions are recognized as the exchange
rates change.

  The forward exchange contracts generally require the Company to exchange
Eurodollars for U.S. dollars at maturity, at rates agreed to at the inception
of the contracts. The counter party to derivative transactions is a major
financial institution with investment grade or better credit rating; however,
the Company is exposed to credit risk with this institution. The credit risk
is limited to the unrealized gains in such contracts should this counter party
fail to perform as contracted.

  The aggregate notional principal amounts and fair values of the Company's
derivative financial instruments were $2,000,000 and no fair value at December
31, 2001 respectively, and $4,800,000 and $5,000 at December 31, 2000,
respectively. The estimated fair value of derivatives used to hedge the
Company's risks will fluctuate over time. The fair value of the forward
exchange contracts is estimated by obtaining quoted market prices.

12. Recognition of Revenues

  Revenues include sales and fees earned on sales by licensees and are
recognized upon shipment of goods.

13. Advertising Costs

  Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses. Advertising expenses amounted to
$14,811,000, $15,882,000 and $18,461,000 for 2001, 2000 and 1999,
respectively.

14.Earnings per Share

  Basic earnings per share excludes dilution and is computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that could occur if options to issue common stock were
exercised.

  The following is a reconciliation of the number of shares (denominator) used
in the basic and diluted earnings per share computations (shares in
thousands):

<TABLE>
<CAPTION>
                                   2001             2000             1999
                             ---------------- ---------------- ----------------
                                    Per Share        Per Share        Per Share
                             Shares  Amount   Shares  Amount   Shares  Amount
                             ------ --------- ------ --------- ------ ---------
<S>                          <C>    <C>       <C>    <C>       <C>    <C>
Basic EPS...................  9,648   $2.42   10,283   $2.05   10,972   $3.12
Effect of Dilutive Stock
 Options....................    589    (.14)     467    (.09)     480    (.13)
                             ------   -----   ------   -----   ------   -----
Diluted EPS................. 10,237   $2.28   10,750   $1.96   11,452   $2.99
                             ======   =====   ======   =====   ======   =====
</TABLE>

                                      29
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

  The following options were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price
of the common shares:

<TABLE>
<CAPTION>
                                          2001          2000           1999
                                      ------------- ------------- --------------
<S>                                   <C>           <C>           <C>
Options to purchase shares of common
 stock (in thousands)...............       104           74             69
Exercise prices.....................  $28.20-$47.38 $18.00-$47.38 $29.63-$47.38
Expiration dates....................   April 2009-   April 2009-   April 2009-
                                        July 2011    August 2010  September 2009
</TABLE>

15.New Accounting Pronouncements

  In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
(FAS 141). The standard concludes that all business combinations within the
scope of the statement will be accounted for using the purchase method.
Previously, the pooling-of-interests method was required when certain criteria
were met. Because those criteria did not distinguish economically dissimilar
transactions, similar business combinations were accounted for using different
methods that produced dramatically different financial statement results. FAS
141 requires separate recognition of intangible assets apart from goodwill if
they meet one of two criteria, the contractual-legal criterion or the
separability criterion. FAS 141 also requires the disclosure of the primary
reasons for a business combination and the allocation of the purchase price
paid to the assets acquired and liabilities assumed by major balance sheet
caption. The provisions of FAS 141 apply to all business combinations
initiated after June 30, 2001.

  In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
(FAS 142), which the Company will adopt effective January 1, 2002. As required
by FAS 142, the Company will perform a test on goodwill and other intangible
assets as of the adoption date to determine if there has been any impairment
of goodwill. The Company will perform impairment tests annually and whenever
events or circumstances indicate the value of goodwill or other intangible
assets might be impaired. No additional amortization of goodwill and certain
other intangible assets, including those recorded in past business
combinations, will be recorded. As a result of the elimination of this
amortization, expenses will decrease by approximately $149,000 annually. The
Company has not yet determined the impact of FAS 142's impairment test
provisions on its results of operations and financial position.

  In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143), which
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and associated asset retirement
costs. The new rules apply to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and (or) normal operation of a long-lived asset. FAS 143 is
effective for the Company at the beginning of fiscal 2003. The Company
believes the adoption of FAS 143 will not have a material impact on its
consolidated financial position or results of operations.

  In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS
144). FAS 144 establishes a

                                      30
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

single accounting model for the Impairment or disposal of long-lived assets,
including discontinued operations. FAS 144 superseded Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), and APB Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. The provisions of FAS 144 are effective in
fiscal years beginning after December 15, 2001, with early adoption permitted,
and in general are to be applied prospectively. The Company believes the
adoption of FAS 144 will not have a material impact on its consolidated
financial position or results of operations.

