Note Regarding Forward-Looking Statements and Analyst Reports

"Forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, 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 or 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 all our product offerings; demographic changes; 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; performance and reliability of products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for our product, and various market factors described above; the availability of credit facilities for our customers and/or the stability of credit markets; 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 timely commercialization; the ability to secure and protect trademarks, patents, and other intellectual property; inadvertent and nonwillful infringement on others' trademarks, patents and other intellectual property; difficulties in implementing, operating, maintaining, and protecting our increasingly complex information systems and controls including, without limitation, the systems related to demand and supply planning, and inventory control; interruptions in data and communication systems; concentration of production in China; changes in our effective tax rates as a result of changes in tax laws or changes in our geographic mix of sales and level of earnings; 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 natural disasters, epidemic diseases or customer purchasing habits; 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; increased material and/or labor costs; 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, exchange rate fluctuations, 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 Inc. (the "Company," "K•Swiss," "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.

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.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the S.E.C. The preparation of these financial statements required 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.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Overview

Our total revenues decreased 24.8% in the three months ended March 31, 2009 from the three months ended March 31, 2008. Our overall gross profit margins, as a percentage of revenues, decreased to 38.2% for the three months ended March 31, 2009 compared to 46.7% for the three months ended March 31, 2008, as a result of product mix, which includes a higher level of sales of closeout product during the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The current downturn of the worldwide economy has had and will continue to have an adverse affect on our business. Our selling, general and administrative expenses decreased to 40.5% of revenues for the three months ended March 31, 2009 from 41.0% of revenues for the three months ended March 31, 2008 due mainly to decreases in advertising, data processing, legal and accounting expenses, partially offset by an increase in compensation expenses. At March 31, 2009, our total futures orders with start ship dates from April through September 2009 were $73,713,000, a decrease of 41.3% from March 31, 2008. Of this amount, domestic futures orders were $28,340,000, a decrease of 39.0%, and international futures orders were $45,373,000, a decrease of 42.7%. Subsequent to March 31, 2009, we sold certain assets related to the Royal Elastics brand, which is shown in the consolidated financial statements as a discontinued operation. Net income from discontinued operations, net of tax benefit, was $512,000 for the three months ended March 31, 2009, compared to a net loss from discontinued operations, net of tax benefit, of $20,000 for the three months ended March 31, 2008. Net loss and net loss per diluted share for the three months ended March 31, 2009 was $1,093,000, or $0.03 per diluted share, compared to net earnings and net earnings per diluted share of $7,110,000, or $0.20 per diluted share for the three months ended March 31, 2008.

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.



                                                                    Three Months
                                                                        Ended
                                                                      March 31,
                                                                   2009      2008
  Revenues                                                         100.0 %   100.0 %
  Cost of goods sold                                                61.8      53.3
  Gross profit                                                      38.2      46.7
  Selling, general and administrative expenses                      40.5      41.0
  Interest (expense)/income, net                                    (0.2 )     2.3
  (Loss)/Earnings before income taxes and discontinued operation    (2.5 )     8.0
  Income tax (benefit)/expense                                      (0.3 )     0.8
  Income from discontinued operations, net of income tax benefit     0.7        -
  Net (loss)/earnings                                               (1.5 )     7.2

K•Swiss brand revenues decreased to $66,693,000 for the three months ended March 31, 2009 from $98,401,000 for the three months ended March 31, 2008, a decrease of $31,708,000 or 32.2%. This decrease was the result of a decrease in the volume of footwear sold as well as lower average wholesale prices per pair. The volume of footwear sold decreased by 20.7%, to 2,619,000 pair for the three months ended March 31, 2009, from 3,304,000 pair for the three months ended March 31, 2008. The decrease in the volume of footwear sold for the three months ended March 31, 2009 was primarily the result of decreased sales of the lifestyle category of 28.8%, offset by increased sales of the performance category of 19.8%. The average wholesale price per pair decreased to $23.84 for the three months ended March 31, 2009 from $28.65 for the three months ended March 31, 2008, a decrease of 16.8%, which resulted primarily from a product mix of sales, which included a higher level of sales of closeout product during the three months ended March 31, 2009 compared to the three months ended March 31, 2008; and from a geographic mix of sales, as domestic sales, which generally sell at a lower price, have increased as a percentage of total K•Swiss brand revenues for the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

The breakdown of revenues (dollar amounts in thousands) is as follows:

                                        Three Months Ended March 31,
                                        2009         2008      % Change
               Domestic
               K•Swiss brand         $   30,375    $  40,741      (25.4 )%

               Total domestic        $   30,375    $  40,741      (25.4 )%

               International
               K•Swiss brand         $   36,318    $  57,660      (37.0 )%
               Palladium brand            7,351           -       100.0 %

               Total international   $   43,669    $  57,660      (24.3 )%

               Total Revenues        $   74,044    $  98,401      (24.8 )%

Customer acceptance of our domestic and international product has been weak and is likely to continue for the near term. In addition, the current downturn of the worldwide economy has had and will continue to have an adverse affect on our business.

