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 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; consumer confidence; the availability of credit facilities for our customers, the tightening of credit and liquidity for our customers and/or the overall stability of credit markets; the level of consumer disposable income and consumer purchasing patterns; 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 price that we charge for our products; the ability and costs incurred to secure and protect trademarks, patents, and other intellectual property; counterfeiting and infringement of our intellectual property and any action by the United States or foreign governments to protect and enforce our intellectual property; inadvertent and nonwillful infringement on others' trademarks, patents and other intellectual property; difficulties in 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 natural disasters or other serious disruptions 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 independent contract manufacturers to manufacture product in a timely and cost-efficient manner while maintaining specified quality standards; dependence on distributors and licensees; dependence on major customers; success of our 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, limitations on conversion of foreign currencies into U.S. Dollars, new investment regulation and other restrictions by foreign governments, restriction on dividend payments and other payments by foreign subsidiaries and other restrictions on transfers of funds to or from foreign countries, 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; the ability for a limited number of stockholders to exert significant influence on us; 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

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.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the reserve for uncollectible accounts receivable and inventory reserves. These policies require that we make estimates in the preparation of our financial statements as of a given date.

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 27.5% and 23.7% in the nine and three months ended September 30, 2009 from the nine and three ended September 30, 2008, respectively. Our overall gross profit margins, as a percentage of revenues, decreased to 35.7% and 37.2% for the nine and three months ended September 30, 2009 compared to 43.5% and 39.8% for the nine and three months ended September 30, 2008, respectively, as a result of product mix, including a higher percentage of closeout product sold during the nine and three months ended September 30, 2009 compared to the nine and three months ended September 30, 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 $90,609,000 for the nine months ended September 30, 2009 from $110,326,000 for the nine months ended September 30, 2008, as a result of decreases in advertising expenses, data processing expenses, legal expenses, compensation expenses and warehousing expenses. Our selling, general and administrative expenses decreased to $30,329,000 for the three months ended September 30, 2009 from $36,409,000 for the three months ended September 30, 2008, as a result of decreases in advertising expenses, compensation expenses and data processing expenses. Included in other (expense)/income, net, for the nine months ended September 30, 2009, is a loss of $2,616,000 upon the purchase of the remaining 43% of Palladium, offset by a gain of $1,367,000 on the sale of certain assets related to the Royal Elastics brand, which is shown in the consolidated financial statements as a discontinued operation. During the three months ended September 30, 2009, an adjustment of $486,000 was recognized to reduce the gain on sale of certain assets of the Royal Elastics brand that occurred in the second quarter of 2009. During the nine months ended September 30, 2008, we received a settlement payment of $30,000,000 in connection with a lawsuit defending our trademarks, which is included in other (expense)/ income, net. At September 30, 2009, our total futures orders with start ship dates from October 2009 through March 2010 were $67,996,000, a decrease of 32.1% from September 30, 2008. Of this amount, domestic futures orders were $23,121,000, a decrease of 36.8%, and international futures orders were $44,875,000, a decrease of 29.3%. We incurred a net loss for the nine months ended September 30, 2009 of $15,474,000 (including net other expense described above), or $0.44 per diluted share, compared to net earnings and earnings per diluted share for the nine months ended September 30, 2008 of $34,599,000 (including the settlement payment described above), or $0.98 per diluted share. We incurred a net loss for the three months ended September 30, 2009 of $2,884,000 (including net other expense described above), or $0.08 per diluted share, compared to net earnings and earnings per diluted share for the three months ended September 30, 2008 of $1,066,000, or $0.03 per diluted share.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of
certain items in the Consolidated Statements of Earnings/Loss relative to
revenues.



                                       15

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                                                          Nine Months           Three Months
                                                             Ended                 Ended
                                                         September 30,         September 30,
                                                        2009       2008       2009       2008

Revenues                                                100.0 %    100.0 %    100.0 %    100.0 %
Cost of goods sold                                       64.3       56.5       62.8       60.2
Gross profit                                             35.7       43.5       37.2       39.8
Selling, general and administrative expenses             45.6       40.3       42.9       39.3
Other (expense)/income, net                              (0.6 )     11.0       (0.7 )       -
Interest income, net                                      0.3        2.3        0.5        2.5
(Loss)/Earnings before income taxes and discontinued
operations                                              (10.2 )     16.5       (5.9 )      3.0
Income tax (benefit)/expense                             (2.5 )      3.3       (2.2 )      1.4
Loss from discontinued operations, net of income tax
benefit                                                  (0.1 )     (0.6 )     (0.4 )     (0.5 )
Net (Loss)/Earnings                                      (7.8 )     12.6       (4.1 )      1.1

