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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file Number    0-18490

K-SWISS INC.

(Exact name of registrant as specified in its charter)

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

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

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

Class A Common Stock, par value $.01 per share

(Title of class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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 28, 2002, 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 $335,235,736.

The number of shares of the Registrant’s Class A Common Stock outstanding at February 6, 2003 was 12,576,454 shares. The number of shares of the Registrant’s Class B Common Stock outstanding at February 6, 2003 was 5,242,173 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the Registrant’s 2003 Annual Stockholders Meeting are incorporated by reference into Part III.

Table of Contents

K•SWISS INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

Table of Contents

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 and National Geographic brands. Royal Elastics, a wholly owned subsidiary, is a leading innovator of slip-on, laceless footwear. National Geographic footwear, under an exclusive license from the National Geographic Society, offers outdoor-oriented and casual footwear. Sales of Royal Elastics and National Geographic brands were not significant during 2002.

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 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 products, thereby enhancing their attractiveness to retailers. This strategy also enables us to maintain

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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 50% of 2002 revenues) and women’s (approximately 27% of 2002 revenues). Most styles within each footwear category are offered in men’s, women’s and children’s.

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 M 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 2002, 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 nine Company-employed sales managers. The independent sales representatives are paid on a commission basis, and are prohibited by contract from representing other brands of athletic footwear and related products. These representatives sold to approximately 2,900, 2,900 and 3,000 separate accounts as of December 31, 2002, 2001 and 2000.

During 2002, the Foot Locker group of stores and affiliates accounted for approximately 23% 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 16 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 2002, K•Swiss was working through 6 international subsidiaries and 20 distributors to market K•Swiss products in potentially 29 countries.

Distribution

During December 1997, we relocated our distribution facility. We now maintain 309,000 square feet of warehouse space at a leased facility 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 or toll-free telephone call. 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 2002, approximately 98% of our footwear products were manufactured in China and 2% 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 2002, our apparel and accessory products were manufactured in Macau, China, Thailand, Taiwan, Korea 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 shoes ranging from 6.0% to 20.0% plus, for certain styles, $.90 per pair and moderately priced textile shoes of 9.0% to 20.0% plus, for certain styles, $.90 per pair. Currently, approximately 91% of our footwear volume is derived from sales of leather footwear and approximately 9% 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 an agreement to enforce intellectual property protections, and the failure of China to meet its obligations could result in the imposition of trade sanctions by the USTR. Any such sanctions could affect our ability to continue to import products from China.

Backlog

At December 31, 2002 and 2001, total futures orders with start ship dates from January through June 2003 and 2002 were approximately $168,877,000 and $118,152,000, respectively, an increase of 42.9%. The 42.9% increase in total futures orders is comprised of a 31.8% increase in the first quarter 2003 futures orders and a 63.2% increase in the second quarter 2003 futures orders. At December 31, 2002 and 2001, domestic futures orders with start ship dates from January through June 2003 and 2002 were approximately $147,663,000 and $103,329,000, respectively, an increase of 42.9%. At December 31, 2002 and 2001, international futures orders with start ship dates from January through June 2003 and 2002 were approximately $21,214,000 and $14,823,000, respectively, an increase of 43.1%. “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 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.

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Competition

The athletic footwear industry is highly competitive, and sales growth of athletic and athletic-style leisure footwear slowed considerably in 2002, increasing competition. The largest domestic marketers of footwear are Nike and adidas, while the international market is dominated by Nike, adidas and Reebok. Each of these companies has substantially greater financial, distribution and marketing resources as well as greater brand awareness than 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. The National Geographic Society (“NGS”) is responsible for registering the marks that it has licensed E.R.E. Footwear, our joint venture, to use in manufacture and sale of NATIONAL GEOGRAPHIC footwear. Those marks are registered in many countries, and the NGS has filed applications for registration in all major markets where the marks are not already registered. 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 in 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, 2002, we employed 204 persons in the United States, 138 persons in Taiwan and China, 64 persons in the United Kingdom, Germany and the Netherlands and 8 persons elsewhere.

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Available Information

K•Swiss’ Internet address is http://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 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 SEC.

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

In June 2001, we were notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of ours, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to us during the 90 day period prior to the bankruptcy filing. The aggregate amount of these payments, which the trustee’s counsel is claiming to be preferential transfers, is approximately $4,315,000, while the trustee is seeking the court’s permission to add a further $600,000 in claimed preferential transfers. We believe these payments were received in the ordinary course of business and that we have meritorious defenses against the trustee’s claims. In November 2001, the trustee filed suit against us (and other creditors) to recover payments made to us during the 90 days prior to the customer’s bankruptcy filing. We continue to believe that we have a meritorious “ordinary course of business” defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in our financial statements as of December 31, 2002.