NOTE B--PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment as of December 31 consists of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                2001     2000
                                                               -------  -------
     <S>                                                       <C>      <C>
     Building and improvements................................ $ 6,351  $ 6,173
     Furniture, machinery and equipment.......................   7,333    6,735
                                                               -------  -------
                                                                13,684   12,908
     Less accumulated depreciation and amortization...........  (6,239)  (5,245)
                                                               -------  -------
                                                                 7,445    7,663
     Land.....................................................     695      695
                                                               -------  -------
                                                               $ 8,140  $ 8,358
                                                               =======  =======
</TABLE>

NOTE C--INTANGIBLE ASSETS

  Intangible assets as of December 31 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                2001     2000
                                                               -------  -------
     <S>                                                       <C>      <C>
     Goodwill................................................. $ 8,073  $ 4,579
     Trademarks...............................................   2,081    2,081
     Licenses.................................................   1,243      --
     Less accumulated amortization............................  (3,035)  (2,687)
                                                               -------  -------
                                                               $ 8,362  $ 3,973
                                                               =======  =======
</TABLE>

NOTE D--BANK LINES OF CREDIT

  The Company maintains revolving credit facilities whereby it may borrow up
to an aggregate of $21,000,000 including outstanding letters of credit and
bankers' acceptances. The weighted average interest rate provided under these
credit facilities was 7.00% at December 31, 2000. A fee of up to 1/8% of the
average unused line is paid for availability of the primary credit facility.

  One of the credit agreements contains certain covenants and financial ratio
requirements, including restrictions on dividend payments. At December 31,
2001, $25,570,000 was unrestricted as to the payment of dividends.

                                      31
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE D--BANK LINES OF CREDIT--(Continued)

  Under the most restrictive covenant, the Company must maintain stockholders'
equity, including subordinated debt, less intangible assets and exclusive of
treasury stock of at least $90,200,000 at December 31, 2001.

NOTE E--SUBORDINATED DEBENTURES

  The subordinated debentures were payable to an officer and a director of the
Company. The debentures bore interest at 10%. Interest was due on the unpaid
balance quarterly. The debentures were paid in full in 2001.

NOTE F--ACCRUED LIABILITIES

  Accrued liabilities as of December 31 consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                 2001    2000
                                                                ------- -------
     <S>                                                        <C>     <C>
     Payroll and related expenses.............................. $ 3,039 $ 2,484
     Other.....................................................   8,167   8,816
                                                                ------- -------
                                                                $11,206 $11,300
                                                                ======= =======
</TABLE>

NOTE G--OTHER LIABILITIES

  Other liabilities consist of amounts due under employee benefit plans,
including the long-term portion of the Company's Economic Value Added ("EVA")
incentive program and deferred compensation. The EVA incentive program amounts
are at risk of forfeiture to the plan participants depending on the Company
maintaining presently achieved levels of EVA. The amounts as of December 31
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    2001   2000
                                                                   ------ ------
     <S>                                                           <C>    <C>
     EVA incentive program........................................ $3,225 $4,640
     Deferred Compensation........................................  3,569  2,950
                                                                   ------ ------
                                                                   $6,794 $7,590
                                                                   ====== ======
</TABLE>

                                      32
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE H--INCOME TAXES

  The provision for income taxes includes the following for the years ended
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                        2001     2000    1999
                                                       -------  ------- -------
     <S>                                               <C>      <C>     <C>
     Current
      United States
       Federal ....................................... $13,107  $11,107 $20,497
       State..........................................   2,349    2,027   3,125
      Foreign.........................................      32       65     155
     Deferred
      United States
       Federal........................................     (43)     702  (1,184)
       State..........................................      (5)      78    (139)
                                                       -------  ------- -------
                                                       $15,440  $13,979 $22,454
                                                       =======  ======= =======
</TABLE>

  A reconciliation from the U.S. federal statutory income tax rate to the
effective tax rate for the years ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                               2001  2000  1999
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     U.S. Federal statutory rate.............................. 35.0% 35.0% 35.0%
     State income taxes.......................................  3.9   3.9   4.1
     Net results of foreign subsidiaries......................  0.4   0.9   0.1
     Amortization of intangibles..............................  0.1   0.1   0.1
     Other....................................................  0.4   --    0.3
                                                               ----  ----  ----
                                                               39.8% 39.9% 39.6%
                                                               ====  ====  ====
</TABLE>

  Deferred income taxes are determined based on the estimated future tax
effects of differences between the financial statement and the tax basis of
assets and liabilities given the provisions of the enacted tax laws. The net
current and non-current components of deferred income taxes recognized in the
balance sheets are as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                   2001   2000
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Net current assets.......................................... $1,822 $1,571
     Net non-current liabilities.................................  7,712  7,509
                                                                  ------ ------
     Net liability............................................... $5,890 $5,938
                                                                  ====== ======
</TABLE>

                                      33
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE H--INCOME TAXES--(Continued)

  Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                 2001    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Assets
     State taxes...............................................   $ 839 $   730
     Bad debts reserve.........................................     319     271
     Inventory reserve and capitalized costs...................     823     786
     Bonuses...................................................   1,070   1,805
     Deferred compensation plan................................   1,388   1,147
     Other.....................................................     353      90
                                                                ------- -------
     Gross deferred tax assets.................................   4,792   4,829

   Liabilities
     Unremitted earnings of a foreign subsidiary...............   9,596   9,805
     Contingent purchase payments..............................     156     163
     Other.....................................................     930     799
                                                                ------- -------
     Gross deferred tax liabilities............................  10,682  10,767
                                                                ------- -------
     Net deferred tax liability................................ $ 5,890 $ 5,938
                                                                ======= =======
</TABLE>

  The Company did not record any valuation allowances against deferred tax
assets at December 31, 2001. Management has determined, based on the Company's
history of prior operating earnings and its expectations for the future, that
operating income of the Company will more likely than not be sufficient to
recognize fully these deferred tax assets.

