LA GEAR INC, 10-K, 1997-02-28

LA GEAR INC
10-K, 1997-02-28
RUBBER & PLASTICS FOOTWEAR

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from _________________ to _________________

Commission file number 1-10157

L.A. GEAR, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 95-3375118
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER OR
ORGANIZATION) IDENTIFICATION NUMBER)

2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (310) 452-4327
Securities registered pursuant to Section 12(b) of the Act:

Common Stock, No Par Value The New York Stock Exchange

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

7 3/4% Convertible Subordinated Debentures due 2002

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
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO ________________________________________________
---

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE 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.

AS OF FEBRUARY 21, 1997, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF
THE COMPANY HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY
$40,909,761 BASED UPON THE CLOSING SALES PRICE OF THE COMMON STOCK ON THAT DATE.
VOTING STOCK INCLUDES THE SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK.

NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF
FEBRUARY 21, 1997: 22,958,070.

DOCUMENTS INCORPORATED BY REFERENCE: (A) THE ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR ENDED NOVEMBER 30, 1996 HAS BEEN INCORPORATED BY
REFERENCE PARTIALLY IN PART II HEREOF, AND (B) THE PROXY STATEMENT FOR THE 1997
ANNUAL MEETING OF SHAREHOLDERS HAS BEEN INCORPORATED BY REFERENCE PARTIALLY IN
PART III HEREOF.

<PAGE>

L.A. GEAR, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended November 30, 1996

Part I Page
- ------ ----

Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 11

Part II
- -------

Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters *
Item 6. Selected Financial Data *
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations *
Item 8. Financial Statements and Supplementary Data *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12

Part III
- --------

Item 10. Directors and Executive Officers of the Registrant **
Item 11. Executive Compensation **
Item 12. Security Ownership of Certain Beneficial Owners **
and Management
Item 13. Certain Relationships and Related Transactions **

Part IV
- -------

Item 14. Exhibits, Financial Statement Schedules and Reports 15
on Form 8-K

Signatures 26

* Information incorporated by reference to L.A. Gear's 1996 Annual Report
to Shareholders (the "Annual Report to Shareholders"), a copy of which
is filed as Exhibit 13.1 to this report.

** Information incorporated by reference to L.A. Gear's Proxy Statement
for the 1997 Annual Meeting of Shareholders (the "Proxy Statement"),
which will be filed with the commission within 120 days of the end of
the fiscal year covered by this report.

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PART I
------

INFORMATION CONCERNING L.A. GEAR

THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH IN THIS REPORT. SEE
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS".

ITEM 1. BUSINESS

GENERAL

L.A. Gear, Inc. (L.A. Gear, Inc. and its subsidiaries are collectively
referred to herein as "L.A. Gear" or the "Company") is a California corporation
that was organized on February 7, 1979. L.A. Gear consists of a holding company
that, through its principal subsidiary, L.A. Gear California, Inc., designs,
develops and markets a broad range of quality athletic and lifestyle footwear
for adults and children worldwide.

According to a report published in SPORTING GOODS INTELLIGENCE on January
27, 1997, Nike and Reebok collectively had over 59% of the United States branded
athletic footwear market in 1996, with L.A. Gear ranking ninth with
approximately a 2% domestic market share. While certain of its products compete
directly with Nike and Reebok, L.A. Gear seeks to differentiate itself by
focusing on its heritage as a women's and children's brand, offering innovative,
high-quality, fashionable footwear.

L.A. Gear's greatest future challenge is to increase sales and margins in
an intensely competitive and consolidating branded athletic footwear industry.
To address this challenge and in light of continuing operating losses, the
Company has adopted a branding, sub-branding and co-labeling strategy for its
1997 product lines aimed at (i) building on existing brand success with products
such as children's lighted footwear and elevating the integrity of its women's
athletic product and (ii) introducing new brands to penetrate additional market
segments. Each brand, sub-brand and co-label will have new packaging and
point-of-sale materials that distinguish it to consumers and retailers. Also,
the Company's non-athletic, casual adult product line has been significantly
reduced for 1997 and certain other products have been discontinued.

In addition, the Company adopted a cost reduction plan in November 1996,
aimed at bringing operating expenses in line with its anticipated sales base.
The plan primarily consists of the following key elements: (i) an approximately
52% reduction in the Company's full-time domestic workforce (from approximately
314 to 150 employees); (ii) reduction of corporate overhead through space
consolidation at the Company's Santa Monica, California headquarters and at its
Ontario, California distribution center; and (iii) a consolidation and
restructuring of the Company's European operations, including, where
appropriate, servicing the Company's European customers through independent
distributors rather than through direct subsidiaries.