In response to our opposition to Swiss Army Brands, Inc.’s registration and intended use of Swiss Army as a trademark on footwear, Swiss Army Brands has petitioned for cancellation of our U.S. registrations for the K•Swiss trademark. We believe we have meritorious defenses to the petitions, but the outcome cannot be predicted at this time. An unfavorable decision could have a material adverse impact on us.

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

None.

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Item 4(a).  Executive Officers of the Registrant

The executive officers of K•Swiss are as follows:

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 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 us, 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 us, 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

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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.

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

Brian Sullivan, Vice President—National Accounts, joined 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.

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.

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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 2002 and 2001 as reported by Nasdaq were as follows:

We announced on May 23, 2002 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 June 21, 2002 to stockholders of record at the close of business on June 7, 2002. 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, 2002 was 83. However, based on available information, we believe that the total number of Class A Common stockholders, including beneficial stockholders, is approximately 3,400.

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, 2002 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 2 cents per common share. On February 8, 1999, we announced an increase in the cash dividend per share to an annual rate of 3 cents per common share. The Board declared quarterly dividends of 0.75 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 1 cent per share to stockholders of record as of the close of business on the last day of the second through fourth quarters of 2002. 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.

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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, 2002:

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Item 6.  Selected Financial Data

The selected consolidated financial data presented below for each of the five years in the period ended December 31, 2002 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.

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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 National Geographic footwear; market acceptance of Royal Elastics footwear; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for 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, including, without limitation, our ability to successfully defend against trademark cancellation claims made by Swiss Army Brands, Inc.; 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 domestic warehouse and headquarters; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; 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; 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 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.

We operate in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on 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.

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Investors should also be aware that while we do 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 contain any projections, forecasts or opinions, such reports are not our responsibility.

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.

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

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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.

2002 Compared to 2001

Total revenues increased 22.4% to $290,413,000 in 2002 from $237,285,000 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 28.1% to 11,296,000 pair in 2002 from 8,821,000 pair in 2001. The average wholesale price per pair was $24.88 in 2002 and $26.09 in 2001.

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Domestic revenues increased 20.4% to $248,589,000 in 2002 from $206,449,000 in 2001. International product revenues increased 34.2% in 2002 to $40,098,000 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 14.4% 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 and National Geographic brands sales were $4,633,000 in 2002 (33% domestic) and $42,000 in 2001.

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, 2002, domestic and international futures orders with start ship dates from January through June 2003 were approximately $147,663,000 and $21,214,000, respectively, 42.9% and 43.1% higher, respectively, than such orders were at December 31, 2001 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, increased to 44.7% in 2002 from 41.7% 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 34.4% to $83,314,000 (28.7% of revenues) in 2002 from $61,969,000 (26.1% 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 (approximately half of which related to payroll due to the Royal Elastics and National Geographic brands), bonus expense for an employee incentive program and development expenses resulting from an increase in product development activities.

Overall net interest income was $904,000 (0.3% of revenues) in 2002 compared to $1,804,000 (0.7% of revenues) in 2001, a decrease of $900,000 or 49.9%. 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 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.

Net earnings increased 23.1% to $28,697,000 or $1.46 per share (diluted earnings per share) in 2002 from $23,309,000 or $1.14 per share (diluted earnings per share) in 2001.

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2001 Compared to 2000

Total revenues increased 6.4% to $237,285,000 in 2001 from $223,102,000 in 2000. This increase was attributable to an increase in the volume of footwear sold partially offset by a slight decrease in the average underlying wholesale price per pair. The volume of footwear sold increased 8.2% to 8,821,000 pair in 2001 from 8,156,000 pair in 2000. The average wholesale price per pair was $26.09 in 2001 and $26.21 in 2000. The major changes in volume for footwear categories are as follows: Classics and training categories increased 9% and 42%, respectively.

Domestic revenues increased 3.9% to $206,449,000 in 2001 from $198,735,000 in 2000. International product revenues increased 26.2% in 2001 to $29,884,000 from $23,679,000 in 2000. Fees earned by us on sales by foreign licensees and distributors were $952,000 for 2001 and $688,000 for 2000. International revenues, as a percentage of total revenues, increased to 13.0% in 2001 from 10.9% in 2000.