  The federal income tax returns of the Company for the years ended 1993,
1995, 1996 and 1998 are currently under examination by the Internal Revenue
Service ("IRS"). In August 2000, the IRS issued its final report proposing
additional taxes for the years ended 1993, 1995 and 1996 of an aggregate of
approximately $4,985,000 plus penalties and interest for these years. Through
September 2001, the Company has agreed to certain adjustments for the years
ended 1993, 1995 and 1996 resulting in approximately $976,000 of taxes. These
tax adjustments did not require the Company to record additional income tax
expense as the Company had recorded deferred income taxes on the untaxed
portion of unremitted earnings of a foreign subsidiary. Of the remaining
balance of the proposed assessments, the Company believes that approximately
$1,222,000 of taxes which might become payable as a result of these
examinations would not result in additional expense recognized in the
financial statements other than interest and penalties, if any, as the Company
has recorded deferred income taxes on the untaxed portion of the unremitted
earnings of a foreign subsidiary. For the remaining assessed taxes of
approximately $2,787,000, for which the Company has not provided deferred
income taxes, the Company believes it has meritorious defenses to the IRS
challenges although no assurance can be given that the final results of such
IRS challenges will not have a material adverse impact on the Company's
financial position and results of operations.

                                      34
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE I--COMMITMENTS AND CONTINGENCIES

  The Company leases its principal warehouse facility through January 2003,
under an agreement which provides for two options, each of which would extend
the lease for three years. In addition, certain property and equipment is
leased primarily on a month to month basis. Future minimum rental payments
under these leases as of December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
       Year ending
       December 31,
       ------------
       <S>                                                                <C>
       2002.............................................................. $1,312
       2003..............................................................    277
       2004..............................................................     89
       2005..............................................................     70
       2006..............................................................      2
                                                                          ------
                                                                          $1,750
                                                                          ======
</TABLE>

  Rent expense for operating leases was approximately $1,485,000, $1,408,000
and $1,281,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. Sublease rental income was approximately $334,000 for the year
ended December 31, 2001.

  The Company has subleased approximately 90,000 square feet of its principal
warehouse facility to another company for the remainder of its initial lease
term. The total of the future minimum rentals to be received as of December
31, 2001 is $362,000.

  The Company has outstanding letters of credit totaling approximately
$3,517,000 and $5,021,000 at December 31, 2001 and 2000, respectively. These
letters of credit, which have original terms from one month to one year,
collateralize the Company's obligation to third parties for the purchase of
inventory. The fair value of these letters of credit is based on fees
currently charged for similar agreements and is not significant at December
31, 2001 and 2000.

  In June 2001, the Company was notified by counsel representing the trustee
appointed to oversee the liquidation of assets of a previous customer of the
Company, which filed for bankruptcy protection in 1999, that they are seeking
reimbursement of all payments made to the Company during the 90 day period
prior to the bankruptcy filing. The aggregate amount of these payments, which
the trustee's counsel is claiming to be preferential transfers, is
approximately $4,315,000. The Company believes these payments were received in
the ordinary course of business and that it has a meritorious defense against
the trustee's claims. In November 2001, the trustee filed suit against K-Swiss
(and other creditors) to recover payments made to K-Swiss during the 90 days
prior to the customer's bankruptcy filing. The Company continues to believe
that it has a meritorious "ordinary course of business" defense against these
claims and will assert that defense in detail at the appropriate time in the
litigation. No provision for this claim has been made in the Company's
financial statements as of December 31, 2001.

NOTE J--EMPLOYEE BENEFIT PLANS

  In 1988, the Company adopted a discretionary contribution profit sharing
plan covering all employees meeting certain eligibility requirements. In 1993,
the plan was amended to include a 401(k) plan. The expense for this plan was
approximately $623,000, $562,000 and $477,000 for 2001, 2000 and 1999,
respectively.

                                      35
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE K--STOCKHOLDERS' EQUITY

  Each share of Class B Common Stock is freely convertible into one share of
Class A Common Stock at the option of the Class B stockholder. Holders of
Class A Common Stock are entitled to one vote per share and holders of Class B
Common Stock are entitled to ten votes per share for all matters submitted to
a vote of the stockholders of the Company, other than the election of
directors. Holders of Class A Common Stock are initially entitled to elect two
directors and holders of Class B Common Stock are entitled to elect all
directors other than directors that the holders of Class A Common Stock are
entitled to elect. If the number of members of the Company's Board of
Directors is increased to not less than eleven and not greater than fifteen
(excluding directors representing holders of Preferred Stock, if any), holders
of Class A Common Stock will be entitled to elect three directors. If the
number of members of the Company's Board of Directors is increased to a number
greater than fifteen (excluding directors representing holders of Preferred
Stock, if any), holders of Class A Common Stock will be entitled to elect four
directors.