Revenues

K•Swiss brand revenues decreased to $178,058,000 for the nine months ended September 30, 2009 from $263,967,000 for the nine months ended September 30, 2008, a decrease of $85,909,000 or 32.5%. K•Swiss brand revenues decreased to $59,424,000 for the three months ended September 30, 2009 from $82,681,000 for the three months ended September 30, 2008, a decrease of $23,257,000 or 28.1%. The decrease for the nine and three months ended September 30, 2009 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 to 6,959,000 and 2,242,000 pair for the nine and three months ended September 30, 2009, respectively, from 9,193,000 and 2,982,000 pair for the nine and three months ended September 30, 2008, respectively. The decrease in the volume of footwear sold for the three months ended September 30, 2009 was primarily the result of decreased sales of the lifestyle category of 30.6%, offset by an increase in sales of the performance category of 19.1%. The average wholesale price per pair decreased to $23.86 for the nine months ended September 30, 2009 from $27.60 for the nine months ended September 30, 2008, a decrease of 13.6%, and to $24.56 for the three months ended September 30, 2009 from $26.44 for the three months ended September 30, 2008, a decrease of 7.1%. The decrease in the average wholesale prices per pair for the nine and three months ended September 30, 2009, resulted from the product mix of sales, which included a higher percentage of sales of closeout product, and from the geographic mix of sales, in which domestic sales generally sell at a lower price; and a general decline in worldwide selling prices.

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

                                       Nine Months Ended September 30,             Three Months Ended September 30,
                                        2009           2008      % Change          2009           2008        % Change
Domestic
K•Swiss brand                       $     82,764    $  111,859      (26.0 )%    $    23,657    $    35,776       (33.9 )%
Palladium brand                              330            -       100.0 %             330             -        100.0 %

Total domestic                      $     83,094    $  111,859      (25.7 )%    $    23,987    $    35,776       (33.0 )%


International
K•Swiss brand                       $     95,294    $  152,108      (37.4 )%    $    35,767    $    46,905       (23.7 )%
Palladium brand                           20,321         9,948      104.3 %          10,879          9,948         9.4 %

Total international                 $    115,615    $  162,056      (28.7 )%    $    46,646    $    56,853       (18.0 )%


Total Revenues                      $    198,709    $  273,915      (27.5 )%    $    70,633    $    92,629       (23.7 )%

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 profit margins, as a percentage of revenues, decreased to 35.7% for the nine months ended September 30, 2009, from 43.5% for the nine months ended September 30, 2008, and decreased to 37.2% for the three months ended September 30, 2009, from 39.8% for the three months ended September 30, 2008. Gross profit margins for the nine and three months ended September 30, 2009 were affected by product mix changes, geographic mix of sales and a general decline in selling prices. For the nine and three months ended September 30, 2009, there was a higher percentage of sales of closeout product compared to the nine and three months ended September 30, 2008, contributing to the decrease in gross profit margin. In addition, for the nine months ended September 30, 2009, there was a shift to domestic revenues comprising a larger percentage of total revenues, and as noted above, domestic sales generally sell at lower prices which in turn yield a lower gross profit margin than international sales. 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 $90,609,000 (45.6% of revenues) for the nine months ended September 30, 2009, from $110,326,000 (40.3% of revenues) for the nine months ended September 30, 2008, a decrease of $19,717,000 or 17.9%, and decreased to $30,329,000 (42.9% of revenues) for the three months ended September 30, 2009, from $36,409,000 (39.3% of revenues) for the three months ended September 30, 2008, a decrease of $6,080,000 or 16.7%. The decrease in selling, general and administrative expenses for the nine months ended September 30, 2009 is a result of decreases in advertising expenses, data processing expenses, legal expenses, compensation expenses and warehousing expenses. The decrease in selling, general and administrative expenses for the three months ended September 30, 2009 is a result of decreases in advertising expenses, compensation expenses and data processing expenses. Advertising expenses decreased 35.5% and 23.5% for nine and three months ended September 30, 2009, respectively, primarily due to decreases in both domestic and international markets as part of an effort to reduce costs as our business declines. Data processing expenses decreased 33.4% and 35.0% for the nine and three months ended September 30, 2009, respectively, as a result of the decreases in on-going maintenance expense for our SAP computer software system which resulted from the completion of the SAP implementation in certain international regions in the fourth quarter of 2008. Compensation expenses, which includes commissions, bonus/incentive related expenses and employee recruiting and relocation expenses, decreased 5.9% and 11.2% for the nine and three months ended September 30, 2009, respectively, as a result of decreases in headcount and other bonuses/incentive related expenses, offset by an increase in stock option compensation expenses. Legal expenses decreased 50.0% for the nine months ended September 30, 2009, as a result of the decreased expenses incurred to defend our trademarks. Warehousing expenses decreased 17.2% for the nine months ended September 30, 2009, as a result of lower level of sales. Corporate expenses of $14,642,000 and $4,621,000 for the nine and three months ended September 30, 2009, respectively, compared to $21,594,000 and $6,191,000 for the nine and three months ended September 30, 2008, respectively, are included in selling, general and administrative expenses and include expenses such as salaries and related expenses for executive management and support departments such as accounting and treasury, information technology and legal which benefit the entire Company. Corporate expenses decreased for the nine and three months ended September 30, 2009 as a result of a decrease in data processing expenses, legal expenses and accounting expenses. The decrease in data processing expenses and legal expenses are due to the reasons discussed above. The decrease in accounting expenses was a result of lower auditing fees for non-recurring 2008 events and a reduction of the outsourcing of certain accounting services. During the three months ended September 30, 2009, the decrease in corporate expenses were offset by an increase in compensation expenses resulting from an increase in stock option compensation expense.