These actions are in addition to the cost reduction measures taken by the
Company in 1995, which reduced operating expenses by approximately $40 million
on an annualized basis. Such measures included a 30% reduction in the Company's
workforce in September 1995, the closure of its retail outlet store division,
the elimination of underutilized sponsorships and licenses, in-house production
of sales catalogs, simplification of customer discount programs and office space
consolidation.

SENIOR MANAGEMENT

In November 1996, the Company announced that William L. Benford, President
and Chief Operating Officer, was resigning as an officer of the Company to join
Shamrock Capital Advisors, Inc. ("SCA") in early February 1997. SCA is the
financial advisor to Trefoil Capital Investors, L.P., the largest beneficial
owner of the Company's stock. Effective November 26, 1996, Bruce W. MacGregor
assumed Mr. Benford's duties on an interim basis and was confirmed as President
and Chief Operating Officer in February 1997. Mr. MacGregor previously served

<PAGE>

as Vice President-Marketing at Avia International and Co-Founder, President and
Chief Executive Officer of Deja Shoe, before joining the Company as a consultant
in February 1996 and being promoted to Senior Vice President-Product Marketing
in August 1996. Mr. Benford will continue to serve on the Company's Board of
Directors. In addition, Victor J. Trippetti was promoted to the position of
Senior Vice President and Chief Financial Officer. Also as part of the
Company's 1996 cost reduction plan, Tracey Doi, former Vice President and
Controller, left the Company in January 1997 to pursue other opportunities, and
Thomas Larkins, Senior Vice President and Chief Administrative Officer, will be
leaving the Company during fiscal 1997 following his completion of certain
projects. See Item 10 "- Directors and Executive Officers of the Registrant".

PRODUCTS

In 1996, the women's footwear collection sought to fill the gap between
casual and strictly performance footwear at retail prices designed to make the
brand attractive to both style and value conscious consumers. Product offerings
were divided into three categories: L.A. Fitness included cross-training and
walking shoes offering quality, comfort and attractive styling at affordable
prices; L.A. Basics featured carryovers of longtime L.A. Gear favorites and
fresh interpretations of time-honored classics for casual wear; L.A. Style
provided interpretations of contemporary athletic/outdoor inspired fashion
footwear featuring unique combinations of fabrics and textures to convey a
sport/casual look. In the women's product line for Fall 1997, L.A. Gear will
offer more athletically oriented footwear to women by introducing ABS+-TM-, a
line of athletic footwear that will reposition the L.A. Gear brand in the
fitness and crosstraining categories. The ABS+-TM- co-label will feature
functional, technically-enhanced athletic footwear, incorporating polyurethane
covered rollers in the heel and forefoot that create an enhanced cushioning
system.

The Company continues to seek to expand its significant presence in the
under 12 year old segment of the athletic footwear market through innovation and
styling in both its lighted and non-lighted footwear product categories. Sales
of children's lighted product represented 57.4% of total children's sales in
1996. In fiscal 1996, the Company introduced NEONZ-TM-, which uses an
electro-luminescent lighting system to emit glowing beams of light on the shoes
uppers, and Graf/x-TM-, a temperature sensitive collection allowing children to
change the color of the uppers, reveal a pattern or personalize their footwear
by writing on it. In addition, sales of Graf/x -TM- were disappointing due to a
lack of understanding of the product at the retail level and this product
category has now been discontinued. The Company's Street Hockey product
category, launched in 1995, was discontinued in 1996.

To build on the success of its children's lighted technology, in 1997 L.A.
Gear will consolidate its lighted product offerings under the L.A.
Lights-Registered Trademark- umbrella to increase brand awareness. The
sub-brand encompasses the ever-popular diode lights on the uppers and bottoms of
kids shoes, offered in the Fall 1997 line as Lites-TM- by L.A. Gear, and
NEONZ-TM-. L.A. Gear will also introduce two new lighted technologies for Fall
1997 under the L.A. Lights-Registered Trademark- umbrella, including
Lazerlites-TM-, utilizing fiber optic technology in the form of motion-sensitive
shoe laces, and Faderz-TM-, optimizing diode lights that feature a fading system
on the bottoms.