  During 1990, the Company adopted the 1990 Stock Option Plan under which it
was authorized to issue non-qualified stock options, incentive stock options,
and warrants to key employees. As amended, the number of options available for
issuance under the 1990 Stock Option Plan was 1,650,000 shares of Class A
Common Stock. The options have a term of ten years and generally become fully
vested by the end of the fifth year.

  In 1999, the Company adopted the 1999 Stock Incentive Plan under which it
was authorized to award up to 600,000 shares or options to employees and
directors of the Company. The awards have a term of ten years and generally
become fully vested by the end of the fifth year.

  Combined plan transactions for 2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                2001               2000               1999
                         ------------------- ----------------- -------------------
                                    Weighted          Weighted            Weighted
                                    average           average             average
                                    exercise          exercise            exercise
                          Shares     price   Shares    price    Shares     price
                         ---------  -------- -------  -------- ---------  --------
<S>                      <C>        <C>      <C>      <C>      <C>        <C>
Options outstanding
 January 1,.............   937,306   $ 9.36  707,003   $ 8.06  1,335,020   $ 6.48
Granted.................   292,500    24.93  306,450    11.14    147,000    19.88
Exercised...............   (68,098)    4.63  (43,644)    4.67   (760,849)    7.48
Canceled................   (22,835)   24.95  (32,503)    4.19    (14,168)   12.73
                         ---------           -------           ---------
Options outstanding
 December 31,........... 1,138,873    13.33  937,306     9.36    707,003     8.06
                         =========           =======           =========
Options available for
 grant at December 31,..    24,050           296,050             650,878
</TABLE>
  Weighted average fair value of options granted during the year are as
follows:

<TABLE>
<CAPTION>
                                                            2001   2000   1999
                                                           ------ ------ ------
     <S>                                                   <C>    <C>    <C>
     Exercise price is below market price at date of
      grant..............................................  $24.47 $12.36 $19.01
     Exercise price equals market price at date of grant.   16.74   7.39  20.39
</TABLE>


                                      36
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE K--STOCKHOLDERS' EQUITY--(Continued)

  The following information applies to options outstanding at December 31,
2001:

<TABLE>
<CAPTION>
                                      Options Outstanding         Options Exercisable
                                --------------------------------- --------------------
                                             Weighted
                                              average    Weighted             Weighted
                                             remaining   average              average
                                  Number    contractual  exercise   Number    exercise
     Range of exercise prices   outstanding life (years)  price   exercisable  price
     ------------------------   ----------- -----------  -------- ----------- --------
     <S>                        <C>         <C>          <C>      <C>         <C>
     $  .01-$ 1.00...........     116,615         7        0.75      15,002     0.53
     $ 4.38-$ 6.50...........     268,600         5        4.86     210,936     4.72
     $ 6.88-$ 9.88...........      68,141         4        8.31      30,021     8.33
     $10.13-$12.75...........     312,017         8       11.12     113,236    11.13
     $17.06-$25.56...........     263,500         9       24.09         --       --
     $27.13-$47.38...........     110,000         8       31.11      20,000    32.13
</TABLE>

  The fair value of options at date of grant was estimated using the Black-
Scholes model with the following assumptions:

<TABLE>
<CAPTION>
                                                               2001  2000  1999
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Expected life (years)....................................    8     7     7
     Risk-free interest rate.................................. 4.86% 5.90% 6.50%
     Expected volatility......................................   59%   60%   59%
     Expected dividend yield..................................   .2%   .3%   .2%
</TABLE>

  Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.

  During 2001, 2000 and 1999, 13,000, 12,000 and 73,000 options, respectively,
were granted at exercise prices below fair market value. This resulted in net
compensation expense of $313,000, $337,000 and $214,000 for 2001, 2000 and
1999, respectively. All other options were granted at an exercise price equal
to the fair market value of the Company's common stock at the date of grant.
Accordingly, no compensation cost has been recognized for such options
granted.

  In connection with the exercise of options, the Company realized income tax
benefits in 2001, 2000 and 1999 which have been credited to additional paid-in
capital.

                                      37
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE K--STOCKHOLDERS' EQUITY--(Continued)

  Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method of SFAS No. 123,
the Company's net earnings and earnings per share would have been:

<TABLE>
<CAPTION>
                                                         2001    2000    1999
                                                        ------- ------- -------
     <S>                                                <C>     <C>     <C>
     Net earnings (in thousands)
       As reported..................................... $23,309 $21,059 $34,284
       Pro forma.......................................  21,989  20,600  34,150
     Basic earnings per share
       As reported..................................... $  2.42 $  2.05 $  3.12
       Pro forma.......................................    2.28    2.00    3.11
     Diluted earnings per share
       As reported..................................... $  2.28 $  1.96 $  2.99
       Pro forma.......................................    2.15    1.92    2.98
</TABLE>

  The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

NOTE L--CONCENTRATIONS OF CREDIT RISK

  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, trade accounts receivable and financial instruments used in
hedging activities. The Company maintains cash and cash equivalents with high
quality institutions and limits the amount of credit exposure to any one
institution. As part of its cash and risk management processes, the Company
performs periodic evaluations of the relative credit standing of the financial
institutions.