Gross Margin

Overall gross profit margins, as a percentage of revenues, decreased to 38.2% for the three months ended March 31, 2009, from 46.7% for the three months ended March 31, 2008. Gross profit margin for the three months ended March 31, 2009 was affected by product mix changes and geographic mix of international sales. For the three months ended March 31, 2009, there were increased sales of closeout product compared to the three months ended March 31, 2008, contributing to the decrease in gross profit margin. International sales generally yield a higher gross profit margin, however, gross margins were lower for the three months ended March 31, 2009 compared with the three months ended March 31, 2008 partially due to an increase in sales of closeout product. Our gross margins may not be comparable to our competitors as we recognize warehousing costs within selling, general and administrative expenses.

Selling, General and Administrative Expenses

Overall selling, general and administrative expenses decreased to $29,976,000 (40.5% of revenues) for the three months ended March 31, 2009, from $40,361,000 (41.0% of revenues) for the three months ended March 31, 2008, a decrease of $10,385,000 or 25.7%. This decrease was the result of decreases in advertising, data processing, legal and accounting expenses, partially offset by an increase in compensation expenses for the three months ended March 31, 2009. Advertising expenses decreased 58.2% primarily due to a decrease in both domestic and international markets as part of an effort to reduce costs as our business declines. Data processing expenses decreased 40.7% as a result of the decreases in on-going maintenance expenses for our SAP computer software system which resulted from a completion of the SAP implementation in certain international regions in the fourth quarter of 2008. Legal expenses decreased 43.6% as a result of the decreased expenses incurred to defend our trademarks. Accounting expenses decreased 104.9% as a result of lower auditing fees for non-recurring 2008 events and the reduction of the outsourcing of certain accounting services. Compensation expenses, which includes commissions, bonus/incentive related expenses and employee recruiting and relocation expenses, increased 3.8% mainly as a result of compensation expenses related to Palladium, which was purchased

Interest, Other and Taxes

Overall net interest expense was $124,000 (0.2% of revenues) for the three months ended March 31, 2009 compared to net interest income of $2,292,000 (2.3% of revenues) for the three months ended March 31, 2008. This decrease in net interest income was the result of the change in fair value of the Mandatorily Redeemable Minority Interest, lower average cash balances and average interest rates and interest expense on lines of credit.

Our effective tax benefit was 11.2% for the three months ended March 31, 2009 compared to an effective tax rate of 9.4% for the three months ended March 31, 2008. On a quarterly basis, we estimate what our effective tax rate will be for the full calendar year by estimating pre-tax income, excluding significant or infrequently occurring items, and tax expense for the remaining quarterly periods of the year. The estimated annual effective tax rate is then applied to year-to-date pre-tax income to determine the estimated year-to-date and quarterly tax expense. The income tax effects of infrequent or unusual items are recognized in the quarterly period in which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings. This continual estimation process periodically results in a change to our expected annual effective tax rate. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax provision equals the estimated annual rate. Our effective tax rate fluctuates mainly due to our geographic mix of sales and earnings. In addition, starting January 1, 2005, provision has not been made for United States income taxes on earnings of selected international subsidiary companies as these are intended to be permanently invested.

At March 31, 2009, uncertain tax positions and the related interest were $6,325,000 and $848,000, respectively, all of which would affect the income tax rate if reversed. During the three months ended March 31, 2009 and 2008, we recognized income tax expense related to uncertain tax positions of $306,000 and $535,000, respectively.

The net loss for the three months ended March 31, 2009 was $1,093,000, or $0.03 per share (diluted loss per share), compared to net earnings of $7,110,000, or $0.20 per share (diluted earnings per share), for the three months ended March 31, 2008.