In 1997, the Company believes that, by creating brands outside of the L.A.
Gear umbrella, it can branch out and target a demographic group that remains
elusive in today's fast changing footwear marketplace. Recognizing the impact
teenagers have on fashion trends and purchase decisions, in Fall 1997 L.A. Gear
will unveil Digit 3-TM-, a brand of alternative, street-smart shoes featuring
chunky outsoles and fun color combinations with a strong influence from the
skate and snowboard trend. Digit 3-TM- will have a suggested retail price point
of $55 and will be marketed to the 13 to 24-year-old fashion-conscious male and
female consumer. In addition, in Fall 1997, the Company will launch Mongo-TM-,
an aggressive, hard-core style shoe featuring fat snowboard-inspired outsoles
with soft, supple suede uppers in rich hues (already being sold by the Company
in Europe under the Fatmox brand). Mongo-TM- is a fashion lifestyle footwear
for trend-setting men and women who strive for individuality and non-conformity.

The Company's streamlined men's line offered stylish athletic and outdoor
looks in 1996. The focus for the men's line was on comfort and styling at
affordable prices. The men's line in 1997 will be further streamlined and
continue to emphasize comfort and affordability.

<PAGE>

Approximately 98% of L.A. Gear's footwear styles available domestically in
1996 carried a suggested retail price below $50 in line with L.A. Gear's
strategy to provide value priced footwear. The 1997 product lines will continue
to offer quality footwear at affordable prices.

MARKETING

Advertising, promotional and merchandising activities are the principal
elements in L.A. Gear's selling and marketing strategies. L.A. Gear's marketing
plan focuses on the women's and children's markets. The principal components of
its advertising efforts in 1996 consisted of a worldwide print advertising
campaign aimed at women's fashion publications such as COSMOPOLITAN, GLAMOUR,
MADEMOISELLE, SELF, ELLE, SEVENTEEN and SHAPE, as well as children's television
commercials, featuring L.A. Gear's new NEONZ-TM- and GRAf/x-TM- children's
footwear collections, airing on Fox, Nickelodeon and the Cartoon Network.
Participation in major international, national and regional sporting goods and
footwear trade shows is also an important part of L.A. Gear's sales, marketing
and promotional activities. The trade shows are an opportunity to reinforce the
Company's brand image and generate sales with existing customers and attract new
customers. In fiscal 1997, the Company will market its products through a
combination of print and television campaigns and will continue to participate
in international, national and regional sporting goods and footwear trade shows.
Increased emphasis will be placed on retail support marketing programs,
including in-store point-of-sale materials, to help differentiate the Company's
products in retail outlets.

As part of a change in its marketing emphasis, the Company has allowed
almost all of its endorsement contracts with professional athletes and others to
expire, and in some cases, including Universal Studios Hollywood, contracts have
been terminated.

L.A. Gear believes that enhancing brand recognition through the use of
distinctive, readily identifiable trademarks and logos is an important factor in
(i) creating a market for its products, (ii) distinguishing its products from
the products of others in a very competitive market place and (iii) licensing
its trademarks for non-footwear products. The Company's future marketing
programs offered will reflect the reduction in the level of the Company's
operations.

DISTRIBUTION AND SALES

L.A. Gear's footwear products are sold in the United States to
approximately 2,500 accounts that include department, shoe, sporting goods and
athletic footwear stores, mass market department stores and mass merchandisers.
L.A. Gear supports retailer sell-through to consumers with design-specialized
point-of-sale displays and giveaway items. In fiscal 1996, L.A. Gear sold its
footwear products domestically through its direct employee sales force. As a
result of the restructuring in November 1996, the Company will sell its products
through a combination of its sales management team and independent sales agents
in fiscal 1997. Also in 1997, the Company will implement its strategy of
segmenting its products between its tiers of distribution for its Fall 1997
product line. The Company will offer its newest technologies and brands to
upper tier distribution channels while continuing to offer its basic lines to
all distribution outlets.

Internationally, L.A. Gear's footwear products were sold in approximately
50 countries, primarily through independent distributors, wholly owned
subsidiaries and its Far East joint venture with Inchcape Pacific Limited
("Inchcape"). Effective September 30, 1996, the Company's Far East joint
venture was terminated and in fiscal 1997 the Company's products will be sold in
the Far East through independent distributors. See "- International Sales".

<PAGE>

The following table sets forth certain information regarding the Company's
net sales.

