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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

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FORM 10-K

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           | 
|           |  | For the fiscal year ended December 31, 2003                                             
|           | 
|           |  | 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

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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 Village, California |  | 91361                 
|(Address of principal executive offices)            |  | (Zip Code)            

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

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each Class |  | Name of each exchange on which registered
|None                |  | None                                     

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

Class A Common Stock, par value $0.01 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.    x  Yes     ̈  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.     ̈

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    x  Yes     ̈  No

The aggregate market value of the Class A Common Stock of the Registrant held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrants most recently completed second fiscal
quarter, based on the closing price of the Class A Common Stock on the Nasdaq National Market on such date was $436,406,466.

The number of shares of
the Registrants Class A Common Stock outstanding at February 4, 2004 was 26,917,363 shares. The number of shares of the Registrants Class B Common Stock outstanding at February 4, 2004 was 8,532,734 shares.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the Registrants 2004 Annual Stockholders Meeting are incorporated by reference into Part III.



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##### Table of Contents

KSWISS INC.



INDEX TO ANNUAL REPORT ON
FORM 10-K



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003



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|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  | Caption                                                                               |  | Page
|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                                   |  | 10  
|         |  |                                                                                      
|PART II  |  |                                                                                       |  |     
|         |  |                                                                                      
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 11  
|         |  |                                                                                      
|Item 6.  |  | Selected Financial Data                                                               |  | 13  
|         |  |                                                                                      
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|         |  |                                                                                      
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21  
|         |  |                                                                                      
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 22  
|         |  |                                                                                      
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 45  
|         |  |                                                                                      
|Item 9A. |  | Controls and Procedures                                                               |  | 45  
|         |  |                                                                                      
|PART III |  |                                                                                       |  |     
|         |  |                                                                                      
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 45  
|         |  |                                                                                      
|Item 11. |  | Executive Compensation                                                                |  | 47  
|         |  |                                                                                      
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 47  
|         |  |                                                                                      
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 47  
|         |  |                                                                                      
|Item 14. |  | Principal Accounting Fees and Services                                                |  | 47  
|         |  |                                                                                      
|PART IV  |  |                                                                                       |  |     
|         |  |                                                                                      
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 47  



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PART I



|Item 1. |  | Business
|------- |  | --------



Company History and General Strategy



KSwiss Inc.
designs, develops and markets an array of athletic footwear for high performance sports use, fitness activities and casual wear under the KSwiss brand. We also design and manufacture footwear under the Royal Elastics brand. Royal Elastics, a
wholly owned subsidiary, is a leading innovator of slip-on, laceless footwear. Sales of Royal Elastics brand was not significant during 2003.



KSwiss 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 our sales. The Classic has evolved from a high-performance shoe into a casual, lifestyle shoe. We have emphasized in our
marketing the commitment to produce products of high quality and enduring style and we plan to continue to emphasize the high quality and classic design of our products as we introduce new models of athletic footwear.



On December 30, 1986, KSwiss was purchased by an investment group led by our
current President. Thereafter we recruited experienced management and reduced manufacturing costs by increasing offshore production and entering into new, lower cost purchasing arrangements. Our products are manufactured to our specifications by
overseas suppliers predominately in China. In June 1991 and September 1992, we established operations in Taiwan and Europe to broaden our distribution on a global scale.



In May 2001, we formed a joint venture to license, produce and market a mens, womens and childrens collection of
National Geographic outdoor-oriented and casual footwear. In the fourth quarter of 2003, we agreed with National Geographic to end our licensing agreement. Operations of the National Geographic brand have been accounted for and shown as a
discontinued operation in the accompanying financial information.



In
November 2001, we 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 discussion during the remainder of this
Item 1., other than backlog, trademarks and patents, and employees, relates solely to the KSwiss brand.



KSwiss 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. Unless the context otherwise indicates, the terms we, us, KSwiss and the Company as used
herein refers to KSwiss Inc. and its consolidated subsidiaries.



Products



Our 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. We endeavor to use classic styling to reduce the impact of changes in consumer preferences as we believe that this strategy
leads to longer product life cycles than are typical of the products of certain of our competitors. We believe that long product life cycles reduce total markdowns over the life of the



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products, thereby enhancing their attractiveness to retailers. This strategy also enables us 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 us to take
advantage of trends in the marketplace that we identify while attempting to minimize the risk generally associated with this type of product.



Presently, we compete in the Classic category (casual), training, tennis and childrens footwear. Each product category has certain styles designated as core
products. Our core products offer style continuity and often include on-going improvement. We believe our core product program is a critical factor in attempting to achieve our 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.



The following table summarizes our KSwiss brand footwear into categories 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 49% of 2003 revenues) and womens (approximately 31% of 2003 revenues). Most styles within
each footwear category are offered in mens, womens and childrens.



|                          |  |                               |         |   |      |   |   |      |         |  |     |   |  |   |         |  |     |  
|------------------------- |  | ----------------------------- | ------- | - | ---- | - | - | ---- | ------- |  | --- | - |  | - | ------- |  | --- | -
|                          |  | Revenues (1)                  |        
|                          |  | Year Ended December 31,       |        
|                          |  | 2003                          |         |   | 2002 |   |   | 2001 |        
|KSwiss Footwear Category |  | $                             |         | % |      |   | $ |      | %       |  |     | $ |  | % |        
|                          |  | (Dollar amounts in thousands) |        
|Classic                   |  | $                             | 277,398 |   | 66   | % |   | $    | 185,212 |  | 66  | % |  | $ | 154,988 |  | 66  | %
|Tennis/Court              |  |                               | 23,395  |   | 6    |   |   |      | 16,386  |  | 6   |   |  |   | 15,916  |  | 7   |  
|Training                  |  |                               | 35,914  |   | 8    |   |   |      | 16,640  |  | 6   |   |  |   | 13,762  |  | 6   |  
|Childrens                |  |                               | 78,046  |   | 19   |   |   |      | 58,067  |  | 20  |   |  |   | 45,283  |  | 19  |  
|Other (2)                 |  |                               | 4,735   |   | 1    |   |   |      | 5,897   |  | 2   |   |  |   | 4,470   |  | 2   |  
|                          |  |                               |         |   |      |   |   |      |         |  |     |   |  |   |         |  |     |  
|Total                     |  | $                             | 419,488 |   | 100  | % |   | $    | 282,202 |  | 100 | % |  | $ | 234,419 |  | 100 | %
|                          |  |                               |         |   |      |   |   |      |         |  |     |   |  |   |         |  |     |  
|Domestic (3)              |  | $                             | 368,701 |   | 88   | % |   | $    | 245,058 |  | 87  | % |  | $ | 204,535 |  | 87  | %
|                          |  |                               |         |   |      |   |   |      |         |  |     |   |  |   |         |  |     |  

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|(1) |  | For purposes of this table, revenues do not include other domestic income and fees earned on sales by foreign licensees and distributors.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



|(3) |  | Included in totals on previous line.
|--- |  | ------------------------------------



Footwear



Our product line through 1987 was primarily 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. 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. We have 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, we 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 original, as described above, and its derivatives, and other casual athletic styles.



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The Classic originals segment contains shoes that we intend to carry in our product assortment for several years.
They generally have shoe characteristics such as d-rings and five stripes, and, because they are multiple season shoes, we maintain significant inventory positions of this segment. Significant inventory positions allow for effective EDI programs
with retailers that fit into our strategy of attempting to become the retailers most profitable vendor. The other casual athletic styles category includes the K-S Collection which 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. Other casual athletic styles also includes the Limited Edition segment which 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, we entered the training performance category. To further differentiate the line of shoes from our competitors, we created 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.



Apparel and Accessories



We market 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 us 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, we introduced a new 7.0 line of high tech tennis apparel to complement our 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. We also offer 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 us visible promotional opportunities.



Sales



We sell our products in the United States through our sales executives, and independent sales representatives primarily to a limited
number of specialty athletic footwear stores, pro shops, sporting good stores and department stores. We also sell through our website which is becoming increasingly important to us particularly in light of our limited distribution. We also sell our
products to a number of foreign distributors. We now have sales offices or distributors throughout the world. In 1992, we established sales offices and now have appointed exclusive distributors in much of Europe.



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



Marketing



Advertising and Promotion



We believe that our strategy of designing products with longer life cycles and
introducing fewer new models relative to our competition enhances the effectiveness of our advertising and promotions.



In 2003, we used television as our 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.



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Advertising and promotion efforts in foreign markets are directed by local distributors. Our agreements with
foreign distributors generally require such distributors to spend a certain percentage of their sales of our products on advertising and promotion. We control the nature and content of these promotions.



Domestic Marketing



Our current marketing strategy emphasizes distribution to retailers whose marketing
strategies are consistent with our reputation for quality and service.



Our footwear products are sold domestically through approximately 40 independent regional sales representatives and 11 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 3,000, 2,900 and 2,900 separate accounts as of December 31, 2003, 2002 and 2001.



During 2003, the Foot Locker group of stores and affiliates accounted for approximately
29% of domestic revenues. See Note K to our Consolidated Financial Statements. No other customer accounted for more than 10% of total revenues during this period.



We offer 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, we engage in certain sales programs from time to time that provide for extended terms on initial domestic orders of new styles.



We maintain a customer service department consisting of 17 persons at our Westlake
Village, California facility. The customer service department accepts orders for our products, handles inquiries and notifies retailers of the status of their orders. We have 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 our products and to take advantage of the new advances in technology and the internet, we
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 and is visually integrated with the current television campaign. 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 our 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 our retailers, and have it shipped directly to them.



International Marketing



In 1991, we established a sales management team in Asia. We have exclusive
distributors in certain Pacific Rim countries. Exclusive distributors of our products are generally contractually obligated to spend specific amounts on advertising and promotion of our products. We have also established exclusive distributors in
other international markets.



To expand the marketing of our products
into Europe, we opened our own office in the Netherlands in 1992.



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By the end of 2003, KSwiss was working through 6 international subsidiaries and 16 distributors to market
KSwiss products in potentially 49 countries.



Distribution



During December 1997, we relocated our distribution facility. We now maintain 371,000
square feet of warehouse space at two leased facilities in Mira Loma, California. See Item 2. Properties.



We purchase footwear from independent manufacturers located predominantly in China. The time required to fill new orders placed by us with our manufacturers is
approximately five months. Such footwear is generally shipped in ocean containers and delivered to our facility in California. In some cases, large customers 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. We generally arrange shipment of other international orders directly from our independent manufacturers.



We maintain an open-stock inventory on certain products which permits us to ship to
retailers on an at once basis in response to orders placed by mail, fax, toll-free telephone call or electronically. We have 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 our futures program. See MarketingDomestic Marketing. We ship by package express or truck from California, depending upon size of order, customer
location and availability of inventory.



Product Design and Development



We maintain 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 our management team in California, who meet regularly to review sales, consumer and market
trends.



Manufacturing



In 2003, approximately 99% of our footwear products were manufactured in China and 1%
in Taiwan. Although we have no long-term manufacturing agreements and compete with other athletic shoe companies for production facilities (including companies that are much larger than us), we believe that our relationships with our footwear
producers are satisfactory and that we have the ability to develop, over time, alternative sources for our footwear. Our 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 us and is subject to quality control standards, and we retain the right to reject products that do not meet specifications. The bulk of all raw materials used in such production are purchased by
manufacturers at our direction. Our inspectors at the manufacturing facilities test and inspect footwear products prior to shipment from those facilities.



During 2003, our apparel and accessory products were manufactured in Macau, China, Thailand, Taiwan, Korea, Pakistan and the United States by certain manufacturers
selected by us.



Our 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



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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 our 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 our 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 our operations and ability to import products at current or increased levels. We 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 KSwiss and the athletic footwear industry as a whole.



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



Our 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 footwear ranging from 6.0% to 20.0% plus, for certain styles,
$0.90 per pair and duties on moderately priced textile footwear of 20.0% plus, for certain styles, $0.90 per pair. Currently, approximately 97% of our footwear volume is derived from sales of leather footwear and approximately 3% of our footwear
volume is derived from sales of synthetic and textile footwear.



A large
portion of our 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 a bilateral agreement with the United States to enforce intellectual property protections within China. In addition, recent concerns with Chinas alleged failure to protect
intellectual property rights and to comply with other commitments made as part of its accession to the World Trade Organization (WTO) have caused the U.S. government to indicate that it would consider filing a case against China in the
WTO if China does not more readily fulfill its obligations. If the U.S. government takes action against China, the result of that action could, among other things, include the imposition of trade sanctions that could affect the ability of the
Company to continue to import products from China.



Backlog



At December 31, 2003 and 2002, total futures orders with start ship dates from January
through June 2004 and 2003 were approximately $224,863,000 and $168,449,000, respectively, an increase of 33.5%. The 33.5% increase in total futures orders is comprised of a 40.8% increase in the first quarter 2004 futures orders and a 22.8%
increase in the second quarter 2004 futures orders. At December 31, 2003 and 2002, domestic futures orders with start ship dates from January through June 2004 and 2003 were approximately $193,390,000 and $147,421,000, respectively, an increase of
31.2%. At December 31, 2003 and 2002, international futures orders with start ship dates from January through June 2004 and 2003 were approximately $31,473,000 and $21,028,000, respectively, an increase of 49.7%. 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. We believe our rate of net customer cancellations of domestic orders
approximates industry averages for similar companies. Customers



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may also reject nonconforming goods. To date, we believe we have not experienced returns of our products or bad debts of customers materially in excess of industry
averages for similar companies.



Competition



The athletic footwear industry is highly competitive. The largest marketers of
footwear are Nike, adidas and Reebok. Each of these companies has substantially greater financial, distribution and marketing resources as well as greater brand awareness than us.



We have recently increased our emphasis on product lines beyond our Classic model. In the past, we have introduced products in such
highly competitive categories such as court, boating, outdoor and childrens shoes. See Products. There can be no assurance that we will penetrate these or other new markets or increase the market share we have 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. Our products compete primarily on the basis of technological innovations, quality, style, and brand awareness
among consumers. While we believe that our competitive strategy has resulted in increased brand awareness and market share, there can be no assurance that we will be able to retain or increase our market share or respond to changing consumer
preferences.