Other (Expense)/Income, Interest and Taxes

Other expense for the nine months ended September 30, 2009 includes a loss upon the purchase of the remaining 43% of Palladium of $2,616,000, offset by a gain on the sale of certain assets of the Royal Elastics brand of $1,367,000. Other expense for the three months ended September 30, 2009 includes an adjustment of $486,000 reducing the gain on sale of certain assets of the Royal Elastics brand, which had occurred in the second quarter of 2009.

On April 30, 2009, we sold certain Royal Elastics assets, consisting of its inventory located in Taiwan and its intangible trademarks, with an approximate net book value of $1.0 million, to Royal Elastics Holdings Ltd. ("REH"), a third party, in an arm's length transaction for $4.0 million. We expect to receive $2.9 million in cash by April 30, 2010 from REH (of which the Company has received approximately $1.6 million as of September 30, 2009) and have also received a $1.1 million promissory note from REH for the remaining balance. In the third quarter of 2009, the Company recognized a reserve of approximately $486,000 relating to the remaining amount expected to be received by April 2010 (or approximately $1.3 million as of September 30, 2009), which reduced the overall gain on sale. 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.

Other income for the nine months ended September 30, 2008 consists of a $30,000,000 settlement payment received on June 30, 2008. On June 24, 2008, the Company entered into a settlement agreement with Payless ShoeSource, Inc., a Missouri corporation and Payless ShoeSource Inc., a Delaware corporation (collectively, "Payless") in connection with our 2004 action filed against Payless in the United States District Court for the Central District of California (Western District), in which we alleged trademark and trade dress infringement, trademark dilution, unfair competition and breach of contract. The settlement agreement provided, among other things, that Payless would pay to us $30 million in cash on or before July 1, 2008 in payment of compensatory damages claimed by us from Payless' advertising, promotion and sale of certain footwear.

Net interest income was $698,000 (0.3% of revenues) and $354,000 (0.5% of revenues) for the nine and three months ended September 30, 2009, respectively, compared to $6,501,000 (2.3% of revenues) and $2,345,000 (2.5% of revenues) for the nine and three months ended September 30, 2008, representing a decrease of $5,803,000 and $1,991,000 for the nine and three months ended September 30, 2009, respectively, compared to the same prior year period. The decrease in net interest income for the nine and three months ended September 30, 2009 was the result of lower average cash balances, lower interest rates and interest expense incurred by Palladium on lines of credit, and for the nine months ended September 30, 2009, recognition of the change in the fair value of the MRMI.

Our effective tax benefit was 24.9% and 37.9% for the nine and three months ended September 30, 2009, respectively compared to an effective tax rate of 19.9% and 46.7% for the nine and three months ended September 30, 2008, respectively. 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 September 30, 2009, uncertain tax positions and the related interest were $6,047,000 and $854,000, respectively, all of which would affect the income tax rate if reversed. During the nine months ended September 30, 2009, we recognized income tax expense related to uncertain tax positions of $9,000 and during the three months ended September 30, 2009, we recognized an income tax benefit related to certain net reversals of uncertain tax positions of $547,000. During the nine and three months ended September 30, 2008, we recognized income tax expense related to uncertain tax positions of $1,547,000 and $566,000, respectively.

The net loss for the nine months ended September 30, 2009 was $15,474,000, or $0.44 per share (diluted loss per share), compared to net earnings of $34,599,000, or $0.98 per share (diluted earnings per share), for the nine months ended September 30, 2008. The net loss for the three months ended September 30, 2009 was $2,884,000, or $0.08 per share (diluted loss per share), compared to net earnings of $1,066,000, or $0.03 per share (diluted earnings per share), for the three months ended September 30, 2008. Net loss and diluted loss per share for the nine months ended September 30, 2009 included the pre-tax loss of $1,249,000 from the pre-tax loss on the purchase of the remaining 43% of Palladium, offset by the net pre-tax gain on the sale of certain Royal Elastics assets, described above, or $0.04 per diluted share (after tax). Net loss and diluted loss per share for the three months ended September 30, 2009 included the pre-tax loss adjustment of $486,000 on the gain on sale of certain Royal Elastics assets, described above, or $0.01 per diluted share (after tax). Net earnings and diluted earnings per share for the nine months ended September 30, 2008 included the pre-tax settlement of litigation of $30,000,000, described above, or $0.52 per diluted share (after tax).

At September 30, 2009 and 2008, total futures orders with start ship dates from October 2009 and 2008 through March 2010 and 2009 were approximately $67,996,000 and $100,076,000, respectively, a decrease of 32.1%. The 32.1% decrease in total futures orders is comprised of a 36.4% decrease in the fourth quarter 2009 . . .