NET SALES
----------------------------------------------------------------------
1996 1995 1994
$ % $ % $ %
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 74,981 38% $ 107,570 36% $ 165,460 40%
WOMEN'S 38,362 20 46,422 16 63,218 15
MEN'S 20,430 10 35,842 12 67,186 16
OTHER 2,282 1 2,659 1 1,721 1
--------- --- -------- --- -------- ---
TOTAL DOMESTIC NET SALES 136,055 69 192,493 65 297,585 72
INTERNATIONAL FOOTWEAR AND OTHER 60,393 31 104,058 35 118,381 28
--------- --- -------- --- -------- ---
TOTAL NET SALES $ 196,448 100% $ 296,551 100% $ 415,966 100%
======== === ======== === ======== ===

</TABLE>

In fiscal 1996 and 1995, sales to Wal-Mart accounted for 17.1% and 15.3%,
respectively, of L.A. Gear's net sales. In 1994, no customer individually
accounted for 10% or more of L.A. Gear's net sales. L.A. Gear's five largest
customers worldwide, in the aggregate, accounted for approximately 31.6%, 27.8%
and 26.8% of L.A. Gear's net sales in fiscal years 1996, 1995 and 1994,
respectively.

ORDERING PROGRAMS

L.A. Gear has a combination of "at once" and "futures" ordering programs.
In contrast to an "at once" ordering program, in which shoes are shipped in
immediate response to the placement of orders, a formal "futures" ordering
program requires retailers and international distributors to place orders from
four to six months in advance of delivery. The "futures" program therefore
reduces L.A. Gear's need to purchase inventory in anticipation of customer
demand. To encourage "futures" orders, L.A. Gear offers certain discounts and
incentives, subject to minimum order requirements. L.A. Gear's goal is to
achieve a balance between its "futures" and "at once" programs in which the "at
once" program is used primarily for "fill-in" orders and for products that
remain relatively unchanged from season to season, while the "futures" program
is used for new introductions. The mix of "futures" and "at once" orders varies
significantly from quarter to quarter and year to year and, therefore, current
"futures" order levels are not necessarily indicative of sales for subsequent
periods. See "- Inventory Levels".

INTERNATIONAL SALES

Internationally, in fiscal 1996, L.A. Gear's products were sold through (i)
its subsidiaries, which sell in The Netherlands, Luxembourg, Belgium, Germany,
Austria, Ireland, United Kingdom, Italy, France and Mexico, and (ii) independent
distributors. Prior to October 1996, the Company also sold goods through L.A.
Gear (Far East) Limited, its joint venture with Inchcape, in selected Far East
markets, including Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Taiwan
and The People's Republic of China. The joint venture was terminated on
September 30, 1996 by mutual agreement.

By selling through its foreign subsidiaries, L.A. Gear realizes a wholesale
margin on the sale to the retailer that is greater than that on sales to
independent distributors. In fiscal years 1996, 1995 and 1994, sales to L.A.
Gear's foreign subsidiaries' customers represented 19.7%, 20.6% and 12.6%,
respectively, of L.A. Gear's consolidated net sales. Although L.A. Gear
realizes higher margins on sales made by its subsidiaries, it also incurs
greater operating costs, including the cost of holding inventory. In addition,
L.A. Gear is increasingly exposed to the other customary risks of doing business
abroad. See "- Manufacturing" and "- Trade Legislation". As part of its
November 1996 restructuring, the Company has decided to service its customers in
the Netherlands, Luxembourg, Germany, Austria and Italy through independent
distributors rather than its subsidiaries in fiscal 1997. Segment information
in regard to geographical areas and export sales are included in "Note 17 -
Segment Information" in the Notes to Consolidated Financial Statements, which
are incorporated by reference in Item 8 of this report, "- Financial Statements
and Supplementary Data".

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L.A. Gear's international operations are subject to currency fluctuations
over which it has no control. L.A. Gear enters into forward exchange contracts,
with terms of less than one year, to offset the effects of exchange rate changes
on cash flow exposures denominated in foreign currencies. These exposures are
primarily repayments of U.S. dollar denominated liabilities by L.A. Gear's
foreign subsidiaries. These contracts are marked to market, and realized and
unrealized gains and losses are recognized in the consolidated statement of
operations.