  During the years ended December 31, 2001, 2000 and 1999, approximately 18%,
23% and 24%, respectively, of revenues were from one domestic customer. At
December 31, 2001 and 2000 approximately 35% and 34% of accounts receivable
were from three customers. Credit risk with respect to other trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
geographies. The Company controls credit risk through credit approvals, credit
limits and monitoring procedures and for international receivables, the use of
letters of credit and letters of guarantee.

                                      38
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE M--ACQUISITIONS

 National Geographic

  In May 2001, the Company formed a joint venture with Rugged Shark, a
designer and manufacturer of young, active-oriented footwear, to license,
produce and market a men's, women's, and children's collection of National
Geographic outdoor-oriented and casual footwear. Under the terms of the joint
venture, the Company owns 75% of the new company and provides the
infrastructure to design, develop, manufacture, distribute and market the line
of National Geographic footwear. Rugged Shark owns 25% of the venture. Profits
and losses of the joint venture will generally be allocated 75% to the Company
and 25% to Rugged Shark. Under certain circumstances, Rugged Shark is entitled
to a special $1,000,000 profits allocation. Under the terms of the agreement,
the Company was granted the right (the "Call") to purchase from the minority
member its minority interest in the joint venture. In addition, the Company
has granted the minority member the right (the "Put") to sell its minority
interest to the Company. The Call and the Put are exercisable at any time
during the period April 1, 2005 through March 31, 2007. The exercise price of
the Call and Put is based on a multiple of earnings before interest, income
taxes and depreciation and amortization of the joint venture. The license
agreement requires the Company to make minimum royalty payments through the
year 2005 as follows (in thousands):

<TABLE>
<CAPTION>
       Year ending
       December 31,
       ------------
       <S>                                                                <C>
       2002.............................................................. $  750
       2003..............................................................  1,155
       2004..............................................................  1,575
       2005..............................................................  1,876
                                                                          ------
                                                                          $5,356
                                                                          ======
</TABLE>

  Losses applicable to the minority interests of Rugged Shark exceed the
equity capital of the minority member. Accordingly, such excess losses
applicable to the minority interests have been charged against the majority
interest. The amount of excess losses charged to the Company was not material
during the year ended December 31, 2001.

 Royal Elastics

  In November 2001, the Company acquired the worldwide rights and business of
Royal Elastics, an Australian-based designer and manufacturer of elasticated
footwear. The purchase excludes distribution rights in Australia, which were
retained by the seller. This acquisition was accounted for as a purchase and
accordingly, the results of operations of the acquired business are included
in the accompanying financial statements from the date of acquisition. On a
pro forma basis, as if the business had been acquired at the beginning of
2001, revenue, net earnings and earnings per common share would not differ
materially from the amounts reported in the accompanying consolidated
financial statements for 2001 and 2000. Goodwill totaling $3,494,000 has been
recognized for the amount of the excess of the purchase price paid over the
fair market value of the net assets acquired. Contingent purchase payments of
approximately $1.5 million are due to the seller if the Company meets certain
revenue levels and the Royal Elastics trademark is registered in the United
States of America. Contingent purchase payments will be recorded as additional
goodwill. Assets acquired and liabilities assumed in the acquisition were not
material.

                                      39
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE M--ACQUISITIONS--(Continued)

  In connection with the acquisition of Royal Elastics, the Company formed a
joint venture with two of the sellers. Profits and losses of the joint venture
during the first six years will be allocated 100% to the Company. Following
the sixth year, profits and losses will be allocated 70% to the Company and
30% to the minority members. Under the terms of the agreement, the Company was
granted the right (the "Call") to purchase from the minority members their
minority interest in the joint venture. In addition, the Company has granted
the minority members the right (the "Put") to sell their minority interest to
the Company. The Call and the Put are exercisable at any time during the
period November 15, 2005 through November 15, 2007. The exercise price of the
Call and Put is based on a multiple of pre tax earnings of the joint venture
less any amounts previously paid by the Company under the purchase agreement.