Trademarks and Patents



We utilize trademarks on all our products and believe that our products are more
marketable on a long-term basis when identified with distinctive markings. KSwiss® is a registered trademark in the United States and certain other countries. Our 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, we have often secured registrations despite such objections. Our 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 registered in some countries because it has been deemed ornamental by regulatory authorities. We selectively seek to register the names of our shoes, logos and the names given to certain of our technical and performance
innovations, including Aosta® rubber and Silicone Formula 18®. The ROYAL ELASTICS and Fleur de Lis trademarks used on ROYAL ELASTICS products are registered in
many countries. Both marks are registered in the United States. We have obtained patents in the United States regarding the Bio Feedback® ankle support system, the Shock Spring® cushioning system incorporated into KSwiss 7.0 System® performance tennis shoes and training line, the D.R. Cinch System®, the stability design incorporated into the Si-18®
tennis shoe, and other features. We vigorously defend our trademarks and patent rights against infringement worldwide and employ independent security consultants to assist in such protection. To date, we are not aware of any significant
counterfeiting problems regarding our products.



Employees



At December 31, 2003, we employed 225 persons in the United States, 156 persons in
Taiwan and China, 53 persons in the United Kingdom, Germany and the Netherlands and 8 persons elsewhere.



Available Information



KSwiss
Internet address is www.kswiss.com. Beginning from at least November 15, 2002, we have made available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or



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furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material was electronically filed with, or furnished to,
the Securities and Exchange Commission (S.E.C.). Materials KSwiss files with the S.E.C. may be read and copied at the S.E.C.s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. This information may also be
obtained by calling the S.E.C at 1-800-SEC-0330. The S.E.C. also maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the S.E.C. at
www.sec.gov. The Company will provide a copy of any of the foregoing documents to stockholders upon request.



|Item 2. |  | Properties
|------- |  | ----------



In August 1998, we moved into our new headquarters facility in Westlake Village, California. This facility, which is owned by us, is approximately 50,000 square feet. We occupy approximately sixty percent of this facility and
lease the remaining portion.



We lease a 309,000 square foot distribution
facility in Mira Loma, California. This lease expires in January 2007, subject to one option, which would extend the term of the lease for three years. We use the Mira Loma facility as our main distribution center. The effective monthly commitment
for this facility is approximately $82,000.



|Item 3. |  | Legal Proceedings
|------- |  | -----------------



The Company is, from time to time, a party to litigation which arises in the normal course of our business operations. We do not believe that we are presently a
party to litigation which will have a material adverse effect on our business or operations.



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



On December 11, 2003, a special meeting of stockholders of KSwiss was held to approve amendments to KSwiss Restated Certificate of Incorporation
to increase the number of shares of Class A Common Stock which KSwiss is authorized to issue from 36,000,000 to 90,000,000 and to increase the number of shares of Class B Common Stock which KSwiss is authorized to issue from 10,000,000
to 18,000,000, thereby increasing the total number of shares of Common Stock which KSwiss is authorized to issue from 46,000,000 to 108,000,000. Of the 11,727,665 shares of Class A Common Stock and the 4,340,367 shares of Class B Common Stock
represented at the meeting, the amendments were approved by the following votes (pre-split):



|        |  |                          |  |           
|------- |  | ------------------------ |  | ----------
|        |  | Number of Votes Received
|        |  | Class A                  |  | Class B   
|For     |  | 6,759,704                |  | 43,403,670
|Against |  | 4,944,676                |  |          
|Abstain |  | 23,285                   |  |          



10



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##### Table of Contents

PART II



|Item 5. |  | Market for Registrants Common Equity and Related Stockholder Matters
|------- |  | ---------------------------------------------------------------------



KSwiss Inc.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 our initial public offering. Per share high and low sales prices (in dollars) for the quarterly periods during 2003 and 2002 as reported by Nasdaq were as follows:



|     |  |           |  |          |  |               |  |             
|---- |  | --------- |  | -------- |  | ------------- |  | ------------
|     |  | March 31, |  | June 30, |  | September 30, |  | December 31,
|2003 |  |           |  |          |  |               |  |             
|Low  |  | 10.61     |  | 12.18    |  | 16.75         |  | 17.75       
|High |  | 13.03     |  | 18.50    |  | 21.50         |  | 25.18       
|2002 |  |           |  |          |  |               |  |             
|Low  |  | 7.84      |  | 10.24    |  | 8.40          |  | 10.20       
|High |  | 10.62     |  | 13.20    |  | 13.38         |  | 13.88       



We announced on December 11,
2003 that our 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 December 26, 2003 to stockholders of record at
the close of business on December 22, 2003. The high and low sales prices above have been restated to reflect the effect of this two-for-one stock split.



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, 2003 was 95. However, based on available information,
we believe that the total number of Class A Common stockholders, including beneficial stockholders, is approximately 8,350.



There is currently no established public trading market for our Class B Common Stock. The number of stockholders of record of the Class B Common Stock on December
31, 2003 was 11.



Dividend Policy



We announced on February 16, 1994 that our Board of Directors was initiating a cash
dividend program payable at an annual rate of 1 cent per common share. On February 8, 1999, we announced an increase in the cash dividend per share to an annual rate of 1.5 cents per common share. The Board declared quarterly dividends of 0.375
cents per share to stockholders of record as of the close of business on the last day of each quarter in 2001 and for the first quarter of 2002. The Board declared quarterly dividends of 0.5 cents per share to stockholders of record as of the close
of business on the last day of the second quarter of 2002 through the second quarter of 2003. The Board a declared quarterly dividend of 1 cent per share to stockholders of record as of the close of business on the last day of the third quarter of
2003. The Board declared a quarterly dividend of 2 cents per share to stockholders of record as of the close of business on the last day of the fourth quarter of 2003. The payment of any future dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, operations, capital requirements, our general financial condition and general business conditions. We are currently limited in the extent to which we are able to pay dividends
under our revolving credit agreement. See Note D to our Consolidated Financial Statements.



11



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##### Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans



The following table provides information with respect to compensation plans (including
individual compensation arrangements) under which equity securities of KSwiss are authorized for issuance to employees or non-employees (such as directors, consultants, advisors, vendors, customers, suppliers or lenders), as of December 31,
2003:



|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |      | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|                                                           |  | (a)                                                                                         |  | (b)                                                                         |      | (c)                                                                                                                                        
|Equity compensation plans approved by security holders     |  | 3,669,270                                                                                   |  | $                                                                           | 7.17 |                                                                                                                                             | 232,032
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |     |                                                                                                                                             |       
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|Total                                                      |  | 3,669,270                                                                                   |  | $                                                                           | 7.17 |                                                                                                                                             | 232,032
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        



Purchases of Equity Securities



The following table provides information with respect to purchases
made by KSwiss of KSwiss Class A Common Stock during the fourth quarter of 2003:



|                                     |  |                                  |  |                              |       |                                                                        |           |                                                                      |   |           
|------------------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | ---------------------------------------------------------------------- | --------- | -------------------------------------------------------------------- | - | ----------
|                                     |  | Total Number of Shares Purchased |  | Average Price Paid per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Program |           | Approximate Dollar Value that May Yet Be Purchased Under the Program
|                                     |  |                                  |  |                              |       |                                                                        |           | (A), (B)                                                            
|October 1 through October 31, 2003   |  | 40,000                           |  | $                            | 19.00 |                                                                        | 1,760,600 |                                                                      | $ | 26,715,000
|November 1 through November 30, 2003 |  |                                 |  |                              |      |                                                                        | 1,760,600 |                                                                      | $ | 26,715,000
|December 1 through December 31, 2003 |  |                                 |  |                              |      |                                                                        | 1,760,600 |                                                                      | $ | 26,715,000
|                                     |  |                                  |  |                              |       |                                                                        |           |                                                                      |   |           
|Total                                |  | 40,000                           |  | $                            | 19.00 |                                                                        | 1,760,600 |                                                                      | $ | 26,715,000
|                                     |  |                                  |  |                              |       |                                                                        |           |                                                                      |   |           

---

|(A) |  | In October 2002, the Board of Directors approved a $25 million stock repurchase program. This program expires in December 2007. At December 31, 2003, the number of shares purchased under this
program was 1,760,600 and the remaining available yet to be purchased is $1,715,000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(B) |  | In October 2003, the Board of Directors approved an additional $25 million stock repurchase program. There was no activity under this program during 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

|Item 6. |  | Selected Financial Data
|------- |  | -----------------------



The selected consolidated financial data presented below for each of the five years in the period ended December 31, 2003 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. Prior
year data has been restated to reflect the National Geographic brand as a discontinued operation in order to conform to the selected financial data for December 31, 2003.



|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------- |  | - | -------
|                                                                    |  | Year ended December 31,              
|                                                                    |  | 2003                                  |         |   | 2002 |   |         | 2001 |  |   | 2000    |   | 1999
|                                                                    |  | (In thousands, except per share data)
|Income Statement Data                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Revenues (1)                                                        |  | $                                     | 429,162 |   |      | $ | 289,593 |      |  | $ | 237,252 |   |      | $ | 223,102 |  | $ | 286,856
|Cost of goods sold                                                  |  |                                       | 235,603 |   |      |   | 159,026 |      |  |   | 137,978 |   |      |   | 132,888 |  |   | 162,658
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Gross profit                                                        |  |                                       | 193,559 |   |      |   | 130,567 |      |  |   | 99,274  |   |      |   | 90,214  |  |   | 124,198
|Selling, general and administrative expenses (1)                    |  |                                       | 106,267 |   |      |   | 79,258  |      |  |   | 60,722  |   |      |   | 58,773  |  |   | 69,244 
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Operating profit                                                    |  |                                       | 87,292  |   |      |   | 51,309  |      |  |   | 38,552  |   |      |   | 31,441  |  |   | 54,954 
|Interest income, net                                                |  |                                       | 699     |   |      |   | 1,058   |      |  |   | 1,827   |   |      |   | 3,597   |  |   | 1,784  
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings from continuing operations before income taxes             |  |                                       | 87,991  |   |      |   | 52,367  |      |  |   | 40,379  |   |      |   | 35,038  |  |   | 56,738 
|Income tax expense                                                  |  |                                       | 34,199  |   |      |   | 20,554  |      |  |   | 16,074  |   |      |   | 13,979  |  |   | 22,454 
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings from continuing operations                                 |  |                                       | 53,792  |   |      |   | 31,813  |      |  |   | 24,305  |   |      |   | 21,059  |  |   | 34,284 
|Loss from discontinued operations, less applicable income taxes (2) |  |                                       | (3,736  | ) |      |   | (3,116  | )    |  |   | (996    | ) |      |   |        |  |   |       
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net earnings                                                        |  | $                                     | 50,056  |   |      | $ | 28,697  |      |  | $ | 23,309  |   |      | $ | 21,059  |  | $ | 34,284 
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings per share (3)                                              |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Basic:                                                              |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings from continuing operations                                 |  | $                                     | 1.52    |   |      | $ | 0.87    |      |  | $ | 0.63    |   |      | $ | 0.51    |  | $ | 0.78   
|Loss from discontinued operations                                   |  |                                       | (0.11   | ) |      |   | (0.09   | )    |  |   | (0.03   | ) |      |   |        |  |   |       
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net earnings                                                        |  | $                                     | 1.41    |   |      | $ | 0.78    |      |  | $ | 0.60    |   |      | $ | 0.51    |  | $ | 0.78   
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Diluted:                                                            |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings from continuing operations                                 |  | $                                     | 1.42    |   |      | $ | 0.81    |      |  | $ | 0.59    |   |      | $ | 0.49    |  | $ | 0.75   
|Loss from discontinued operations                                   |  |                                       | (0.10   | ) |      |   | (0.08   | )    |  |   | (0.02   | ) |      |   |        |  |   |       
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net earnings                                                        |  | $                                     | 1.32    |   |      | $ | 0.73    |      |  | $ | 0.57    |   |      | $ | 0.49    |  | $ | 0.75   
|                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Weighted average number of sharesoutstanding (3)                    |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Basic                                                               |  |                                       | 35,396  |   |      |   | 36,700  |      |  |   | 38,591  |   |      |   | 41,131  |  |   | 43,888 
|Diluted (4)                                                         |  |                                       | 37,913  |   |      |   | 39,415  |      |  |   | 40,947  |   |      |   | 43,000  |  |   | 45,806 
|                                                                    |  |                                       |         |   |     
|Balance Sheet Data (at period end)                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Current assets                                                      |  | $                                     | 213,895 |   |      | $ | 163,793 |      |  | $ | 140,888 |   |      | $ | 142,677 |  | $ | 131,230
|Current liabilities                                                 |  |                                       | 36,509  |   |      |   | 30,875  |      |  |   | 21,934  |   |      |   | 22,109  |  |   | 17,442 
|Total assets                                                        |  |                                       | 234,630 |   |      |   | 183,883 |      |  |   | 160,799 |   |      |   | 157,427 |  |   | 146,772
|Total debt (5)                                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   | 1,046   |  |   | 853    
|Stockholders equity                                                |  |                                       | 179,527 |   |      |   | 139,793 |      |  |   | 124,359 |   |      |   | 120,219 |  |   | 112,030

---

|(1) |  | Freight billed to customers has been reclassified from operating expenses to revenues for the years ended December 31, 2001, 2000 and 1999 in the amounts of $1,207,000, $1,473,000 and
$1,359,000, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | In the fourth quarter of 2003, the Company agreed with National Geographic to end our licensing agreement. Operations of the National Geographic brand have been accounted for as a
discontinued operation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The amounts reflect the effect of the two-for-one stock split announced by the Company on December 11, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------



|(4) |  | Includes common stock and dilutive potential common stock (options).
|--- |  | --------------------------------------------------------------------



|(5) |  | Includes all interest-bearing debt and capital lease obligations, but excludes outstanding letters of credit ($2,083,000, $4,560,000, $3,517,000, $5,021,000 and $8,765,000 as of December 31,
2003, 2002, 2001, 2000 and 1999, respectively).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|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 us or our 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 we file 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
our competitors; intense competition among designers, marketers, distributors and sellers of athletic footwear and apparel for consumers and endorsers; market acceptance of our training shoe line; market acceptance of new Limited Edition product;
market acceptance of non-performance product in Europe; 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 our products; the size, timing and mix of purchases of our 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; our ability to continue, manage or forecast our growth and inventories; new product development and commercialization; the ability to
secure and protect trademarks, patents, and other intellectual property; difficulties in implementing, operating and maintaining our increasingly complex information systems and controls; concentration of production in China; potential earthquake
disruption due to the location of our warehouse and headquarters; potential disruption in supply chain, due to various factors including but not limited to Bovine Spongiform Encephalopathy (Mad Cow Disease), or customer purchasing
habits, due to various factors including but not limited to health concerns relating to severe acute respiratory syndrome or other related illnesses; performance and reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; dependence on major customers; concentration of credit risk; 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 us; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports.