MANUFACTURING

L.A. Gear's footwear is manufactured to its specifications by independent
producers located primarily in The People's Republic of China, Indonesia,
Portugal and Mexico. During fiscal 1996, manufacturers located in these
countries supplied 81%, 16%, 2% and 1%, respectively, of total pairs of footwear
purchased by L.A. Gear. A large percentage of L.A. Gear's product is currently
developed and produced in China because of the technical complexity of the
product. The Company commenced manufacturing in Mexico in fiscal 1996 for sales
in that market as a result of high duty rates imposed on imported footwear
products. See "-Trade Legislation".

L.A. Gear selects its footwear manufacturing plants based upon its ability
to realize procurement efficiencies, achieve product quality objectives and
lower product costs. In addition, since 1992, L.A. Gear has engaged an
affiliate of Pentland Group plc ("Pentland") to act as its sourcing agent in the
Far East. Also, the Company has retained BBC International, Ltd. ("BBC") as its
sourcing agent for lighted footwear. The responsibilities of the sourcing agent
include inspecting finished goods prior to shipment by the manufacturer,
supervising development, production and management and facilitating the shipment
of goods from foreign ports. All manufacturing of footwear is performed in
accordance with specifications furnished by L.A. Gear, subject to quality
control standards that include the right to reject products that do not meet
such specifications. Pentland and BBC provide similar sourcing services to
other footwear companies. Failure to maintain satisfactory relationships with
these sourcing agents could require the Company to either source its products
directly with the factories or to secure new sourcing agents for its products
which, if it is unable to do, could cause a material delay in the timely
fulfillment of the Company's product orders.

The principal materials used in L.A. Gear's footwear products are leather,
rubber and synthetic fabrics. L.A. Gear's suppliers buy raw materials in bulk.
Most raw materials are available in the countries where manufacturing takes
place. Although L.A. Gear's suppliers have thus far experienced little
difficulty in satisfying their raw materials requirements, a loss of supply of
any one of the major component materials could temporarily disrupt production.

The footwear products imported into the United States by L.A. Gear are
subject to customs duties. Under the Harmonized Tariff System, duties on the
footwear products imported by L.A. Gear range from 6% to 48.5% of production
costs (plus a unit charge in some cases of approximately 90 cents). Duty rates
depend on the construction and gender of the shoe, as well as whether the
principal component is leather or other materials. In fiscal 1996 and 1995,
these duties averaged approximately 12.0% and 10.2%, respectively, on the cost
of L.A. Gear's footwear. L.A. Gear is unable to predict whether additional
United States customs duties may be imposed upon the importation of its products
in the future.

As a result of L.A. Gear's use of foreign manufacturing facilities, L.A.
Gear is subject to the customary risks of doing business abroad, including
fluctuations in the value of currencies, export duties, import controls and
trade barriers (including quotas), restrictions on the transfer of funds, work
stoppages and, in certain parts of the world, political instability. To date,
these factors have not had a material adverse impact on L.A. Gear's operations.

L.A. Gear has no long term contracts with manufacturing facilities and
competes with other shoe companies, such as Nike, Reebok, Fila, adidas and
Stride Rite, for production capacity. Management believes that its present
sources of supply are adequate and that, if existing production capacities
become unavailable or inadequate, or fail to manufacture products consistent
with the Company's standards, L.A. Gear has the ability to develop alternative
sources over time for the footwear obtained from its current producers. L.A.
Gear's operations could, however, be materially and adversely affected by a
substantial delay in locating alternative sources of production. See "-Trade
Legislation".

<PAGE>

Although all of L.A. Gear's inventory purchases (and the prices of most of
the raw materials used in the manufacture of its products) are denominated in
U.S. dollars, L.A. Gear's product costs, pricing structure and profit margins
depend, in part, on the currency exchange rates between the United States and
the countries where its products are manufactured. The currencies of these
countries have, from time to time, increased in value against the U.S. dollar
and may experience further increases in the future as a result of various
economic and political factors. Although L.A. Gear believes that such
fluctuations in exchange rates have not had a material impact on its operations
to date, such fluctuations could, depending upon their extent and duration,
materially increase L.A. Gear's future cost of goods, resulting in higher
product prices or lower profits unless alternative manufacturing arrangements
can be implemented.