                                      40
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE N--SEGMENT INFORMATION

  The Company's predominant business is the design, development and
distribution of athletic footwear. The Company is organized into three
geographic regions: the United States, Europe and other international
operations. Certain reclassifications have been made in the 2001, 2000 and
1999 presentations. The following tables summarize segment information (in
thousands):

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                   ----------------------------
                                                     2001      2000      1999
                                                   --------  --------  --------
     <S>                                           <C>       <C>       <C>
     Revenues from unrelated entities:
       United States.............................. $205,237  $197,262  $264,054
       Europe.....................................   13,701    12,862    11,395
       Other International........................   17,135    11,505    10,048
                                                   --------  --------  --------
                                                   $236,073  $221,629  $285,497
                                                   ========  ========  ========
     Inter-geographic revenues:
       United States.............................. $  1,696  $  1,014  $    854
       Europe.....................................       77        29        22
       Other International........................    7,634     5,790     5,110
                                                   --------  --------  --------
                                                   $  9,407  $  6,833  $  5,986
                                                   ========  ========  ========
     Total revenues:
       United States.............................. $206,933  $198,276  $264,908
       Europe.....................................   13,778    12,891    11,417
       Other International........................   24,769    17,295    15,158
       Less inter-geographic revenues.............   (9,407)   (6,833)   (5,986)
                                                   --------  --------  --------
                                                   $236,073  $221,629  $285,497
                                                   ========  ========  ========
     Operating profit (loss):
       United States.............................. $ 45,506  $ 41,424  $ 62,410
       Europe.....................................   (3,192)   (2,774)   (1,437)
       Other International........................    2,812       848     4,268
       Less corporate expenses and Eliminations...   (8,181)   (8,057)  (10,287)
                                                   --------  --------  --------
                                                   $ 36,945  $ 31,441  $ 54,954
                                                   ========  ========  ========
     Interest income:
       United States.............................. $  2,310  $  2,852  $  1,043
       Europe.....................................       33        66        30
       Other International........................      597     1,051       877
                                                   --------  --------  --------
         Total interest income....................    2,940     3,969     1,950
     Interest expense:
       United States..............................    1,094       320       118
       Europe.....................................       42        52        48
       Other International........................      --        --        --
                                                   --------  --------  --------
         Total interest expense...................    1,136       372       166
                                                   --------  --------  --------
     Interest income, net......................... $  1,804  $  3,597  $  1,784
                                                   ========  ========  ========
     Income tax expense:
       United States.............................. $ 15,408  $ 13,914  $ 22,334
       Europe.....................................       72        65        65
       Other International........................      (40)      --         55
                                                   --------  --------  --------
                                                   $ 15,440  $ 13,979  $ 22,454
                                                   ========  ========  ========
</TABLE>

                                      41
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE N--SEGMENT INFORMATION--(Continued)

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                     --------------------------
                                                       2001     2000     1999
                                                     -------- -------- --------
<S>                                                  <C>      <C>      <C>
Identifiable assets:
  United States..................................... $ 79,875 $ 78,944 $ 82,114
  Europe............................................   11,886    5,770    6,777
  Other International...............................   28,290   20,752   17,213
  Corporate assets and eliminations (1).............   40,748   51,961   40,668
                                                     -------- -------- --------
                                                     $160,799 $157,427 $146,772
                                                     ======== ======== ========
Provision for depreciation and amortization:
  United States..................................... $  1,637 $  1,348 $  1,184
  Europe............................................      113      127      125
  Other International...............................       59       56       65
                                                     -------- -------- --------
                                                     $  1,809 $  1,531 $  1,374
                                                     ======== ======== ========
Capital expenditures:
  United States..................................... $    913 $    672 $  1,891
  Europe............................................      188       91      139
  Other International...............................       51      101       56
                                                     -------- -------- --------
                                                     $  1,152 $    864 $  2,086
                                                     ======== ======== ========
</TABLE>
--------
(1) Corporate assets include cash and cash equivalents, investments and
    intangible assets.

NOTE O--QUARTERLY FINANCIAL DATA (Unaudited)

  Summarized quarterly financial data for 2001 and 2000 follows (in thousands
except for per share amounts):

<TABLE>
<CAPTION>
                                         First  Second   Third  Fourth
                                        Quarter Quarter Quarter Quarter   Year
                                        ------- ------- ------- ------- --------
<S>                                     <C>     <C>     <C>     <C>     <C>
2001
  Revenues............................. $68,249 $55,419 $67,786 $44,619 $236,073
  Gross profit.........................  27,509  22,154  29,268  18,771   97,702
  Net earnings.........................   6,613   4,085   8,069   4,542   23,309
 Earnings per share
  Basic................................ $   .67 $   .41 $   .85 $   .49 $   2.42
  Diluted.............................. $   .63 $   .39 $   .79 $   .46 $   2.28
2000
  Revenues............................. $71,458 $51,006 $60,466 $38,699 $221,629
  Gross profit.........................  27,020  21,742  24,989  14,990   88,741
  Net earnings.........................   7,337   3,971   6,346   3,405   21,059
 Earnings per share
  Basic................................ $   .69 $   .38 $   .63 $   .34 $   2.05
  Diluted.............................. $   .67 $   .37 $   .59 $   .32 $   1.96
</TABLE>

                                      42
<PAGE>

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

  None.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

  Except for the information disclosed in Item 4(a) of this Annual Report on
Form 10-K, the information required by this item will be contained in the
Company's Proxy Statement for its Annual Stockholders Meeting to be held May
23, 2002 to be filed with the Securities and Exchange Commission within 120
days after December 31, 2001 and is incorporated herein by reference.