KSwiss (the Company, we, us, and our) 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 we assess the impact of all such risk factors on our 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.



14



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##### Table of Contents

Investors should also be aware that while we communicate, from time to time, with securities analysts, it is
against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the
content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections,
forecasts or opinions, such reports are not our responsibility.



Overview



The Company designs, develops and markets athletic footwear for
high performance sports use, fitness activities and casual wear under the KSwiss brand, and also designs and manufactures footwear under the Royal Elastics brand. Royal Elastics is our wholly owned subsidiary. The categories of footwear we
sell is explained in more detail in Item 1, under the subheading, Products. We market our products in the United States (through our sales executives and independent sales representatives) primarily to a limited number of specialty
athletic footwear stores, pro shops, sporting good stores and department stores. We also sell through our products through our website and to a number of foreign distributors.



In the fourth quarter of 2003, we reached an agreement with National Geographic to end our licensing agreement. Operations of the
National Geographic brand have been accounted for and shown as a discontinued operation in the accompanying financial information.



In 2003, we had a net cash inflow of approximately $34,904,000 from continuing operating activities and a net cash outflow from investing activities due to the net
purchase of property, plant and equipment. We anticipate future cash needs for principal repayments required pursuant to any borrowings under our lines of credit and, depending on future growth, additional funds may be required by operating
activities.



On October 22, 2003, our Board of Directors authorized a new
stock repurchase program to repurchase up to an additional $25 million of Class A Common Stock from time to time on the open market. This program was adopted because we believe repurchasing our shares can be a good use of excess cash.



There was no debt at December 31, 2003 (excluding outstanding letters of credit of
$2,083,000 million), and our working capital increased $44,468,000 to approximately $177,386,000 at December 31, 2003 from $132,918,000 at December 31, 2002.



At December 31, 2003, our total futures orders with start ship dates from January through June 2004 were $224,863,000, an increase of 33.5% from the comparable
period of the prior year. Of this amount, domestic futures orders were $193,390,000, an increase of 31.2%, and international futures orders were $31,473,000, an increase of 49.7%. Notwithstanding the foregoing, we recognize that the athletic
footwear industry is highly competitive. Each of the largest makers of footwear have substantially greater financial, distribution and marketing resources as well as greater brand awareness than us.



Because we record revenues when title passes and the risks and rewards of ownership
have passed to the customer, our revenues may fluctuate in cases when our customers delay accepting shipment of products. Our total revenues increased 48.2% in 2003 from 2002, due to an increase in the volume of footwear sold offset by a decrease in
the average underlying wholesale price, and our overall gross profit margins, as a percentage of revenues, was 45.1% in 2003 and 2002. Likewise, our overall selling, general and administrative expenses also increased 34.1% in 2003 from 2002.



15



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##### Table of Contents

In 2003, our largest single marketing expenditure was television. Our marketing campaign was run mainly on network
and cable television, and was supported by sports, music and general interest/fashion magazines. Our independent sales representatives sold to approximately 3,000 separate accounts as of December 31, 2003 (up from 2,900 as of December 31, 2002).
Internationally, by the end of 2003, we were working through 6 international subsidiaries and 16 distributors to market our products in potentially 49 countries. Also, during 2003, the Foot Locker store group and its affiliates accounted for
approximately 27% of total revenues.



In 2003, approximately 99% of our
footwear products were manufactured in China. We have no long-term manufacturing agreements, but we believe that our relationships with our producers are satisfactory and that we will have the ability to develop alternative sources for our footwear,
as well. Our operations could, however, be materially and adversely affected if a substantial delay occurred in locating and obtaining alternative producers.



Critical Accounting Policies



Our significant accounting policies are described in Note A to the consolidated financial statements included in Item 8 of this Form 10-K. Our discussion and
analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.



On an on-going basis, we evaluate our estimates, including those related to the
carrying value of inventories, realizability of outstanding accounts receivable, sales returns and allowances, and the provision for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. In the past, actual results have not been materially different from our estimates. However, results
may differ from these estimates under different assumptions or conditions.



We have identified the following as critical accounting policies, based on the significant judgments and estimates used in determining the amounts reported in our consolidated financial statements:



Revenue Recognition



We record revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale.
Title passes generally upon shipment.



In some instances, we ship product
directly from our supplier to the customer. In these cases, we recognize revenue when the product is delivered to the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several
weeks.



As part of our revenue recognition policy, we record the
estimated income reductions from estimated sales returns and allowances. We base our estimates on historical rates of returns and allowances. In the past, actual returns and allowances have not exceeded our reserves. However, actual returns and
allowances in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and allowances were significantly greater or lower than the reserves we had established, we would record a
reduction or increase in the period in which we made such determination.



16



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##### Table of Contents

Accounts Receivable



We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate potential
losses based on our knowledge of the financial condition of certain customers, as well as an assessment of the overall conditions at retail. Historically, losses have been within our expectations. If the financial condition of our customers were to
change, adjustments may be required to these estimates. Furthermore, we provide for estimated losses resulting from differences that arise from the gross carrying value of our receivables and the amounts which customers estimate are owed to us. The
settlement or resolution of these differences could result in future changes to these estimates.



Inventory Reserves



We also make ongoing estimates
relating to the market value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record
a reserve equal to the difference between the cost of the inventory and the estimated market value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated market value of our
inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales.



Other Contingencies



In the ordinary course of business, we are involved in legal proceedings involving contractual and employment relationships, product liability claims, trademark
rights, and a variety of other matters. We record contingent liabilities resulting from claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities
when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgment about the potential actions of third party claimants
and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations.
However, if actual or estimated probable future losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred.



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.



|                                                        |  |                         |   |  |       |   |  |       |  
|------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                        |  | Year ended December 31, |  
|                                                        |  | 2003                    |   |  | 2002  |   |  | 2001  |  
|Revenues                                                |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                                      |  | 54.9                    |   |  | 54.9  |   |  | 58.2  |  
|Gross profit                                            |  | 45.1                    |   |  | 45.1  |   |  | 41.8  |  
|Selling, general and administrative expenses            |  | 24.8                    |   |  | 27.4  |   |  | 25.6  |  
|Interest income, net                                    |  | 0.2                     |   |  | 0.4   |   |  | 0.8   |  
|Earnings from continuing operations before income taxes |  | 20.5                    |   |  | 18.1  |   |  | 17.0  |  
|Income tax expense                                      |  | 8.0                     |   |  | 7.1   |   |  | 6.8   |  
|Earnings from continuing operations                     |  | 12.5                    |   |  | 11.0  |   |  | 10.2  |  
|Loss from discontinued operations                       |  | (0.8                    | ) |  | (1.1  | ) |  | (0.4  | )
|Net earnings                                            |  | 11.7                    |   |  | 9.9   |   |  | 9.8   |  



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##### Table of Contents

2003 Compared to 2002



Total revenues increased 48.2% to $429,162,000 in 2003 from $289,593,000 in 2002. This increase was attributable to an increase in the volume of footwear sold
partially offset by a decrease in the average underlying wholesale price per pair. The volume of footwear sold increased 50.2% to 16,939,000 pair in 2003 from 11,275,000 pair in 2002. The average wholesale price per pair was $24.81 in 2003 and
$24.85 in 2002.



Domestic revenues increased 50.1% to $372,443,000 in
2003 from $248,048,000 in 2002. International product revenues increased 37.2% in 2003 to $54,640,000 from $39,819,000 in 2002. Fees earned by the Company on sales by foreign licensees and distributors were $2,079,000 for 2003 and $1,726,000 for
2002. International revenues, as a percentage of total revenues, decreased to 13.2% in 2003 from 14.3% in 2002.



KSwiss brand revenues increased 48.3% to $423,696,000 in 2003 from $285,780,000 in 2002. This increase was the result of an increase in the volume of footwear
sold at slightly lower average wholesale prices per pair. The volume of footwear sold increased 50.4% to 16,718,000 pair in 2003 from 11,117,000 pair in 2002. The average wholesale price per pair was $24.83 in 2003 and $24.88 in 2002. The major
changes in volume for footwear categories are as follows: Classics, training, tennis and childrens categories increased 51.4%, 110.7%, 49.2% and 38.5%, respectively.



Royal Elastics brand revenues were $5,466,000 in 2003 (28% domestic) and $3,813,000 in 2002 (27% domestic).



We believe 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. We present 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, 2003, domestic and international futures orders with start ship dates from January through June 2004 were approximately $193,390,000 and $31,473,000, respectively, 31.2% and 49.7% higher, respectively, than such orders were
at December 31, 2002 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.



Overall gross profit margins, as a percentage of revenues, were 45.1% in 2003 and 2002.



Overall selling, general and administrative expenses increased 34.1% to $106,267,000 (24.8% of revenues) in 2003 from $79,258,000
(27.4% of revenues) in 2002. The increase in the amounts for the year ended December 31, 2003 compared to the year ended December 31, 2002 was primarily the result of increases in advertising expenses, compensation and related expenses, including an
increase in the bonus accrual for an employee incentive program, commission due to increased revenues, legal expenses and warehousing expenses.



Overall net interest income was $699,000 (0.2% of revenues) in 2003 compared to $1,058,000 (0.4% of revenues) in 2002, a decrease of $359,000 or 33.9%. This
decrease in net interest income was the result of significantly lower average interest rates as well as lower average balances.



Our effective tax rate was 38.9% and 39.3% in 2003 and 2002, respectively. The $3,965,000 and $4,474,000 income tax benefit of options exercised during 2003 and
2002, respectively, were credited to additional paid-in capital and therefore did not impact the effective tax rate.



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The net loss from discontinued operations was $3,736,000 in 2003 compared to $3,116,000 in 2002. Included in 2003
was a $2,000,000 settlement to terminate our agreement with National Geographic and a $746,000 impairment loss on the National Geographic license.



Net earnings increased 74.4% to $50,056,000 or $1.32 per share (diluted earnings per share) in 2003 from $28,697,000 or $0.73 per share (diluted earnings per share)
in 2002.



2002 Compared to 2001



Total revenues increased 22.1% to $289,593,000 in 2002 from $237,252,000 in 2001. This
increase was attributable to an increase in the volume of footwear sold partially offset by a decrease in the average underlying wholesale price per pair. The volume of footwear sold increased 27.8% to 11,275,000 pair in 2002 from 8,820,000 pair in
2001. The average wholesale price per pair was $24.85 in 2002 and $26.09 in 2001.



Domestic revenues increased 20.2% to $248,048,000 in 2002 from $206,416,000 in 2001. International product revenues increased 33.2% in 2002 to $39,819,000 from $29,884,000 in 2001. Fees earned by the Company on sales by foreign licensees
and distributors were $1,726,000 for 2002 and $952,000 for 2001. International revenues, as a percentage of total revenues, increased to 14.3% in 2002 from 13.0% in 2001.



KSwiss brand revenues increased 20.5% to $285,780,000 in 2002 from $237,243,000 in 2001. This increase was the result of an
increase in the volume of footwear sold at slightly lower average wholesale prices per pair. The volume of footwear sold increased 26.0% to 11,117,000 pair in 2002 from 8,820,000 pair in 2001. The average wholesale price per pair was $24.88 in 2002
and $26.09 in 2001. The major changes in volume for footwear categories are as follows: Classics, childrens and training categories increased 27.1%, 28.2% and 19.2%, respectively.



Royal Elastics brand revenues were $3,813,000 in 2002 (27% domestic) and $9,000 in 2001.



Overall gross profit margins, as a percentage of revenues, increased to 45.1% in 2002
from 41.8% in 2001. Gross profit margins increased primarily due to achievement of target costing objectives and higher levels of at-once business than in the prior year.



Overall selling, general and administrative expenses increased 30.5% to $79,258,000 (27.4% of revenues) in 2002 from $60,722,000
(25.6% of revenues) in 2001. The increase in the amounts for the year ended December 31, 2002 compared to the year ended December 31, 2001 was primarily the result of increases in advertising, payroll and related expenses (partially as a result of
the Royal Elastics brand), bonus expense for an employee incentive program and development expenses resulting from an increase in product development activities.



Overall net interest income was $1,058,000 (0.4% of revenues) in 2002 compared to $1,827,000 (0.8% of revenues) in 2001, a decrease of
$769,000 or 42.1%. This decrease in net interest income was the result of significantly lower average interest rates as well as lower average balances.



Our effective tax rate decreased to 39.3% in 2002 from 39.8% in 2001. The $4,474,000 and $529,000 income tax benefit of options exercised during 2002 and 2001,
respectively, were credited to additional paid-in capital and therefore did not impact the effective tax rate.



The net loss from discontinued operations was $3,116,000 in 2002 compared to $996,000 in 2001, in which 2002 represents a full years worth of operations.



Net earnings increased 23.1% to $28,697,000 or $0.73 per share (diluted
earnings per share) in 2002 from $23,309,000 or $0.57 per share (diluted earnings per share) in 2001.



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Liquidity and Capital Resources



We experienced a net cash inflow of approximately $34,904,000, $30,330,000 and $23,193,000 from our continuing operating activities during 2003, 2002 and 2001,
respectively. Cash provided by continuing operations in 2003 increased from 2002, and increased in 2002 from 2001, due primarily to differences in the amounts of changes in inventories, accounts receivable and accounts payable and accrued
liabilities, as well as an increase in net earnings.



We had a net
outflow of cash from our investing activities during 2003 and 2002 due to the net purchase of property, plant and equipment.



In 2003 and 2002, the net outflow of cash from our financing activities was used for the purchase of treasury stock and to pay cash dividends, partially offset by
proceeds from stock options exercised.



We anticipate future cash needs
for principal repayments required pursuant to any borrowings under our lines of credit facilities. In addition, depending on our future growth rate, additional funds may be required by operating activities. Finally, at December 31, 2003,
approximately $22,201,000 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, we will use approximately $8,614,000 in
cash to pay income taxes previously accrued on these foreign subsidiary earnings. Our intention is to repatriate earnings of foreign operations as cash needs and other circumstances require. No other material capital commitments exist at December
31, 2003. With continued use of our revolving credit facility (as discussed below), we believe our present and currently anticipated sources of capital are sufficient to sustain our anticipated capital needs for the remainder of 2004.