Subsequent Event

On April 30, 2009, we sold certain Royal Elastics assets, consisting of its inventory located in Taiwan and its intangible assets, with an approximate net book value of $1.2 million, to Royal Elastics Holdings Ltd. ("REH"), a third party, in an arm's length transaction for $4.0 million. We will receive $2.9 million in cash over the next twelve months from REH and have also received a $1.1 million promissory note from REH for the remaining balance. Interest on the promissory note is payable quarterly at an interest rate of Wall Street Journal Prime plus 1%. The principal balance is due on April 30, 2016. The expected gain on sale is $1.4 million, or approximately $0.04 per diluted share. Operations of the Royal Elastics brand have been accounted for and presented as a discontinued operation in the accompanying financial statements. Net income from discontinued operations, net of tax benefit, was $512,000 for the three months ended March 31, 2009, compared to a net loss from discontinued operations, net of tax benefit, of $20,000 for the three months ended March 31, 2008.

Backlog

At March 31, 2009 and 2008 total futures orders with start ship dates from April 2009 and 2008 through September 2009 and 2008 were approximately $73,713,000 and $125,608,000, respectively, a decrease of 41.3%. The 41.3% decrease in total futures orders is comprised of a 50.9% decrease in the second quarter 2009 futures orders and a 30.4% decrease in the third quarter 2009 futures orders. At March 31, 2009 and 2008, domestic futures orders with start ship dates from April 2009 and 2008 through September 2009 and 2008 were approximately $28,340,000 and $46,429,000, respectively, a decrease of 39.0%. At March 31, 2009 and 2008, international futures orders with start ship dates from April 2009 and 2008 through September 2009 and 2008 were approximately $45,373,000 and $79,179,000, respectively, a decrease of 42.7%. "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 experienced net cash outflows from continuing operations of approximately $25,131,000 and $10,461,000 during the three months ended March 31, 2009 and 2008, respectively. The decrease in cash flows from operating activities from the prior year is due primarily to a net loss from continuing operations for the three months ended March 31, 2009 and to the difference in amount in the change in accounts payable and accrued liabilities, offset by the differences in the amounts in the changes in prepaid expense and other assets, accounts receivable and inventories.

We had net cash outflows from our investing activities of $260,000 and $7,009,000 for the three months ended March 31, 2009 and 2008, respectively, due to the purchase of property, plant and equipment and for the three months ended March 31, 2008, the purchase of trademarks. The decrease in investment in property, plant and equipment in 2009 is due to the completion of the implementation of the SAP information management software to certain international regions in the fourth quarter of 2008.

We had net cash inflows from our financing activities of $1,934,000 for the three months ended March 31, 2009 and net cash outflows from our financing activities of $3,179,000 for the three months ended March 31, 2008. The decrease in cash outflows from financing activities was due primarily to an increase in the net borrowings under our bank lines of credit for the three months ended March 31, 2009, attributable to borrowings by Palladium, and by a decrease in repurchases of stock and payment of dividends in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

On October 26, 2004, the Board of Directors authorized a stock repurchase program to supplement prior stock repurchase programs, which allows us to repurchase through December 2009, up to 5,000,000 shares of our Class A Common Stock from time to time on the open market, as market conditions warrant. As of March 31, 2009, a maximum of 3,911,289 shares may be repurchased pursuant to the stock repurchase program. We adopted this program because we believe that depending upon the then-array of alternatives, repurchasing our shares can be a good use of excess cash. Currently, we have made purchases under all stock repurchase programs from August 1996 through May 6, 2009 (the day prior to the filing of the Form 10-Q) of 25.5 million shares at an aggregate cost totaling approximately $166,759,000, at an average price of $6.55 per share. See Part II
- Other Information, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

No other material capital commitments existed at March 31, 2009. Depending on our future growth rate, funds may be required by operating activities. With continued use of our revolving credit facilities and internally generated funds, we believe our present and currently anticipated sources of capital are sufficient to sustain our anticipated capital needs for the remainder of 2009. At March 31, 2009 and December 31, 2008, the Company had debt outstanding of $7,027,000 and $5,376,000, respectively, which is attributable to Palladium. At March 31, 2009, we were in compliance with all relevant covenants under our credit facilities.

Our working capital decreased $2,415,000 to $278,892,000 at March 31, 2009 from $281,307,000 at December 31, 2008. Working capital decreased during the three months ended March 31, 2009 mainly due to a decrease in cash and cash equivalents and inventory and an increase in bank lines of credit and short-term debt, offset by an increase in accounts receivable and a decrease in trade accounts payable and accrued liabilities.

Off-Balance Sheet Arrangements

We did not enter into any off-balance sheet arrangements during the three months ended March 31, 2009 or 2008, nor did we have any off-balance sheet arrangements outstanding at March 31, 2009 or 2008.