INVENTORY LEVELS

Inventory decreased from $51.7 million (5.7 million pairs) at November 30,
1995 to $32.8 million (3.8 million pairs) at November 30, 1996. This reduction
resulted primarily from a reduced level of operations, an increase in inventory
reserves at November 30, 1996 compared to November 30, 1995 and L.A. Gear's
continuing efforts to effectively manage inventory levels. L.A. Gear
continually monitors its inventory levels and, when necessary, reduces excess
inventory primarily through utilization of selected segments of the mass market
discount channel. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") - Liquidity and Capital Resources -
Inventory", which is incorporated by reference in Item 7 of this report.

TRADEMARKS AND PATENTS

L.A. Gear regards its intellectual property as being one of its most
valuable assets. It is the policy of L.A. Gear to defend vigorously its
trademarks and patents against infringement to the fullest extent practicable
under the laws of the United States and other countries in which its products
are manufactured or sold. L.A. Gear-Registered Trademark- and L.A.
Lights-Registered Trademark- are federally registered trademarks of L.A. Gear in
the United States. L.A. Gear-Registered Trademark- is also a registered
trademark in 101 foreign countries for footwear, apparel and other products.
L.A. Gear has numerous other trademarks that are registered in the United
States, many of which are also registered in foreign countries. L.A. Gear has
more than 450 foreign trademark registrations and more than 170 foreign
trademark applications pending.

L.A. Gear has obtained utility and design patents for numerous footwear
technologies and ornamental aspects of its shoes, and it has numerous patent
applications pending for other footwear technologies and designs. L.A. Gear has
also acquired licensed rights for certain footwear technologies and trademarks
from third parties for use in its products. See "Item 3 - Legal Proceedings" for
a description of certain pending legal actions related to the Company's
intellectual property rights.

EMPLOYEES

At November 30, 1996, L.A. Gear had 314 full-time domestic and 99 full-time
international employees, compared to 369 full-time domestic and 140 full-time
international employees at November 30, 1995. In December 1996, pursuant to the
Company's cost reduction plan, 164 full-time domestic employees were laid off,
reducing the domestic work force to 150 employees. L.A. Gear's employees are
not covered by any collective bargaining agreements, and L.A. Gear considers its
current relations with its employees to be satisfactory.

SEASONALITY

L.A. Gear believes that sales of its footwear products tend to be seasonal
in nature, with the highest level of sales generally occurring in the third
quarter of its fiscal year (representing shipments for the Back-to-School
season). L.A. Gear also offers, on a continuing basis, new products
specifically designed for a Spring season (which ship in the second fiscal
quarter), a Back-to-School season and a limited Holiday season (which ship in
the fourth fiscal quarter).

<PAGE>

BACKLOG

L.A. Gear had a combined domestic and international order backlog of $46.5
million and $88.0 million at December 31, 1996 and 1995, respectively. The
lower backlog at December 31, 1996 is primarily due to (i) the inclusion in the
December 31, 1995 backlog of the then-remaining balance ($29.5 million) of
Wal-Mart's $80 million minimum purchase commitment for fiscal 1995 (the December
31, 1996 backlog includes $5.5 million for Wal-Mart) and (ii) an approximate
$12.0 million decrease in orders for children's lighted product. Children's
lights as a percentage of the total December 31, 1996 and 1995 backlog,
excluding Wal-Mart orders, were 28.0% and 40.2%, respectively. The Company's
agreement with Wal-Mart does not provide for the sale of L.A. Gear lighted
footwear products to Wal-Mart. Wal-Mart was not subject to any minimum purchase
commitment for fiscal 1996 and is not subject to any minimum purchase commitment
for fiscal 1997.

Shipments and sales for future periods depend on, among other things, the
combination of "futures" and "at once" orders. See " - Ordering Programs".
Accordingly, the comparison of backlog from period to period may not be
indicative of eventual actual shipments. Although orders are generally not
cancelable by their terms, in the past the Company has, at its option in
exceptional circumstances, allowed orders to be canceled by customers.

COMPETITION

The athletic and athletic-style footwear industry is highly competitive in
the United States and on a worldwide basis. L.A. Gear's competitors include
both specialized athletic shoe companies and companies with diversified footwear
product lines. The principal elements of competition in the athletic and
athletic-style footwear market include brand awareness, product quality,
performance, design, pricing, marketing and distribution. L.A. Gear's products
compete primarily on the basis of recognition of L.A. Gear's trademarks,
innovative design, value, quality, fashion, style and incorporation of the
latest technological advances. L.A. Gear's primary competitors in domestic and
international athletic and athletic-style markets -- Nike, Reebok, Fila, adidas
and Stride Rite -- are more established and have greater financial, distribution
and marketing resources, as well as greater brand awareness, than L.A. Gear.
According to a report published in SPORTING GOODS INTELLIGENCE on January 27,
1997, Nike and Reebok collectively had over 59% of the United States branded
athletic footwear market in 1996, with L.A. Gear ranking ninth with
approximately 2% of domestic market share.