In October 2002, we announced the completion of our September 2001 $25 million stock
repurchase program and a new authorization by the Board of Directors for us to repurchase through December 2007 up to an additional $25 million of our Class A Common Stock from time to time on the open market, as market conditions warrant. On
October 22, 2003, the Board of Directors authorized a new stock repurchase program to repurchase through December 2008 up to an additional $25 million of our Class A Common Stock. We adopted this program because we believe repurchasing our shares
can be a good use of excess cash depending on our array of alternatives. Currently, we have made purchases under all stock repurchase programs from August 1996 through February 4, 2004 (the day prior to the filing of the Form 10-K) of 23.0 million
shares at an aggregate cost totaling approximately $108,569,000.



In May
2003, we signed an amendment to our July 2001 agreement with a bank whereby we 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 $14,006,000 at December 31, 2003. This facility currently expires in July 2005. The credit facility provides for interest to be paid at the prime rate less 3/4% or, at our discretion and with certain restrictions, other
market based rates. We pay a commitment fee of 1/8% of the unused line for availability of the credit facility. We must meet certain restrictive financial covenants as agreed upon in the facility. At December 31, 2003, we were in compliance with our
covenants.



Our Asian offices have agreements with a bank whereby they
can borrow up to $5,250,000 in the form of unsecured revolving credit facilities. The unused portion of these credit facilities was $4,161,000 at December 31, 2003. These facilities are made available until terminated by either party.



Our European offices have agreements with a bank whereby they can borrow up to
$6,000,000 in the form of unsecured revolving credit facilities. The unused portion of these credit facilities was $6,000,000 at December 31, 2003. These facilities are made available until terminated by either party.



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There was no debt at December 31, 2003 and December 31, 2002 (excluding outstanding letters of credit of $2,083,000
and $4,560,000 at December 31, 2003 and 2002, respectively).



At December
31, 2003, our operating lease obligations were as follows (in thousands):



|                            |  |                        |       |                    |   |                    |  |                     |       |                      |   |     |  |   |  
|--------------------------- |  | ---------------------- | ----- | ------------------ | - | ------------------ |  | ------------------- | ----- | -------------------- | - | --- |  | - | -
|                            |  | Payments due by period
|                            |  | Total                  |       | Less than one year |   | One to three years |  | Three to five years |       | More than five years
|Operating lease obligations |  | $                      | 5,728 |                    | $ | 2,348              |  | $                   | 3,080 |                      | $ | 294 |  | $ | 6
|                            |  |                        |       |                    |   |                    |  |                     |       |                      |   |     |  |   |  



We did not enter into any
off-balance sheet arrangements during 2003 or 2002, nor did we have any off-balance sheet arrangements outstanding at December 31, 2003 or 2002.



Our working capital increased $44,468,000 to $177,386,000 at December 31, 2003 from $132,918,000 at December 31, 2002.



We have historically maintained higher levels of inventory relative to sales compared
to our competitors because (1) we do not ship directly to our major domestic customers from our foreign contract manufacturers to the same extent as our larger competitors, which would reduce inventory levels and increase inventory turns, and (2)
unlike many of our competitors, we designate certain shoes as core products whereby we commit to our retail customers that we will carry core products from season to season and, therefore, we attempt to maintain open-stock positions on our core
products in our Mira Loma, California distribution center to meet at-once orders. We intend to increase direct shipments to our customers from our foreign contract manufacturers in 2004.



|Item 7A. |  | 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. Our 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 our 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 us to market risk from unfavorable movements in foreign exchange rates between the U.S. dollar and the foreign currency. Our historical primary risk exposures have been from changes in the rates between the U.S. dollar
and the Euro. This trend is expected to continue. In 2003, we did not enter into forward exchange contracts to sell foreign currency denominated in Euros to fix the U.S. dollar amount we will receive on sales denominated in that currency. The extent
to which forward exchange contracts are used is modified periodically in response to our managements estimate of market conditions and the terms and length of specific sales contracts.



We enter 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 us to reduce our 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. We do



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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 us 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, we are 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 Company did not have any foreign currency forward exchange contracts outstanding as of December 31, 2003 and 2002.



Inflation



We believe that distributors of footwear in the higher priced end of the footwear market, including ours, 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 our 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 15(a) of this Report.



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##### Table of Contents

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, 2003 and 2002, 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,
2003. 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, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 2003, 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, 2003. 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 30, 2004



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##### Table of Contents

KSWISS INC.



CONSOLIDATED BALANCE
SHEETS



December 31,



(Dollar amounts in thousands)



|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                                               |  | 2003 |         | 2002 |  
|ASSETS                                                                                                                                                                                                                                         |  |      |         |      |  
|                                                                                                                                                                                                                                               |  |     
|CURRENT ASSETS                                                                                                                                                                                                                                 |  |      |         |      |   |         |  
|Cash and cash equivalents (Note A4)                                                                                                                                                                                                            |  | $    | 81,455  |      | $ | 67,593  |  
|Accounts receivable, less allowance for doubtful accounts of $2,079 and $1,479 for 2003 and 2002, respectively (Notes A13 and K)                                                                                                               |  |      | 51,006  |      |   | 37,048  |  
|Inventories (Note A5)                                                                                                                                                                                                                          |  |      | 73,660  |      |   | 53,227  |  
|Prepaid expenses and other                                                                                                                                                                                                                     |  |      | 4,760   |      |   | 3,497   |  
|Deferred taxes (Notes A9 and G)                                                                                                                                                                                                                |  |      | 3,014   |      |   | 2,428   |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|Total current assets                                                                                                                                                                                                                           |  |      | 213,895 |      |   | 163,793 |  
|PROPERTY, PLANT AND EQUIPMENT, net (Notes A6, A7 and B)                                                                                                                                                                                        |  |      | 8,596   |      |   | 8,444   |  
|OTHER ASSETS                                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Intangible assets (Notes A7, A8, C and L)                                                                                                                                                                                                      |  |      | 7,301   |      |   | 8,107   |  
|Other                                                                                                                                                                                                                                          |  |      | 4,838   |      |   | 3,539   |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|                                                                                                                                                                                                                                               |  |      | 12,139  |      |   | 11,646  |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|                                                                                                                                                                                                                                               |  | $    | 234,630 |      | $ | 183,883 |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                           |  |      |         |      |  
|                                                                                                                                                                                                                                               |  |     
|CURRENT LIABILITIES                                                                                                                                                                                                                            |  |      |         |      |   |         |  
|Bank lines of credit (Note D)                                                                                                                                                                                                                  |  | $    |        |      | $ |        |  
|Trade accounts payable                                                                                                                                                                                                                         |  |      | 19,447  |      |   | 13,936  |  
|Accrued liabilities (Note E)                                                                                                                                                                                                                   |  |      | 17,062  |      |   | 16,939  |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|Total current liabilities                                                                                                                                                                                                                      |  |      | 36,509  |      |   | 30,875  |  
|OTHER LIABILITIES (Note F)                                                                                                                                                                                                                     |  |      | 15,234  |      |   | 7,408   |  
|DEFERRED TAXES (Notes A9 and G)                                                                                                                                                                                                                |  |      | 3,360   |      |   | 5,807   |  
|                                                                                                                                                                                                                                               |  |     
|COMMITMENTS AND CONTINGENCIES (Note H)                                                                                                                                                                                                         |  |      |        |      |   |        |  
|                                                                                                                                                                                                                                               |  |     
|STOCKHOLDERS EQUITY (Notes D and J)                                                                                                                                                                                                           |  |      |         |      |   |         |  
|Preferred Stockauthorized 2,000,000 shares of $0.01 par value; none issued and outstanding                                                                                                                                                    |  |      |        |      |   |        |  
|Common Stock:                                                                                                                                                                                                                                  |  |      |         |      |   |         |  
|Class Aauthorized 90,000,000 shares of $0.01 par value; 26,755,362 shares issued and outstanding at December 31, 2003 and 47,283,902 shares
issued, 25,667,574 shares outstanding and 21,616,328 shares held in treasury at December 31, 2002 |  |      | 268     |      |   | 473     |  
|Class Bauthorized 18,000,000 shares of $0.01 par value; issued and outstanding 8,682,734 shares at December 31, 2003 and 10,484,346 shares at
December 31, 2002                                                                               |  |      | 87      |      |   | 105     |  
|Additional paid-in capital                                                                                                                                                                                                                     |  |      | 31,059  |      |   | 47,612  |  
|Treasury Stock                                                                                                                                                                                                                                 |  |      |        |      |   | (89,135 | )
|Retained earnings                                                                                                                                                                                                                              |  |      | 143,427 |      |   | 180,318 |  
|Accumulated other comprehensive earningsForeign currency translation (Note A10)                                                                                                                                                               |  |      | 4,686   |      |   | 420     |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|                                                                                                                                                                                                                                               |  |      | 179,527 |      |   | 139,793 |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  
|                                                                                                                                                                                                                                               |  | $    | 234,630 |      | $ | 183,883 |  
|                                                                                                                                                                                                                                               |  |      |         |      |   |         |  



The accompanying notes are an
integral part of these statements.



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KSWISS INC.



CONSOLIDATED
STATEMENTS OF EARNINGS

AND COMPREHENSIVE EARNINGS



Year Ended December 31,



(Dollar amounts in thousands, except per share amounts)



|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                                                             |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Revenues (Notes A13, K and N)                                                                                                                                                |  | $    | 429,162 |   |      | $ | 289,593 |      |  | $ | 237,252 |  
|Cost of goods sold                                                                                                                                                           |  |      | 235,603 |   |      |   | 159,026 |      |  |   | 137,978 |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Gross profit                                                                                                                                                                 |  |      | 193,559 |   |      |   | 130,567 |      |  |   | 99,274  |  
|Selling, general and administrative expenses (Notes A13and A14)                                                                                                              |  |      | 106,267 |   |      |   | 79,258  |      |  |   | 60,722  |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Operating profit                                                                                                                                                             |  |      | 87,292  |   |      |   | 51,309  |      |  |   | 38,552  |  
|Interest income, net                                                                                                                                                         |  |      | 699     |   |      |   | 1,058   |      |  |   | 1,827   |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations before income taxes                                                                                                                      |  |      | 87,991  |   |      |   | 52,367  |      |  |   | 40,379  |  
|Income tax expense (Notes A9 and G)                                                                                                                                          |  |      | 34,199  |   |      |   | 20,554  |      |  |   | 16,074  |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations                                                                                                                                          |  |      | 53,792  |   |      |   | 31,813  |      |  |   | 24,305  |  
|Loss from discontinued operations, less applicable income tax benefit of $2,360, $1,983 and $634 for the years ended December 31, 2003, 2002 and 2001,
respectively (Note L) |  |      | (3,736  | ) |      |   | (3,116  | )    |  |   | (996    | )
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|NET EARNINGS                                                                                                                                                                 |  | $    | 50,056  |   |      | $ | 28,697  |      |  | $ | 23,309  |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                                                             |  |      |        
|Earnings per common share (Note A15)                                                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Basic:                                                                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations                                                                                                                                          |  | $    | 1.52    |   |      | $ | 0.87    |      |  | $ | 0.63    |  
|Loss from discontinued operations                                                                                                                                            |  |      | (0.11   | ) |      |   | (0.09   | )    |  |   | (0.03   | )
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net Earnings                                                                                                                                                                 |  | $    | 1.41    |   |      | $ | 0.78    |      |  | $ | 0.60    |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted:                                                                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations                                                                                                                                          |  | $    | 1.42    |   |      | $ | 0.81    |      |  | $ | 0.59    |  
|Loss from discontinued operations                                                                                                                                            |  |      | (0.10   | ) |      |   | (0.08   | )    |  |   | (0.02   | )
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net Earnings                                                                                                                                                                 |  | $    | 1.32    |   |      | $ | 0.73    |      |  | $ | 0.57    |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                                                             |  |      |        
|Net Earnings                                                                                                                                                                 |  | $    | 50,056  |   |      | $ | 28,697  |      |  | $ | 23,309  |  
|Other comprehensive earnings (loss), net of taxForeign currency translation adjustments                                                                                     |  |      | 4,266   |   |      |   | 1,188   |      |  |   | (180    | )
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Comprehensive earnings                                                                                                                                                       |  | $    | 54,322  |   |      | $ | 29,885  |      |  | $ | 23,129  |  
|                                                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  



The accompanying notes are an
integral part of these statements.



25



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##### Table of Contents

KSWISS INC.



CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY



Three years ended December 31, 2003



(Dollar amounts in thousands)