Item 11. Executive Compensation

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001 and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001 and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 23, 2002 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001 and is incorporated herein by reference.

                                    PART IV

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

  (a) Financial Statements:

<TABLE>
<CAPTION>
                                                                 Page Reference
                                                                   Form 10-K
                                                                 --------------
<S>                                                              <C>
Report of Independent Certified Public Accountants..............       22
Consolidated Balance Sheets as of December 31, 2001 and 2000....       23
Consolidated Statements of Earnings and Comprehensive Earnings
 for the three years ended December 31, 2001....................       24
Consolidated Statement of Stockholders' Equity for the three
 years ended December 31, 2001..................................       25
Consolidated Statements of Cash Flows for the three years ended
 December 31, 2001..............................................       26
Notes to Consolidated Financial Statements......................       27
</TABLE>

  (b) Reports on Form 8-K

  There were no reports on Form 8-K filed during the fourth quarter of 2001.

                                      43
<PAGE>

  (c) Exhibits

<TABLE>
     <C>  <S>
      3.1 Amended and Restated Certificate of Incorporation of K-Swiss Inc.
          (incorporated by reference to exhibit 3.4 to the Registrant's Form S-
          1 Registration Statement No. 33-34369).

      3.2 Certificate of Designations of Class A Common Stock of K-Swiss Inc.
          (incorporated by reference to exhibit 3.2 to the Registrant's Form S-
          1 Registration Statement No. 33-34369).

      3.3 Certificate of Designations of Class B Common Stock of K-Swiss Inc.
          (incorporated by reference to exhibit 3.3 to the Registrant's Form S-
          1 Registration Statement No. 33-34369).

      3.4 Amended and Restated Bylaws of K-Swiss Inc. (incorporated by
          reference to exhibit 3.4 to the Registrant's Form 10-K for the fiscal
          year ended December 31, 1991).

      4.1 Specimen K-Swiss Inc. Class A Common Stock Certificate (incorporated
          by reference to exhibit 4.1 to the Registrant's Form S-1 Registration
          Statement No. 33-34369).

      4.2 Specimen K-Swiss Inc. Class B Common Stock Certificate (incorporated
          by reference to exhibit 4.2 to the Registrant's Form S-1 Registration
          Statement No. 33-34369).

      4.3 $400,000 324 Corp. 10% Junior Subordinated Debenture due December 31,
          2001 originally issued to The Rug Warehouse, Inc. Pension Plan and
          Trust (incorporated by reference to exhibit 4.7 to the Registrant's
          Form S-1 Registration Statement No. 33-34369).

      4.4 $100,000 324 Corp. 10% Junior Subordinated Debenture due December 31,
          2001 issued to George E. Powlick (incorporated by reference to
          exhibit 4.8 to the Registrant's Form S-1 Registration Statement No.
          33-34369).

      9.1 Stockholders Agreement dated as of December 30, 1986 by and among 324
          Corp., Steven B. Nichols, Kenneth J. Zises and The Biltrite
          Corporation (incorporated by reference to exhibit 9.2 to the
          Registrant's Form S-1 Registration Statement No. 33-34369).

      9.2 Letter Agreement dated May 3, 1990 by and among the Company, Steven
          B. Nichols, Kenneth J. Zises, The Biltrite Corporation and certain
          affiliates (incorporated by reference to exhibit 9.3 to the
          Registrant's Form S-1 Registration Statement No. 33-34369).

      9.3 Voting Agreement dated May 3, 1990 by and between The Biltrite
          Corporation and the Nichols Family Trust (incorporated by reference
          to exhibit 9.4 to the Registrant's Form S-1 Registration Statement
          No. 33-34369).

     10.1 K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by reference to
          exhibit 10.1 to the Registrant's Form S-1 Registration Statement No.
          33-34369).

     10.2 Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by
          reference to exhibit 10.36 to the Registrant's Form 10-K for the
          fiscal year ended December 31, 1993).

     10.3 Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by
          reference to exhibit 10.32 to the Registrant's Form 10-K for the
          fiscal year ended December 31, 1995).
</TABLE>

                                       44
<PAGE>

<TABLE>
     <C>   <S>
     10.4  K-Swiss Inc. 1999 Stock Incentive Plan (incorporated by reference to
           Exhibit 4.1 of the Registrant's Form S-8 Registration Statement No.
           333-79641).

     10.5  K-Swiss Inc. Profit Sharing Plan, as amended (incorporated by
           reference to exhibit 10.3 to the Registrant's Form S-1 Registration
           Statement No. 33-34369).

     10.6  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan
           (incorporated by reference to exhibit 10.35 to the Registrant's Form
           10-K for the fiscal year ended December 31, 1993).

     10.7  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated May
           26, 1994 (incorporated by reference to exhibit 10.32 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1994).

     10.8  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated
           January 1, 2000 (incorporated by reference to exhibit 10.30 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1999).

     10.9  Form of Indemnity Agreement entered into by and between K-Swiss Inc.
           and directors (incorporated by reference to exhibit 10.4 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).