Gross profit margins increased, as a percentage of revenues, to 41.7% in 2001 from 40.4% in 2000. Gross profit margins increased primarily due to changes in the product mix of sales.

Selling, general and administrative expenses increased 5.4% to $61,969,000 (26.1% of revenues) in 2001 from $58,773,000 (26.3% of revenues) in 2000. The increase in the amounts for the year ended December 31, 2001 compared to the year ended December 31, 2000 was primarily the result of an increase in payroll and related expenses, partially the result of the decrease in the expense related to an employee incentive bonus during 2000 that did not also occur in 2001. In 2000, there was a reduction of employee incentive bonus accruals due to diminished financial performance in that year compared to the previous year. The decrease in selling, general and administrative expenses, as a percentage of revenues, was due primarily to these expenses increasing at a slower rate than revenues during 2001.

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

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

Net earnings increased 10.7% to $23,309,000 or $1.14 per share (diluted earnings per share) in 2001 from $21,059,000 or $.98 per share (diluted earnings per share) in 2000.

Liquidity and Capital Resources

We experienced a net cash inflow of approximately $26,469,000, $21,041,000 and $27,235,000 from our operating activities during 2002, 2001 and 2000, respectively. Cash provided by operations in 2002 increased from 2001, due primarily to differences in the amounts of changes in inventories and accounts payable and accrued liabilities, as well as an increase in net earnings. Cash provided by operating activities for the year ended 2001 as compared to 2000, decreased due primarily to differences in the amounts of changes in accounts receivable and accounts payable and accrued liabilities, partially offset by an increase in net earnings.

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We had a net outflow of cash from our investing activities during 2002 and 2001 due to the net purchase of property, plant and equipment, and for 2001 due to a cash payment for the acquisition of Royal Elastics and a cash payment for interest in a licensing agreement.

In 2002 and 2001, the net cash provided by operating activities was used for the purchase of treasury stock and to pay cash dividends, partially offset by proceeds from stock options exercised. Also, in 2001, cash provided by operating activities was used for the repayment of borrowings under bank lines of credit and subordinated debentures.

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, 2002, approximately $20,715,000 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 $8,068,000 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, 2002. 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 2003.

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. 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 12, 2002 (the day prior to the filing of the Form 10-K) of 11,066,164 shares at an aggregate cost totaling approximately $94,957,000.

In June 2001, we were notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of ours, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to us during the 90 day period prior to the bankruptcy filing. The aggregate amount of these payments, which the trustee’s counsel is claiming to be preferential transfers, is approximately $4,315,000 while the trustee is seeking the court’s permission to add a further $600,000 in claimed preferential transfers. We believe these payments were received in the ordinary course of business and that we have meritorious defenses against the trustee’s claims. In November 2001, the trustee filed suit against us (and other creditors) to recover payments made to us during the 90 days prior to the customer’s bankruptcy filing. We continue to believe that we have a meritorious “ordinary course of business” defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in our financial statements as of December 31, 2002.

In July 2001, we signed a new 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 $11,159,000 at December 31, 2002. This facility currently expires in July 2003. The credit facility provides for interest to be paid at the prime rate less 3/4% or, at 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.

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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 $5,282,000 at December 31, 2002. These facilities are made available until terminated by either party.

There was no debt at December 31, 2002 and December 31, 2001 (excluding outstanding letters of credit of $4,560,000 and $3,517,000 at December 31, 2002 and 2001, respectively).

Our working capital increased $13,964,000 to $132,918,000 at December 31, 2002 from $118,954,000 at December 31, 2001.

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.

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. To fix the U.S. dollar amount we will receive on sales denominated in Euros, we enter into forward exchange contracts to sell the foreign currency denominated in that currency. The extent to which forward exchange contracts are used is modified periodically in response to 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 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

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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 table below provides information as of December 31, 2002 and 2001 about our foreign currency forward exchange contracts by currency. The information is presented in U.S. dollars:

We do not anticipate any material adverse effect on our results of operations or financial position relating to these foreign currency forward exchange contracts. Based on our overall currency rate exposure at December 31, 2002, a 10% change in currency rates would not have had a material effect on our financial position, results of operations and cash flows.

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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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2002, 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, 2002. 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

February 4, 2003

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K•SWISS INC.

CONSOLIDATED BALANCE SHEETS

December 31,

(Dollar amounts in thousands)

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)

The accompanying notes are an integral part of these statements.

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K•SWISS INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three years ended December 31, 2002

(Dollar amounts in thousands)