|                                            |  |              |   |  |                            |      |   |                |            |   |                   |   |     |                                          |        |   |         |        |  |             |   |  |   |         |   |  |   |         |   |  |   |       |   |  |   |         |  
|------------------------------------------- |  | ------------ | - |  | -------------------------- | ---- | - | -------------- | ---------- | - | ----------------- | - | --- | ---------------------------------------- | ------ | - | ------- | ------ |  | ----------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|                                            |  | Common Stock |   |  | Additional paid-in capital |      |   | Treasury Stock |            |   | Retained earnings |   |     | Accumulated other comprehensive earnings |        |   | Total   |       
|                                            |  | Class A      |   |  | Class B                    |      |   |                | Class A    |   |                   |   |    
|                                            |  | Shares       |   |  | Amount                     |      |   | Shares         |            |   | Amount            |   |     |                                          | Shares |   |         | Amount |  |             |   | 
|Balance at January 1, 2001                  |  | 44,321,196   |   |  | $                          | 443  |   |                | 11,933,912 |   |                   | $ | 119 |                                          |        | $ | 40,023  |        |  | 16,351,328  |   |  | $ | (49,348 | ) |  | $ | 129,570 |   |  | $ | (588  | ) |  | $ | 120,219 |  
|Conversion of shares (Note J)               |  | 320,000      |   |  |                            | 3    |   |                | (320,000   | ) |                   |   | (3  | )                                        |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   |        |  
|Exercise of options (Note J)                |  | 272,392      |   |  |                            | 3    |   |                |           |   |                   |   |    |                                          |        |   | 388     |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 391     |  
|Income tax benefit of options exercised     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   | 529     |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 529     |  
|Purchase of treasury stock                  |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  | 3,184,800   |   |  |   | (19,338 | ) |  |   |        |   |  |   |      |   |  |   | (19,338 | )
|Dividends paid ($0.015 per share) (Note D)  |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | (571    | ) |  |   |      |   |  |   | (571    | )
|Net earnings for the year                   |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | 23,309  |   |  |   |      |   |  |   | 23,309  |  
|Foreign currency translation (Note A10)     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   | (180  | ) |  |   | (180    | )
|                                            |  |              |   |  |                            |      |   |                |            |   |                   |   |     |                                          |        |   |         |        |  |             |   |  |   |         |   |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2001                |  | 44,913,588   |   |  |                            | 449  |   |                | 11,613,912 |   |                   |   | 116 |                                          |        |   | 40,940  |        |  | 19,536,128  |   |  |   | (68,686 | ) |  |   | 152,308 |   |  |   | (768  | ) |  |   | 124,359 |  
|Conversion of shares (Note J)               |  | 1,129,566    |   |  |                            | 11   |   |                | (1,129,566 | ) |                   |   | (11 | )                                        |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   |        |  
|Exercise of options (Note J)                |  | 1,240,748    |   |  |                            | 13   |   |                |           |   |                   |   |    |                                          |        |   | 2,198   |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 2,211   |  
|Income tax benefit of options exercised     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   | 4,474   |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 4,474   |  
|Purchase of treasury stock                  |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  | 2,080,200   |   |  |   | (20,449 | ) |  |   |        |   |  |   |      |   |  |   | (20,449 | )
|Dividends paid ($0.01875 per share)(Note D) |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | (687    | ) |  |   |      |   |  |   | (687    | )
|Net earnings for the year                   |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | 28,697  |   |  |   |      |   |  |   | 28,697  |  
|Foreign currency translation (Note A10)     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   | 1,188 |   |  |   | 1,188   |  
|                                            |  |              |   |  |                            |      |   |                |            |   |                   |   |     |                                          |        |   |         |        |  |             |   |  |   |         |   |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2002                |  | 47,283,902   |   |  |                            | 473  |   |                | 10,484,346 |   |                   |   | 105 |                                          |        |   | 47,612  |        |  | 21,616,328  |   |  |   | (89,135 | ) |  |   | 180,318 |   |  |   | 420   |   |  |   | 139,793 |  
|Conversion of shares (Note J)               |  | 1,801,612    |   |  |                            | 18   |   |                | (1,801,612 | ) |                   |   | (18 | )                                        |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   |        |  
|Exercise of options (Note J)                |  | 706,976      |   |  |                            | 7    |   |                |           |   |                   |   |    |                                          |        |   | 2,289   |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 2,296   |  
|Income tax benefit of options exercised     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   | 3,965   |        |  |            |   |  |   |        |   |  |   |        |   |  |   |      |   |  |   | 3,965   |  
|Purchase of treasury stock                  |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  | 1,420,800   |   |  |   | (19,434 | ) |  |   |        |   |  |   |      |   |  |   | (19,434 | )
|Retirement of treasury stock                |  | (23,037,128  | ) |  |                            | (230 | ) |                |           |   |                   |   |    |                                          |        |   | (22,807 | )      |  | (23,037,128 | ) |  |   | 108,569 |   |  |   | (85,532 | ) |  |   |      |   |  |   |        |  
|Dividends paid ($0.04 per share) (Note D)   |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | (1,415  | ) |  |   |      |   |  |   | (1,415  | )
|Net earnings for the year                   |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   | 50,056  |   |  |   |      |   |  |   | 50,056  |  
|Foreign currency translation (Note A10)     |  |             |   |  |                            |     |   |                |           |   |                   |   |    |                                          |        |   |        |        |  |            |   |  |   |        |   |  |   |        |   |  |   | 4,266 |   |  |   | 4,266   |  
|                                            |  |              |   |  |                            |      |   |                |            |   |                   |   |     |                                          |        |   |         |        |  |             |   |  |   |         |   |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2003                |  | 26,755,362   |   |  | $                          | 268  |   |                | 8,682,734  |   |                   | $ | 87  |                                          |        | $ | 31,059  |        |  |            |   |  | $ |        |   |  | $ | 143,427 |   |  | $ | 4,686 |   |  | $ | 179,527 |  
|                                            |  |              |   |  |                            |      |   |                |            |   |                   |   |     |                                          |        |   |         |        |  |             |   |  |   |         |   |  |   |         |   |  |   |       |   |  |   |         |  



The accompanying notes are an
integral part of this statement.



26



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##### Table of Contents

KSWISS INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS



Year ended December 31,



(Dollar amounts in thousands)



|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                      |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Cash flows from operating activities:                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations                                                                                   |  | $    | 53,792  |   |      | $ | 31,813  |      |  | $ | 24,305  |  
|Adjustments to reconcile earnings from continuing operations to net cash provided by continuing operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                                         |  |      | 1,642   |   |      |   | 1,629   |      |  |   | 1,638   |  
|Net loss on disposal of property, plant and equipment                                                                 |  |      | 6       |   |      |   | 3       |      |  |   | 4       |  
|Deferred income taxes                                                                                                 |  |      | (3,033  | ) |      |   | (2,511  | )    |  |   | (48     | )
|Income tax benefit of stock options exercised                                                                         |  |      | 3,965   |   |      |   | 4,474   |      |  |   | 529     |  
|Minority interest in loss of consolidated subsidiary                                                                  |  |      |        |   |      |   |        |      |  |   | (333    | )
|Increase in accounts receivable                                                                                       |  |      | (13,515 | ) |      |   | (5,924  | )    |  |   | (4,986  | )
|(Increase) decrease in inventories                                                                                    |  |      | (19,322 | ) |      |   | (7,939  | )    |  |   | 222     |  
|(Increase) decrease in prepaid expenses and other assets                                                              |  |      | (2,489  | ) |      |   | (571    | )    |  |   | 1,783   |  
|Increase in accounts payable and accrued liabilities                                                                  |  |      | 13,858  |   |      |   | 9,356   |      |  |   | 79      |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by continuing operations from operating activities                                                  |  |      | 34,904  |   |      |   | 30,330  |      |  |   | 23,193  |  
|Net cash used in discontinued operations                                                                              |  |      | (1,898  | ) |      |   | (3,861  | )    |  |   | (2,152  | )
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                             |  |      | 33,006  |   |      |   | 26,469  |      |  |   | 21,041  |  
|                                                                                                                      |  |      |        
|Cash flows from investing activities:                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Cash paid for acquisition of Royal Elastics                                                                           |  |      |        |   |      |   |        |      |  |   | (3,889  | )
|Cash paid for interest in licensing agreement                                                                         |  |      |        |   |      |   |        |      |  |   | (1,000  | )
|Purchase of property, plant and equipment                                                                             |  |      | (1,770  | ) |      |   | (1,909  | )    |  |   | (1,152  | )
|Proceeds from disposal of property, plant and equipment                                                               |  |      | 7       |   |      |   |        |      |  |   | 8       |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                                 |  |      | (1,763  | ) |      |   | (1,909  | )    |  |   | (6,033  | )
|                                                                                                                      |  |      |        
|Cash flows from financing activities:                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Net repayments under bank lines of credit and subordinated debentures                                                 |  |      |        |   |      |   |        |      |  |   | (1,006  | )
|Purchase of treasury stock                                                                                            |  |      | (19,434 | ) |      |   | (20,449 | )    |  |   | (19,338 | )
|Payment of dividends                                                                                                  |  |      | (1,415  | ) |      |   | (687    | )    |  |   | (571    | )
|Proceeds from stock options exercised                                                                                 |  |      | 1,755   |   |      |   | 1,819   |      |  |   | 315     |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                                                                 |  |      | (19,094 | ) |      |   | (19,317 | )    |  |   | (20,600 | )
|                                                                                                                      |  |      |        
|Effect of exchange rate changes on cash                                                                               |  |      | 1,713   |   |      |   | 771     |      |  |   | (179    | )
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                  |  |      | 13,862  |   |      |   | 6,014   |      |  |   | (5,771  | )
|                                                                                                                      |  |      |        
|Cash and cash equivalents at beginning of year                                                                        |  |      | 67,593  |   |      |   | 61,579  |      |  |   | 67,350  |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                                              |  | $    | 81,455  |   |      | $ | 67,593  |      |  | $ | 61,579  |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                      |  |      |        
|Non-cash financing activities:                                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Contribution of assets by minority member                                                                             |  | $    |        |   |      | $ |        |      |  | $ | 333     |  
|Cash paid during the year for:                                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Interest                                                                                                              |  | $    | 339     |   |      | $ | 773     |      |  | $ | 1,045   |  
|Income taxes                                                                                                          |  | $    | 32,759  |   |      | $ | 15,828  |      |  | $ | 13,345  |  



The accompanying notes are an
integral part of these statements.



27



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



December 31, 2003, 2002 and 2001



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 slightly less than three 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 significantly all of its products from a small number of contract manufacturers in China. This concentration of suppliers in this location
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.



In the fourth quarter of 2003, the
Company reached an agreement with National Geographic to end the licensing agreement. Operations of the National Geographic brand have been accounted for and shown as a discontinued operation in the accompanying financial information. See Note L.



|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 2002 and 2001 presentation to conform to the 2003 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. Included in cash and cash equivalents as of December 31, 2003 and 2002 is $17,530,000 and $5,881,000, respectively, of balances maintained in foreign bank accounts.



28



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



|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 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. |  | Impairment of Long-Lived Assets
|-- |  | -------------------------------



When events or circumstances indicate the carrying value of a long-lived asset may be impaired, the Company estimates the future undiscounted cash flows to be
derived from the asset to assess whether or not a potential impairment exists. If the carrying value exceeds the Companys estimate of future undiscounted cash flows, the Company then calculates the impairment as the excess of the carrying
value of the asset over the Companys estimate of its fair market value.



29



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



|8. |  | Goodwill and Intangible Assets
|-- |  | ------------------------------



The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which supersedes
Accounting Principles Board (APB) Opinion No. 17, Intangible Assets as of January 1, 2002. SFAS No. 142 eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, requiring instead that those
assets be measured for impairment at least annually, and more often when events indicate that an impairment exists. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS No. 142 applies to goodwill and
intangible assets arising from transactions completed before and after the Statements effective date. In adopting SFAS No. 142, the Company has performed the transitional reassessment and impairment tests required as of January 1, 2002, and
determined that the goodwill and trademarks of the Company have indefinite lives and that there was no impairment on these assets. The Company discontinued amortizing these assets on January 1, 2002. At the time of adoption, the Company had
accumulated amortization pertaining to goodwill and trademarks of $2,976,000. The license agreement related to National Geographic was considered to have a finite life and was being amortized over the remaining term of the agreement that extended
through December 2005. For additional discussion regarding the discontinuation of the National Geographic brand, see Note L. Below is the calculation of reported net earnings adjusted for the effect of amortization expense for the year ended
December 31, 2001 (in thousands):



|                                                         |  |                         |        |      |   |                      |  |       |        |         |   |      |  |   |     
|-------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | -------------------- |  | ----- | ------ | ------- | - | ---- |  | - | ----
|                                                         |  | Year Ended December 31,
|                                                         |  | 2003                    |        | 2002 |   | 2001                
|                                                         |  |                         |        |      |   | Per Share Amount (1)
|                                                         |  | $                       |        | $    |   | $                    |  | Basic |        | Diluted
|Reported net earnings                                    |  | $                       | 50,056 |      | $ | 28,697               |  | $     | 23,309 |         | $ | 0.60 |  | $ | 0.57
|Add back amortization expense of goodwill and trademarks |  |                         |       |      |   |                     |  |       | 199    |         |   | 0.01 |  |   |    
|                                                         |  |                         |        |      |   |                      |  |       |        |         |   |      |  |   |     
|Adjusted net earnings                                    |  | $                       | 50,056 |      | $ | 28,697               |  | $     | 23,508 |         | $ | 0.61 |  | $ | 0.57
|                                                         |  |                         |        |      |   |                      |  |       |        |         |   |      |  |   |     

---

|(1) |  | Per share amounts have been retroactively adjusted to reflect the effect of the two-for-one stock split distributed in December 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|9. |  | Income Taxes
|-- |  | ------------



The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. SFAS No. 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.



|10. |  | 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.



30



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



|11. |  | Fair Value of Financial Instruments
|--- |  | -----------------------------------



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



|12. |  | Financial Risk Management and Derivatives
|--- |  | -----------------------------------------



The Company enters into foreign exchange contracts in order to reduce the impact of foreign currency fluctuations (Euros) 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 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 Euros 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 Company did not enter into any derivative financial instruments during 2003 and 2002 and did not have any derivative financial instruments outstanding at
December 31, 2003 and 2002.



|13. |  | Recognition of Revenues and Accounts Receivable
|--- |  | -----------------------------------------------



Revenues include sales and fees earned on sales by licensees and are recognized when title passes and the risks and rewards of ownership have passed to the
customer, based on the terms of sale. Title passes generally upon shipment. Provisions for estimated sales returns, sales allowances and uncollectible accounts are made at the time of sale. In some instances, we ship product directly from our
supplier to the customer. In these cases, we recognize revenue when the product is delivered to the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks.



We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We estimate potential losses based on our knowledge of the financial condition of certain customers, as well as an assessment of the overall conditions at retail. Historically, losses have been
within our expectations. If the financial condition of our customers were to change, adjustments may be required to these estimates. Furthermore, we provide for estimated losses resulting from differences that arise from the gross carrying value of
our receivables and the amounts which customers estimate are owed to us. The settlement or resolution of these differences could result in future changes to these estimates.



In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs, shipping and handling costs billed to customers are included



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



in sales and the related costs are included in selling, general and administrative expenses in the Consolidated Statement of Earnings. Shipping and handling costs
included in selling, general and administrative expenses totaled $2,542,000, $1,758,000 and $1,395,000 for the years ended December 31, 2003, 2002 and 2001.



|14. |  | Advertising Costs
|--- |  | -----------------



Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expenses amounted to $27,857,000,
$17,676,000 and $15,753,000 for 2003, 2002 and 2001, respectively.



|15. |  | 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):



|                                 |  |        |  |                 |       |   |       |        |                 |   |       |        |  |                 |  |   |       |  
|-------------------------------- |  | ------ |  | --------------- | ----- | - | ----- | ------ | --------------- | - | ----- | ------ |  | --------------- |  | - | ----- | -
|                                 |  | 2003   |  |                 | 2002  |   |       | 2001   |                
|                                 |  | Shares |  | Per ShareAmount |       |   | Share |        | Per ShareAmount |   |       | Shares |  | Per ShareAmount | 
|Basic EPS                        |  | 35,396 |  | $               | 1.41  |   |       | 36,700 |                 | $ | 0.78  |        |  | 38,591          |  | $ | 0.60  |  
|Effect of Dilutive Stock Options |  | 2,517  |  |                 | (0.09 | ) |       | 2,715  |                 |   | (0.05 | )      |  | 2,356           |  |   | (0.03 | )
|                                 |  |        |  |                 |       |   |       |        |                 |   |       |        |  |                 |  |   |       |  
|Diluted EPS                      |  | 37,913 |  | $               | 1.32  |   |       | 39,415 |                 | $ | 0.73  |        |  | 40,947          |  | $ | 0.57  |  
|                                 |  |        |  |                 |       |   |       |        |                 |   |       |        |  |                 |  |   |       |  



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:



|                                                          |  |                         |  |                        |  |                     
|--------------------------------------------------------- |  | ----------------------- |  | ---------------------- |  | --------------------
|                                                          |  | 2003                    |  | 2002                   |  | 2001                
|Options to purchase shares of common stock (in thousands) |  | 341                     |  | 116                    |  | 416                 
|Exercise prices                                           |  | $17.62$23.71           |  | $11.38$11.85          |  | $7.05$11.85        
|Expiration dates                                          |  | July 2013December 2013 |  | May 2009December 2012 |  | April 2009July 2011



Reference to share amounts, per
share amounts and exercise prices above retroactively reflect the effect of the two-for-one stock split distributed in December 2003.



|16. |  | Accounting for Stock-Based Compensation
|--- |  | ---------------------------------------



SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of SFAS 123, 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 APB Opinion



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



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 2003, 2002 and 2001, 62,000, 6,000 and 52,000 options, respectively, were granted at exercise prices below fair market value. This resulted in net
compensation expense of $419,000, $400,000 and $313,000 for 2003, 2002 and 2001, 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 2003, 2002 and 2001 that have been credited to additional paid-in capital.