     10.10 Employment Agreement between the Registrant and Steven B. Nichols
           dated as of May 18, 2000 (incorporated by reference to exhibit 10.31
           to the Registrant's Form 10-Q for the quarter ended June 30, 2000).

     10.11 Lease Agreement dated March 11, 1997 by and between K-Swiss Inc. and
           Space Center Mira Loma, Inc. (incorporated by reference to exhibit
           10 to the Registrant's Form 10-Q for the quarter ended March 31,
           1997).

     10.12 Credit Agreement dated March 25, 1994 by and among the Registrant
           and Bank of America National Trust and Savings Association, with
           schedules (incorporated by reference to exhibit 10.33 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1994).

     10.13 Amendment to Credit Agreement dated March 25, 1994 by and among the
           Registrant and Bank of America National Trust and Savings
           Association (incorporated by reference to exhibit 10.1 to the
           Registrant's Form 10-Q for the quarter ended June 30, 1995).

     10.14 Second Amendment to Credit Agreement (incorporated by reference to
           exhibit 10 to the Registrant's Form 10-Q for the quarter ended
           September 30, 1996).

     10.15 Third Amendment to Credit Agreement (incorporated by reference to
           exhibit 10 to the Registrant's Form 10-Q for the quarter ended
           September 30, 1997).

     10.16 Fourth Amendment to Credit Agreement (incorporated by reference to
           exhibit 10 to the Registrant's Form 10-Q for the quarter ended
           September 30, 1998).

     10.17 Fifth Amendment to Credit Agreement (incorporated by reference to
           exhibit 10.31 to the Registrant's Form 10-K for the year ended
           December 31, 1998).

     10.18 Business Loan Agreement (incorporated by reference to exhibit 10 to
           the Registrant's Form 10-Q for the quarter ended June 30, 2001).

     10.19 K-Swiss Inc. Deferred Compensation Plan, Master Plan Document
           (incorporated by reference to exhibit 10.1 to the Registrant's Form
           10-Q for the quarter ended March 31, 1998).
</TABLE>

                                       45
<PAGE>

<TABLE>
     <C>   <S>
     10.20 K-Swiss Inc. Deferred Compensation Plan, Master Trust Agreement
           (incorporated by reference to exhibit 10.2 to the Registrant's Form
           10-Q for the quarter ended March 31, 1998).

     21    Subsidiaries of K-Swiss Inc.

     23    Consent of Grant Thornton LLP.
</TABLE>

  (d) Schedules

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
   <S>                                                                    <C>
       Financial Statement Schedules:
        Schedule II--Valuation and Qualifying Accounts...................  48

        All supplemental schedules other than as set forth above are
         omitted as inapplicable or because the required information is
         included in the Consolidated Financial Statements or the Notes
         to Consolidated Financial Statements.
</TABLE>

                                       46
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                          K-Swiss Inc.

                                               /s/ George Powlick
                                          By __________________________________
                                               George Powlick, Vice-President
                                               and
                                               Chief Financial Officer

                                          February 6, 2002

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

<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>
/s/
Steven Nichols                                                      February 6, 2002
------------------------------------
Steven Nichols                       Chairman of the Board,
                                      President and Chief
                                      Executive Officer
/s/
George Powlick                                                      February 6, 2002
------------------------------------
George Powlick                       Vice President Finance,
                                      Chief Financial Officer,
                                      Principal Accounting
                                      Officer, Secretary and
                                      Director
/s/
Lawrence Feldman                                                    February 6, 2002
------------------------------------
Lawrence Feldman                     Director
/s/
David Lewin                                                         February 6, 2002
------------------------------------
David Lewin                          Director
/s/
Martyn Wilford                                                      February 6, 2002
------------------------------------
Martyn Wilford                       Director
/s/
Stephen Fine                                                        February 6, 2002
------------------------------------
Stephen Fine                         Director
</TABLE>

                                      47
<PAGE>

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

                             (Amounts in thousands)

<TABLE>
<CAPTION>
        Column A            Column B         Column C        Column D   Column E
        --------          ------------- ------------------- ----------- --------
                                             Additions
                                        ------------------- Write-offs
                           Balance at   Charged to Charged    and End   Balance
                          Beginning of  Costs and  to Other Deductions,  at of
      Description            Period      Expenses  Accounts     Net      Period
      -----------         ------------- ---------- -------- ----------- --------
<S>                       <C>    <C>    <C>        <C>      <C>         <C>
Allowance for bad debts.  (2001) $  852   $  537     $ --     $  (396)   $  993
                          (2000)  1,740      544       --      (1,432)      852
                          (1999)    825    1,341       --        (426)    1,740

Allowance for
 inventories............  (2001) $1,417   $1,622     $ --     $(1,527)   $1,512
                          (2000)    966    1,203       --        (752)    1,417
                          (1999)  1,521    1,171       --      (1,726)      966
</TABLE>

                                       48
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Number                                                                     Page
 ------                                                                     ----
 <C>    <S>                                                                 <C>
  21    Subsidiaries of K-Swiss Inc. .....................................

  23    Consent of Grant Thornton LLP. ...................................
</TABLE>