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. 148, the
Companys net earnings and earnings per share would have been:



|                            |  |      |        |      |   |        |  |   |       
|--------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                            |  | 2003 |        | 2002 |   | 2001  
|Net earnings (in thousands) |  |      |        |      |   |        |  |   |       
|As reported                 |  | $    | 50,056 |      | $ | 28,697 |  | $ | 23,309
|Pro forma                   |  |      | 48,590 |      |   | 27,641 |  |   | 21,989
|                            |  |      |       
|Basic earnings per share    |  |      |        |      |   |        |  |   |       
|As reported                 |  | $    | 1.41   |      | $ | 0.78   |  | $ | 0.60  
|Pro forma                   |  |      | 1.37   |      |   | 0.75   |  |   | 0.57  
|                            |  |      |       
|Diluted earnings per share  |  |      |        |      |   |        |  |   |       
|As reported                 |  | $    | 1.32   |      | $ | 0.73   |  | $ | 0.57  
|Pro forma                   |  |      | 1.28   |      |   | 0.70   |  |   | 0.54  



The effects of applying SFAS No.
148 in this proforma disclosure are not indicative of future amounts. SFAS No. 148 does not apply to awards prior to 1995, and additional awards in future years are anticipated. Earnings per share have been adjusted to reflect the effect of the
two-for-one stock split distributed in December 2003.



|17. |  | Recent Accounting Pronouncements
|--- |  | --------------------------------



In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under previous guidance, a liability for an exit cost was recognized at the date of the
commitment to an exit plan. The provisions of this statement will be applied prospectively, as applicable, and are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a
material effect on the Companys financial position or results of operations.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
This interpretation elaborates on the disclosures to be made by a guarantor in its interim



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



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



and annual financial statements about its obligations under specified guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements in this interpretation were effective for financial statements of interim or annual periods ending after
December 15, 2002. Additionally, the recognition of a guarantors obligation should be applied on a prospective basis to guarantees issued after December 31, 2002. The adoption of FIN 45 did not have a material effect on the Companys
financial position or results of operations.



In January 2003, the FASB
issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable
interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among
parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This
interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material effect on the Companys financial position or
results of operations.



In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity
or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and with one exception, is effective at the beginning of the first interim period beginning after June 15, 2003. The effect of adopting SFAS No. 150 will be recognized as a cumulative effect of an accounting change as of
the beginning of the period of adoption. Restatement of prior periods is not permitted. SFAS No. 150 did not have any impact on the Companys 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):



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2003 |        |   | 2002 |  
|Building and improvements                      |  | $    | 6,607  |   |      | $ | 6,526  |  
|Furniture, machinery and equipment             |  |      | 10,031 |   |      |   | 8,452  |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | 16,638 |   |      |   | 14,978 |  
|Less accumulated depreciation and amortization |  |      | (8,737 | ) |      |   | (7,229 | )
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | 7,901  |   |      |   | 7,749  |  
|Land                                           |  |      | 695    |   |      |   | 695    |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  | $    | 8,596  |   |      | $ | 8,444  |  
|                                               |  |      |        |   |      |   |        |  



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE CINTANGIBLE ASSETS



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



|                              |  |      |        |   |      |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                              |  | 2003 |        |   | 2002 |  
|Goodwill                      |  | $    | 4,772  |   |      | $ | 4,772  |  
|Trademarks                    |  |      | 5,382  |   |      |   | 5,382  |  
|Licenses                      |  |      |       |   |      |   | 1,243  |  
|Other                         |  |      | 8      |   |      |   | 8      |  
|Less accumulated amortization |  |      | (2,861 | ) |      |   | (3,298 | )
|                              |  |      |        |   |      |   |        |  
|                              |  | $    | 7,301  |   |      | $ | 8,107  |  
|                              |  |      |        |   |      |   |        |  



The changes in the carrying
amount of goodwill and intangible assets as of December 31 is as follows (in thousands):



|                                         |  |      |       |   |      |   |       |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                         |  | 2003 |       |   | 2002 |  
|Beginning balance                        |  | $    | 8,107 |   |      | $ | 8,362 |  
|Additional assets                        |  |      |      |   |      |   | 8     |  
|Amortization of assets with finite lives |  |      | (60   | ) |      |   | (263  | )
|Impairment losses                        |  |      | (746  | ) |      |   |      |  
|                                         |  |      |       |   |      |   |       |  
|Ending balance                           |  | $    | 7,301 |   |      | $ | 8,107 |  
|                                         |  |      |       |   |      |   |       |  



In applying SFAS No. 142, the
Company has performed the annual reassessment and impairment test required as of January 1, 2003. After a review of sales backlog, the Company determined based on estimated revenues, operating profits and cash flows from its investment in the
National Geographic license, that the license was impaired and recognized an impairment loss of $746,000 in the first quarter of 2003. See Note L for additional information on National Geographic. The remaining goodwill and intangible assets were
not impaired.



NOTE DBANK LINES OF CREDIT



The Company maintains revolving credit facilities whereby it may borrow up to an
aggregate of $26,250,000 including outstanding letters of credit and bankers acceptances. 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, 2003, $49,094,000 was unrestricted as to the payment of dividends.



Under the most restrictive covenant, the Company must maintain stockholders equity, less intangible assets and exclusive of treasury stock of at least
$105,000,000 at December 31, 2003.



NOTE EACCRUED LIABILITIES



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



|                 |  |      |        |      |   |       
|---------------- |  | ---- | ------ | ---- | - | ------
|                 |  | 2003 |        | 2002
|Compensation     |  | $    | 5,363  |      | $ | 4,083 
|Advertising      |  |      | 2,372  |      |   | 1,030 
|Production molds |  |      | 1,488  |      |   | 1,941 
|Treasury stock   |  |      |       |      |   | 1,884 
|Other            |  |      | 7,839  |      |   | 8,001 
|                 |  |      |        |      |   |       
|                 |  | $    | 17,062 |      | $ | 16,939
|                 |  |      |        |      |   |       



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE F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):



|                      |  |      |        |      |   |      
|--------------------- |  | ---- | ------ | ---- | - | -----
|                      |  | 2003 |        | 2002
|EVA incentive program |  | $    | 10,741 |      | $ | 3,368
|Deferred compensation |  |      | 4,493  |      |   | 4,040
|                      |  |      |        |      |   |      
|                      |  | $    | 15,234 |      | $ | 7,408
|                      |  |      |        |      |   |      



NOTE GINCOME TAXES



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



|              |  |      |        |   |      |   |        |      |  |   |        |  
|------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|              |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Current:      |  |      |        |   |      |   |        |      |  |   |        |  
|United States |  |      |        |   |      |   |        |      |  |   |        |  
|Federal       |  | $    | 31,375 |   |      | $ | 19,706 |      |  | $ | 13,677 |  
|State         |  |      | 5,201  |   |      |   | 2,970  |      |  |   | 2,413  |  
|Foreign       |  |      | 656    |   |      |   | 389    |      |  |   | 32     |  
|Deferred:     |  |      |        |   |      |   |        |      |  |   |        |  
|United States |  |      |        |   |      |   |        |      |  |   |        |  
|Federal       |  |      | (2,736 | ) |      |   | (2,259 | )    |  |   | (43    | )
|State         |  |      | (297   | ) |      |   | (252   | )    |  |   | (5     | )
|              |  |      |        |   |      |   |        |      |  |   |        |  
|              |  | $    | 34,199 |   |      | $ | 20,554 |      |  | $ | 16,074 |  
|              |  |      |        |   |      |   |        |      |  |   |        |  



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:



|                                    |  |      |   |  |      |   |  |      |  
|----------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                    |  | 2003 |   |  | 2002 |   |  | 2001 |  
|U.S. Federal statutory rate         |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
|State income taxes                  |  | 3.9  |   |  | 3.9  |   |  | 3.9  |  
|Net results of foreign subsidiaries |  | (0.4 | ) |  | 0.4  |   |  | 0.4  |  
|Amortization of intangibles         |  |     |   |  |     |   |  | 0.1  |  
|Other                               |  | 0.4  |   |  |     |   |  | 0.4  |  
|                                    |  |      |   |  |      |   |  |      |  
|                                    |  | 38.9 | % |  | 39.3 | % |  | 39.8 | %
|                                    |  |      |   |  |      |   |  |      |  



36



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE GINCOME TAXES(Continued)



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):



|                            |  |      |       |      |   |      
|--------------------------- |  | ---- | ----- | ---- | - | -----
|                            |  | 2003 |       | 2002
|Net current assets          |  | $    | 3,014 |      | $ | 2,428
|Net non-current liabilities |  |      | 3,360 |      |   | 5,807
|                            |  |      |       |      |   |      
|Net liability               |  | $    | 346   |      | $ | 3,379
|                            |  |      |       |      |   |      



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



|                                            |  |      |       |      |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                            |  | 2003 |       | 2002
|Assets                                      |  |      |       |      |   |      
|State taxes                                 |  | $    | 1,612 |      | $ | 816  
|Bad debts reserve                           |  |      | 585   |      |   | 528  
|Inventory reserve and capitalized costs     |  |      | 873   |      |   | 1,019
|Bonuses                                     |  |      | 4,206 |      |   | 1,310
|Deferred compensation plan                  |  |      | 1,743 |      |   | 1,572
|Other                                       |  |      | 475   |      |   | 440  
|                                            |  |      |       |      |   |      
|Gross deferred tax assets                   |  |      | 9,494 |      |   | 5,685
|Liabilities                                 |  |      |       |      |   |      
|Unremitted earnings of a foreign subsidiary |  | $    | 8,614 |      | $ | 8,068
|Contingent purchase payments                |  |      | 155   |      |   | 156  
|Other                                       |  |      | 1,071 |      |   | 840  
|                                            |  |      |       |      |   |      
|Gross deferred tax liabilities              |  |      | 9,840 |      |   | 9,064
|                                            |  |      |       |      |   |      
|Net deferred tax liability                  |  | $    | 346   |      | $ | 3,379
|                                            |  |      |       |      |   |      



The Company did not record any
valuation allowances against deferred tax assets at December 31, 2003. 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.



NOTE
HCOMMITMENTS AND CONTINGENCIES



The Company leases its
principal warehouse facility through January 2007, under an agreement that provides for one option that 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, 2003 are as follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |  
|2004                     |  | $ | 2,348 
|2005                     |  |   | 1,763 
|2006                     |  |   | 1,317 
|2007                     |  |   | 282   
|2008                     |  |   | 12    
|Thereafter               |  |   | 6     
|                         |  |   |       
|                         |  |   | $5,728
|                         |  |   |       



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE HCOMMITMENTS AND CONTINGENCIES(Continued)



Rent expense for operating leases was approximately $2,874,000, $2,084,000 and $1,721,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. Sublease rental income was approximately $251,000 and $334,000 for the years ended December 31, 2002 and 2001, respectively.



The Company has outstanding letters of credit totaling approximately $2,083,000 and $4,560,000 at December 31, 2003 and 2002,
respectively. These letters of credit, which have original terms from one to four months, 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, 2003 and 2002.



NOTE I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 $1,007,000, $564,000 and
$623,000 for 2003, 2002 and 2001, respectively.



NOTE J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 6,600,000 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 2,400,000 shares or options to employees and directors of the Company. In May 2002, the 1999 Stock Incentive Plan was amended to increase the number of options by 1,200,000 to 3,600,000 shares of
Class A Common Stock. The awards have a term of ten years and generally become fully vested by the end of the fifth year.



38



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##### Table of Contents

KSwiss INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE JSTOCKHOLDERS EQUITY(Continued)



Combined plan transactions for 2003, 2002 and 2001 are as follows:



|                                           |  |           |   |      |                              |       |        |            |   |                              |   |        |  |           |                              |  |   |     
|------------------------------------------ |  | --------- | - | ---- | ---------------------------- | ----- | ------ | ---------- | - | ---------------------------- | - | ------ |  | --------- | ---------------------------- |  | - | ----
|                                           |  | 2003      |   | 2002 |                              | 2001 
|                                           |  | Shares    |   |      | Weightedaverageexerciseprice |       | Shares |            |   | Weightedaverageexerciseprice |   | Shares |  |           | Weightedaverageexerciseprice
|Options outstanding January 1              |  | 3,697,078 |   |      | $                            | 4.75  |        | 4,555,492  |   |                              | $ | 3.33   |  | 3,749,224 |                              |  | $ | 2.34
|Granted                                    |  | 809,832   |   |      |                              | 14.08 |        | 558,334    |   |                              |   | 9.29   |  | 1,170,000 |                              |  |   | 6.23
|Exercised                                  |  | (706,976  | ) |      |                              | 2.48  |        | (1,240,748 | ) |                              |   | 1.47   |  | (272,392  | )                            |  |   | 1.16
|Canceled                                   |  | (130,664  | ) |      |                              | 6.50  |        | (176,000   | ) |                              |   | 5.71   |  | (91,340   | )                            |  |   | 6.24
|                                           |  |           |   |      |                              |       |        |            |   |                              |   |        |  |           |                              |  |   |     
|Options outstanding December 31            |  | 3,669,270 |   |      |                              | 7.17  |        | 3,697,078  |   |                              |   | 4.75   |  | 4,555,492 |                              |  |   | 3.33
|                                           |  |           |   |      |                              |       |        |            |   |                              |   |        |  |           |                              |  |   |     
|Options available for grant at December 31 |  | 232,032   |   |      |                              |       |        | 913,866    |   |                              |   |        |  | 96,200    |                              |  |   |     
|                                           |  |           |   |      |                              |       |        |            |   |                              |   |        |  |           |                              |  |   |     



Weighted average fair value of
options granted during the year is as follows:



|                                                      |  |      |       |      |   |      |  |   |     
|----------------------------------------------------- |  | ---- | ----- | ---- | - | ---- |  | - | ----
|                                                      |  | 2003 |       | 2002 |   | 2001
|Exercise price is below market price at date of grant |  | $    | 10.87 |      | $ | 9.19 |  | $ | 6.12
|Exercise price equals market price at date of grant   |  |      | 8.59  |      |   | 5.33 |  |   | 4.19



The following information
applies to options outstanding at December 31, 2003:



|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of exercise prices |  | Numberoutstanding   |  | Weightedaverageremainingcontractuallife (years) |  | Weightedaverageexerciseprice |       | Numberexercisable |         | Weightedaverageexerciseprice
|$ 0.13$ 1.63            |  | 384,254             |  | 5                                               |  | $                            | 0.61  |                   | 162,003 |                              | $ | 0.93 
|$ 2.05$ 3.19            |  | 894,988             |  | 6                                               |  |                              | 2.76  |                   | 338,823 |                              |   | 2.87 
|$ 4.27$ 6.78            |  | 791,196             |  | 7                                               |  |                              | 6.11  |                   | 25,866  |                              |   | 5.08 
|$ 7.05$ 9.00            |  | 751,000             |  | 8                                               |  |                              | 8.35  |                   | 127,668 |                              |   | 8.03 
|$11.17$15.00            |  | 506,666             |  | 9                                               |  |                              | 12.01 |                   | 4,002   |                              |   | 11.52
|$17.62$23.71            |  | 341,166             |  | 10                                              |  |                              | 18.77 |                   |        |                              |   |     



Exercisable options outstanding
at December 31, 2002 and 2001 were 847,526 and 1,556,780 options, respectively.



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



|                        |  |      |   |  |      |   |  |      |  
|----------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Expected life (years)   |  | 7    |   |  | 6    |   |  | 8    |  
|Risk-free interest rate |  | 3.30 | % |  | 3.82 | % |  | 4.86 | %
|Expected volatility     |  | 58   | % |  | 59   | % |  | 59   | %
|Expected dividend yield |  | 0.2  | % |  | 0.2  | % |  | 0.2  | %



39



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE JSTOCKHOLDERS EQUITY(Continued)



On December 11, 2003, the Companys Board of Directors declared 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 December 26, 2003 to stockholders of record at the close of business on December 22, 2003. The Board of Directors also approved an
increase in the cash dividend per share to an annual rate, on a post-split basis, of 8 cents per common share from an annual rate of 4 cents per common share. The number of shares, weighted average exercise price per share and range of exercise
prices have been retroactively adjusted to reflect the effect of this two-for-one stock split.



NOTE K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, 2003,
2002 and 2001, approximately 27%, 24% and 18%, respectively, of revenues were from one customer. At December 31, 2003 and 2002 approximately 38% and 34% of accounts receivable were from two 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.



NOTE L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. 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.



40



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE LNATIONAL GEOGRAPHIC(Continued)



In the fourth quarter of 2003, the Company reached an agreement with National Geographic to terminate the
licensing agreement for $2.0 million. The operations for National Geographic for the years ended December 31, 2003, 2002 and 2001 are as follows (in thousands):



|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Revenues                                     |  | $    | 869    |   |      | $ | 820    |      |  | $ | 33     |  
|Cost of goods sold                           |  |      | 3,814  |   |      |   | 1,709  |      |  |   | 393    |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Gross loss                                   |  |      | (2,945 | ) |      |   | (889   | )    |  |   | (360   | )
|Selling, general and administrative expenses |  |      | 2,925  |   |      |   | 4,056  |      |  |   | 1,247  |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Operating loss                               |  |      | (5,870 | ) |      |   | (4,945 | )    |  |   | (1,607 | )
|Interest expense, net                        |  |      | (226   | ) |      |   | (154   | )    |  |   | (23    | )
|Income tax benefit                           |  |      | 2,360  |   |      |   | 1,983  |      |  |   | 634    |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Loss from discontinued operations            |  | $    | (3,736 | ) |      | $ | (3,116 | )    |  | $ | (996   | )
|                                             |  |      |        |   |      |   |        |      |  |   |        |  



NOTE M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. Identifiable assets consisted primarily of a trademark of $3,300,000. The excess of purchase price over net assets
acquired (goodwill) totaled $194,000. The Company is no longer required to pay the contingent purchase payments of approximately $1.5 million to the seller as certain revenue levels were not met as of December 31, 2003. Assets acquired and
liabilities assumed in the acquisition were not material.



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. During the fourth quarter of 2003, the minority members
resigned and gave up their rights to the Put.



41



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE NSEGMENT INFORMATION



The Companys predominant business is the design, development and distribution of athletic footwear. Substantially all of the
Companys revenues are from the sales of footwear products. The Company is organized into three geographic regions: the United States, Europe and other international operations. Certain segment information that follows excludes the operations
of the National Geographic brand, which was discontinued in 2003. Certain reclassifications have been made in the 2002 and 2001 presentations. The following tables summarize segment information (in thousands):



|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | Year ended December 31, |        
|                                         |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Revenues from unrelated entities (1):    |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 372,443 |   |      | $ | 248,047 |      |  | $ | 206,416 |  
|Europe                                   |  |                         | 26,260  |   |      |   | 17,258  |      |  |   | 13,701  |  
|Other International                      |  |                         | 30,459  |   |      |   | 24,288  |      |  |   | 17,135  |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                       | 429,162 |   |      | $ | 289,593 |      |  | $ | 237,252 |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Inter-geographic revenues:               |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 2,715   |   |      | $ | 2,276   |      |  | $ | 1,696   |  
|Europe                                   |  |                         | 134     |   |      |   | 158     |      |  |   | 77      |  
|Other International                      |  |                         | 11,272  |   |      |   | 9,141   |      |  |   | 7,634   |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                       | 14,121  |   |      | $ | 11,575  |      |  | $ | 9,407   |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Total revenues:                          |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 375,158 |   |      | $ | 250,323 |      |  | $ | 208,112 |  
|Europe                                   |  |                         | 26,394  |   |      |   | 17,416  |      |  |   | 13,778  |  
|Other International                      |  |                         | 41,731  |   |      |   | 33,429  |      |  |   | 24,769  |  
|Less inter-geographic revenues           |  |                         | (14,121 | ) |      |   | (11,575 | )    |  |   | (9,407  | )
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                       | 429,162 |   |      | $ | 289,593 |      |  | $ | 237,252 |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating profit (loss):                 |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 97,230  |   |      | $ | 64,624  |      |  | $ | 47,027  |  
|Europe                                   |  |                         | (3,009  | ) |      |   | (5,533  | )    |  |   | (3,106  | )
|Other International                      |  |                         | 6,288   |   |      |   | 3,209   |      |  |   | 944     |  
|Less corporate expenses and eliminations |  |                         | (13,217 | ) |      |   | (10,991 | )    |  |   | (6,313  | )
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                       | 87,292  |   |      | $ | 51,309  |      |  | $ | 38,552  |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest income:                         |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 645     |   |      | $ | 913     |      |  | $ | 2,310   |  
|Europe                                   |  |                         | 37      |   |      |   | 24      |      |  |   | 33      |  
|Other International                      |  |                         | 25      |   |      |   | 150     |      |  |   | 597     |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest income                    |  |                         | 707     |   |      |   | 1,087   |      |  |   | 2,940   |  
|Interest expense:                        |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  |                         |        |   |      |   |        |      |  |   | 1,071   |  
|Europe                                   |  |                         | 3       |   |      |   | 29      |      |  |   | 42      |  
|Other International                      |  |                         | 5       |   |      |   |        |      |  |   |        |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest expense                   |  |                         | 8       |   |      |   | 29      |      |  |   | 1,113   |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest income, net                     |  | $                       | 699     |   |      | $ | 1,058   |      |  | $ | 1,827   |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Income tax expense:                      |  |                         |         |   |      |   |         |      |  |   |         |  
|United States                            |  | $                       | 33,460  |   |      | $ | 20,177  |      |  | $ | 16,042  |  
|Europe                                   |  |                         | (21     | ) |      |   | (52     | )    |  |   | 72      |  
|Other International                      |  |                         | 760     |   |      |   | 429     |      |  |   | (40     | )
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|                                         |  | $                       | 34,199  |   |      | $ | 20,554  |      |  | $ | 16,074  |  
|                                         |  |                         |         |   |      |   |         |      |  |   |         |  



42



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE NSEGMENT INFORMATION(Continued)



|                                             |  |                         |         |      |   |         |  |   |        
|-------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                                             |  | Year ended December 31,
|                                             |  | 2003                    |         | 2002 |   | 2001   
|Indentifiable assets:                        |  |                         |         |      |   |         |  |   |        
|United States                                |  | $                       | 127,380 |      | $ | 92,641  |  | $ | 79,875 
|Europe                                       |  |                         | 26,350  |      |   | 14,737  |  |   | 11,886 
|Other International                          |  |                         | 11,109  |      |   | 8,824   |  |   | 7,172  
|Corporate assets and eliminations (2)        |  |                         | 69,791  |      |   | 67,681  |  |   | 61,866 
|                                             |  |                         |         |      |   |         |  |   |        
|                                             |  | $                       | 234,630 |      | $ | 183,883 |  | $ | 160,799
|                                             |  |                         |         |      |   |         |  |   |        
|Provision for depreciation and amortization: |  |                         |         |      |   |         |  |   |        
|United States                                |  | $                       | 1,209   |      | $ | 1,357   |  | $ | 1,467  
|Europe                                       |  |                         | 326     |      |   | 195     |  |   | 112    
|Other International                          |  |                         | 107     |      |   | 77      |  |   | 59     
|                                             |  |                         |         |      |   |         |  |   |        
|                                             |  | $                       | 1,642   |      | $ | 1,629   |  | $ | 1,638  
|                                             |  |                         |         |      |   |         |  |   |        
|Capital expenditures:                        |  |                         |         |      |   |         |  |   |        
|United States                                |  | $                       | 1,388   |      | $ | 1,203   |  | $ | 913    
|Europe                                       |  |                         | 281     |      |   | 576     |  |   | 188    
|Other International                          |  |                         | 101     |      |   | 130     |  |   | 51     
|                                             |  |                         |         |      |   |         |  |   |        
|                                             |  | $                       | 1,770   |      | $ | 1,909   |  | $ | 1,152  
|                                             |  |                         |         |      |   |         |  |   |        

---

|(1) |  | Revenue is attributable to geographic regions based on the location of the Company subsidiary.
|--- |  | ----------------------------------------------------------------------------------------------



|(2) |  | Corporate assets include cash and cash equivalents, investments and intangible assets.
|--- |  | --------------------------------------------------------------------------------------



43



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##### Table of Contents

KSWISS INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2003, 2002 and 2001



NOTE OQUARTERLY FINANCIAL DATA (Unaudited)



Summarized quarterly financial data for 2003 and 2002 follows (in thousands except for per share amounts):



|                                           |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|------------------------------------------ |  | ------------- | ------- | - | -------------- | - | ------- | ------------- |  | - | -------------- | - |  | ---- | ------ | - |  | - | ------- | -
|                                           |  | First Quarter |         |   | Second Quarter |   |         | Third Quarter |  |   | Fourth Quarter |   |  | Year |       
|2003                                       |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Revenues                                   |  | $             | 115,809 |   |                | $ | 111,629 |               |  | $ | 121,292        |   |  | $    | 80,432 |   |  | $ | 429,162 |  
|Gross profit                               |  |               | 54,216  |   |                |   | 51,301  |               |  |   | 53,046         |   |  |      | 34,996 |   |  |   | 193,559 |  
|Earnings from continuing operations        |  |               | 16,900  |   |                |   | 13,826  |               |  |   | 15,504         |   |  |      | 7,562  |   |  |   | 53,792  |  
|Income/(loss) from discontinued operations |  |               | (3,256  | ) |                |   | (1,207  | )             |  |   | (398           | ) |  |      | 1,125  |   |  |   | (3,736  | )
|Net earnings                               |  |               | 13,644  |   |                |   | 12,619  |               |  |   | 15,106         |   |  |      | 8,687  |   |  |   | 50,056  |  
|Earnings per share (1)                     |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Basic                                      |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Earnings from continuing operations        |  | $             | 0.47    |   |                | $ | 0.39    |               |  | $ | 0.44           |   |  | $    | 0.22   |   |  | $ | 1.52    |  
|Income/(loss) from discontinued operations |  |               | (0.09   | ) |                |   | (0.03   | )             |  |   | (0.01          | ) |  |      | 0.03   |   |  |   | (0.11   | )
|Net earnings                               |  |               | 0.38    |   |                |   | 0.36    |               |  |   | 0.43           |   |  |      | 0.25   |   |  |   | 1.41    |  
|Diluted                                    |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Earnings from continuing operations        |  | $             | 0.45    |   |                | $ | 0.36    |               |  | $ | 0.41           |   |  | $    | 0.20   |   |  | $ | 1.42    |  
|Income/(loss) from discontinued operations |  |               | (0.09   | ) |                |   | (0.03   | )             |  |   | (0.01          | ) |  |      | 0.03   |   |  |   | (0.10   | )
|Net earnings                               |  |               | 0.36    |   |                |   | 0.33    |               |  |   | 0.40           |   |  |      | 0.23   |   |  |   | 1.32    |  
|                                           |  |               |         |   |               
|                                           |  | First Quarter |         |   | Second Quarter |   |         | Third Quarter |  |   | Fourth Quarter |   |  | Year |       
|2002                                       |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Revenues                                   |  | $             | 80,630  |   |                | $ | 74,701  |               |  | $ | 81,076         |   |  | $    | 53,186 |   |  | $ | 289,593 |  
|Gross profit                               |  |               | 36,837  |   |                |   | 32,718  |               |  |   | 37,519         |   |  |      | 23,493 |   |  |   | 130,567 |  
|Earnings from continuing operations        |  |               | 10,798  |   |                |   | 6,642   |               |  |   | 9,002          |   |  |      | 5,371  |   |  |   | 31,813  |  
|Loss from discontinued operations          |  |               | (1,130  | ) |                |   | (574    | )             |  |   | (829           | ) |  |      | (583   | ) |  |   | (3,116  | )
|Net earnings                               |  |               | 9,668   |   |                |   | 6,068   |               |  |   | 8,173          |   |  |      | 4,788  |   |  |   | 28,697  |  
|Earnings per share (1)                     |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Basic                                      |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Earnings from continuing operations        |  | $             | 0.29    |   |                | $ | 0.18    |               |  | $ | 0.24           |   |  | $    | 0.15   |   |  | $ | 0.87    |  
|Loss from discontinued operations          |  |               | (0.03   | ) |                |   | (0.02   | )             |  |   | (0.02          | ) |  |      | (0.02  | ) |  |   | (0.09   | )
|Net earnings                               |  |               | 0.26    |   |                |   | 0.16    |               |  |   | 0.22           |   |  |      | 0.13   |   |  |   | 0.78    |  
|Diluted                                    |  |               |         |   |                |   |         |               |  |   |                |   |  |      |        |   |  |   |         |  
|Earnings from continuing operations        |  | $             | 0.27    |   |                | $ | 0.17    |               |  | $ | 0.23           |   |  | $    | 0.14   |   |  | $ | 0.81    |  
|Loss from discontinued operations          |  |               | (0.03   | ) |                |   | (0.02   | )             |  |   | (0.02          | ) |  |      | (0.02  | ) |  |   | (0.08   | )
|Net earnings                               |  |               | 0.24    |   |                |   | 0.15    |               |  |   | 0.21           |   |  |      | 0.12   |   |  |   | 0.73    |  

---

|(1) |  | Earnings per share reflect the effect of the two-for-one stock split distributed in December 2003.
|--- |  | --------------------------------------------------------------------------------------------------



44



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##### Table of Contents

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



None.



|Item 9A. |  | Controls and Procedures
|-------- |  | -----------------------



(a) Evaluation of Disclosure Controls and Procedures



The Companys management carried out an evaluation, under the supervision and with the participation of the Companys President and Chief Executive
Officer and Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Companys President and Chief Executive Officer along with the Companys Vice President of Finance and Chief Financial Officer concluded
that the Companys disclosure controls and procedures as of December 31, 2003 are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the
Companys periodic filings under the Exchange Act.



(b) Changes
in Internal Control Over Financial Reporting



No changes in the
Companys internal control over financial reporting have come to managements attention that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



|Item 10. |  | Directors and Executive Officers of the Registrant
|-------- |  | --------------------------------------------------



The executive officers of KSwiss are as follows:



|                 |  |                        |  |                                                                        
|---------------- |  | ---------------------- |  | -----------------------------------------------------------------------
|Name             |  | Age atDecember 31,2003 |  | Position                                                               
|Steven Nichols   |  | 61                     |  | Chairman of the Board and President                                    
|Preston Davis    |  | 59                     |  | Vice President-Sales                                                   
|Edward Flora     |  | 52                     |  | Vice President-Operations                                              
|Lee Green        |  | 50                     |  | Corporate Counsel                                                      
|Thomas Harrison  |  | 61                     |  | Senior Vice President                                                  
|Deborah Mitchell |  | 42                     |  | Vice President-Marketing                                               
|George Powlick   |  | 59                     |  | Vice President-Finance, Chief Financial Officer, Secretary and Director
|Kimberly Scully  |  | 36                     |  | Corporate Controller                                                   
|Brian Sullivan   |  | 50                     |  | Vice President-National Accounts                                       
|Peter Worley     |  | 43                     |  | Vice President-Product Development                                     



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 KSwiss 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



45



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##### Table of Contents

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 KSwiss 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 KSwiss 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 KSwiss 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 KSwiss 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 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 KSwiss 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 KSwiss 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.



Kimberly Scully, Corporate Controller, joined KSwiss in April 2003. Ms. Scully is a certified public accountant. From 2000 through April 2003, Ms. Scully was
the Corporate Controller of SMTEK International, Inc., an electronics manufacturing services provider. From 1995 through 1999, Ms. Scully was a Corporate Accounting Manager of Home Savings of America, FSB, a $50 billion savings institution, which
was acquired in 1998. From 1989 through 1995, Ms. Scully was an auditor in the independent accounting firm of KPMG LLP and became an audit manager in 1994.



Brian Sullivan, Vice President-National Accounts, joined KSwiss 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.



46



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##### Table of Contents

Peter Worley, Vice President-Product Development, joined KSwiss 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.



Except for the information disclosed above, the information required by this item will be contained in the Companys Proxy Statement for its Annual
Stockholders Meeting to be held May 6, 2004 to be filed with the S.E.C. within 120 days after December 31, 2003 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 6, 2004 to be filed
with the S.E.C. within 120 days after December 31, 2003 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 6, 2004 to be filed
with the S.E.C. within 120 days after December 31, 2003 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 6, 2004 to be filed
with the S.E.C. within 120 days after December 31, 2003 and is incorporated herein by reference.



|Item 14. |  | Principal Accounting Fees and Services
|-------- |  | --------------------------------------



The information required by this item will be contained in the Companys Proxy Statement for its Annual Stockholders Meeting to be held May 6, 2004 to be filed
with the S.E.C. within 120 days after December 31, 2003 and is incorporated herein by reference.



PART IV



|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K
|-------- |  | ----------------------------------------------------------------



(a) Financial Statements:



|                                                                                                           |  |                        
|---------------------------------------------------------------------------------------------------------- |  | -----------------------
|                                                                                                           |  | Page ReferenceForm 10-K
|Report of Independent Certified Public Accountants                                                         |  | 23                     
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                               |  | 24                     
|Consolidated Statements of Earnings and Comprehensive Earnings for the three years ended December 31, 2003 |  | 25                     
|Consolidated Statement of Stockholders Equity for the three years ended December 31, 2003                 |  | 26                     
|Consolidated Statements of Cash Flows for the three years ended December 31, 2003                          |  | 27                     
|Notes to Consolidated Financial Statements                                                                 |  | 28-44                  



47



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##### Table of Contents

(b) Reports on Form 8-K



On November 21, 2003, the Company filed a Current Report on Form 8-K that reported Steven Nichols, the Companys President and
CEO, had entered into a Sales Plan with a brokerage firm under SEC Rule 10b5-1 pursuant to which Mr. Nichols will sell subject to a predetermined minimum price condition up to an aggregate of 260,000 shares of the Companys Class A Common Stock
during the term of the Sales Plan. Trading under the Sales Plan may occur from January 12, 2004 through and including December 31, 2004.



On December 11, 2003, the Company filed a Current Report on Form 8-K with respect to a press release issued by the Company that announced its stockholders approved
a proposal to increase the number of authorized Class A Common Stock and Class B Common Stock and its Board of Directors declared a two-for-one stock split of the Class A and Class B Common Stock. The stock split will be effected by way of a one
hundred percent (100%) stock dividend whereby one additional share of Class A Common Stock and one additional share of Class B Common Stock will be issued for each share of Class A Common Stock and Class B Common Stock held, respectively. The Board
of Directors also approved an increase in the Companys quarterly cash dividend payable on Class A and Class B Common Stock to $0.02 per share, on a split-adjusted basis.



On December 22, 2003, the Company filed a Current Report on Form 8-K with respect to a press release issued by the Company that
announced it had agreed with National Geographic to end their license agreement to develop and market a collection of National Geographic outdoor-oriented and casual footwear.



(c) Exhibits



|    |  |                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Restated Certificate of Incorporation of KSwiss Inc. (incorporated by reference to exhibit 3.1 to the Registrants Form 10-Q for the quarter ended September 30, 2002)                                                                                   
|    | 
|3.2 |  | 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 |  | 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)                                                                           
|    | 
|4.2 |  | 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)                                                                           
|    | 
|4.3 |  | 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)                                                                                        
|    | 
|4.4 |  | 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)                                                                                        
|    | 
|4.5 |  | $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)
|    | 
|4.6 |  | $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)                                        



48



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.1  |  | KSwiss Inc. 1990 Stock Incentive Plan, as amended through October 28, 2002 (incorporated by reference to exhibit 10.1 to the Registrants Form 10-K for the year ended December 31,
2002)                                      
|      | 
|10.2  |  | Form of Amendment No. 1 to KSwiss Inc. Employee Stock Option Agreement Pursuant to the 1990 Stock Incentive Plan (incorporated by reference to exhibit 10.2 to the Registrants Form 10-K for
the year ended December 31, 2002)
|      | 
|10.3  |  | KSwiss Inc. 1999 Stock Incentive Plan, as amended through October 28, 2002 (incorporated by reference to exhibit 10.3 to the Registrants Form 10-K for the year ended December 31,
2002)                                      
|      | 
|10.4  |  | Form of Amendment No. 1 to KSwiss Inc. Employee Stock Option Agreement Pursuant to the 1999 Stock Incentive Plan (incorporated by reference to exhibit 10.4 to the Registrants Form 10-K for
the year ended December 31, 2002)
|      | 
|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  |  | Amendment to KSwiss Inc. 401(k) and Profit Sharing Plan (incorporated by reference to exhibit 10 to the Registrants Form 10-Q for the quarter ended March 31, 2002)                                                           
|      | 
|10.10 |  | Amendment to KSwiss Inc. 401(k) and Profit Sharing Plan dated January 10, 2003 (incorporated by reference to exhibit 10.23 to the Registrants Form 10-Q for the quarter ended June 30,
2003)                                  
|      | 
|10.11 |  | 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))                                
|      | 
|10.12 |  | 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)                       
|      | 
|10.13 |  | 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)                  
|      | 
|10.14 |  | Business Loan Agreement (incorporated by reference to exhibit 10 to the Registrants Form 10-Q for the quarter ended June 30, 2001)                                                                                             
|      | 
|10.15 |  | Amendment No. 2 to Business Loan Agreement, dated May 27, 2003, between the Company and Bank of America (incorporated by reference to exhibit 10.22 to the Registrants Form 10-Q for the quarter
ended June 30, 2003)          
|      | 
|10.16 |  | 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)                                                    



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##### Table of Contents

|      |  |                                                                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.17 |  | 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)
|      | 
|14    |  | KSwiss Inc. Code of Ethics for the Chief Executive Officer, Senior Financial Officers and Board of Directors                                                                 
|      | 
|21    |  | Subsidiaries of KSwiss Inc.                                                                                                                                                  
|      | 
|23    |  | Consent of Grant Thornton LLP                                                                                                                                                 
|      | 
|31.1  |  | Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14                                                                                   
|      | 
|31.2  |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14                                                                                                 
|      | 
|32    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to the Sarbanes-Oxley Act of 2002                                                                       



(d) Schedules



|                                                                                                                                                                                                                                 |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                                                 |  | Page
|Financial Statement Schedules:                                                                                                                                                                                                   |  |     
|Schedule IIValuation and Qualifying Accounts                                                                                                                                                                                    |  | 52  
|                                                                                                                                                                                                                                 | 
|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. |  |     



50



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##### Table of Contents

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.By

/s/    GEORGE POWLICKGeorge Powlick, Vice President and Chief     Financial OfficerFebruary 4, 2004




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.



|                                                  |  |                                                                                                       |  |                 
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----------------
|Signature                                         |  | Title                                                                                                 |  | Date            
|                                                  |  |                                                                                                      
|/s/                 STEVEN NICHOLSSteven Nichols  |  | Chairman of the Board, President and Chief Executive Officer                                          |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/                GEORGE POWLICKGeorge Powlick   |  | Vice President Finance, Chief Financial Officer, Principal Accounting Officer, Secretary and Director |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/              LAWRENCE
FELDMANLawrence Feldman |  | Director                                                                                              |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/                    STEPHEN FINEStephen Fine   |  | Director                                                                                              |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/                     DAVID LEWINDavid Lewin    |  | Director                                                                                              |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/                     MARK LOUIEMark Louie      |  | Director                                                                                              |  | February 4, 2004
|                                                  |  |                                                                                                      
|/s/                MARTYN WILFORDMartyn Wilford   |  | Director                                                                                              |  | February 4, 2004



51



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##### Table of Contents

SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS



(Amounts in thousands)



|                          |  |                              |   |                             |   |                         |  |                               |          |  |                        |   |  |   |        |   |  |   |      
|------------------------- |  | ---------------------------- | - | --------------------------- | - | ----------------------- |  | ----------------------------- | -------- |  | ---------------------- | - |  | - | ------ | - |  | - | -----
|Column A                  |  | Column B                     |   | Column C                    |   | Column D                |  |                               | Column E
|                          |  |                              |   | Additions                   |   |                         |  |                               |         
|Description               |  | Balance atBeginning ofPeriod |   | Charged toCosts andExpenses |   | Chargedto OtherAccounts |  | Write-offs andDeductions, Net |          |  | Balance atEnd ofPeriod
|Allowance for bad debts   |  | (2003                        | ) |                             | $ | 1,479                   |  | $                             | 1,266    |  | $                      |  |  | $ | (666   | ) |  | $ | 2,079
|                          |  | (2002                        | ) |                             |   | 993                     |  |                               | 760      |  |                        |  |  |   | (274   | ) |  |   | 1,479
|                          |  | (2001                        | ) |                             |   | 852                     |  |                               | 537      |  |                        |  |  |   | (396   | ) |  |   | 993  
|                          |  |                              |   |                             |   |                        
|Allowance for inventories |  | (2003                        | ) |                             | $ | 2,120                   |  | $                             | 4,385    |  | $                      |  |  | $ | (3,172 | ) |  | $ | 3,333
|                          |  | (2002                        | ) |                             |   | 1,512                   |  |                               | 1,754    |  |                        |  |  |   | (1,146 | ) |  |   | 2,120
|                          |  | (2001                        | ) |                             |   | 1,417                   |  |                               | 1,622    |  |                        |  |  |   | (1,527 | ) |  |   | 1,512



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##### Table of Contents

EXHIBIT INDEX



|        |  |                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                              
|        | 
|14      |  | KSwiss Inc. Code of Ethics for the Chief Executive Officer, Senior Financial Officers and Board of Directors
|        | 
|21      |  | Subsidiaries of KSwiss Inc.                                                                                 
|        | 
|23      |  | Consent of Grant Thornton LLP                                                                                
|        | 
|31.1    |  | Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14                  
|        | 
|31.2    |  | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14                                
|        | 
|32      |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to the Sarbanes-Oxley Act of 2002