The casual and lifestyle footwear market is also highly competitive but is
more fragmented than the athletic and athletic-style footwear market. L.A. Gear
faces competition from a number of companies that produce and market casual
footwear products (including other marketers of athletic and athletic-style
footwear that also compete in the casual footwear market). The principal
elements of competition in the casual footwear market are similar to those in
the athletic footwear market and include brand identity, price, product quality,
fashionable designs, product marketing and distribution.

The intensity of the competition faced by L.A. Gear, as well as the rapid
changes in fashion, technology and consumer preferences that can occur in the
footwear markets, are significant risk factors in L.A. Gear's operations. There
can be no assurance that L.A. Gear will be able (i) to respond in a timely
manner to changing consumer preferences, (ii) to maintain or increase the
current share of the total athletic and casual footwear markets that L.A. Gear
has established to date, or (iii) to penetrate new markets.

TRADE LEGISLATION

The Company's practice of overseas manufacturing to specification, with
subsequent importation into the United States, exposes it to the possibility of
product supply disruptions and increased costs in the event of administrative
developments adverse to continued trade or the enactment of protectionist
legislation.

The "Special 301" provision of the Trade Act of 1974, as amended, requires
the United States Trade Representative ("USTR") to determine whether the acts,
policies and practices of foreign countries deny adequate and effective
protection of intellectual property rights or fair and equitable access for U.S.
persons who rely on intellectual property protections. Special 301 was amended
in the Uruguay Round Agreements Act, effective January 1, 1995, to state
specifically that a country can be found to deny adequate and effective
intellectual property

<PAGE>

protection even if it is in compliance under the World Trade Organization
Agreement on Trade-Related Aspects of Intellectual Property Rights.

Special 301 provisions require the identification of countries that fail to
provide the rights of access described in its provisions. On April 30 1996, the
USTR identified China as a "priority foreign country" under the Special 301
intellectual property protection provision for failure to implement the
bilateral Intellectual Property Rights ("IPR") Enforcement Agreement with the
United States, signed in February 1995. The Clinton Administration found that
China's enforcement efforts continue to fall short of the requirements of the
Agreement. Although the Clinton Administration decided to focus on China's
compliance under the current bilateral Agreement, rather than to initiate a new
investigation under Special 301, trade sanctions for non-compliance with Special
301 can be imposed at any time pursuant to a decision by the USTR that China is
not satisfactorily implementing the Agreement. Indeed, the United States
threatened sanctions on May 15, 1996, though an agreement reached between the
two governments led the USTR to drop the sanctions threat on June 17, 1996.

Also on April 30, 1996, the USTR placed eight U.S. trading partners on the
Special 301 "priority watch list": Argentina, the European Union, Greece,
India, Indonesia, Japan, Korea and Turkey. It committed itself to conducting
"out-of-cycle" reviews of El Salvador, Italy, the Philippines, Paraguay, Russia,
Saudi Arabia and Thailand. On the same date, the USTR placed twenty-five
countries on the "watch-list": Australia, Bahrain, Brazil, Canada, Chile,
Columbia, Costa Rica, Ecuador, Egypt, El Salvador, Guatemala, Italy, Kuwait,
Oman, Pakistan, Paraguay, Peru, the Philippines, Poland, the Russian Federation,
Saudi Arabia, Singapore, Thailand, the UAE and Venezuela.

The Company is unable to predict whether the United States will retaliate
against any of these countries for their practices or whether such retaliation
will result in increases in cost, or reductions in supply, of footwear
generally, or the Company's footwear in particular. The Company can report,
however, that the United States announced on April 30, 1996, that it would
invoke World Trade Organization ("WTO") dispute settlement procedures with
respect to the intellectual property protection practices of Portugal, India,
Pakistan and Turkey. The USTR charged that these countries did not live up to
the obligations of the WTO Trade-Related Aspects of Intellectual Property
Rights.

In March 1994, the European Union ("EU") imposed quotas that restrict the
importation into the EU of footwear manufactured in China. Two of the shoe
quotas were eliminated in March 1995. In June 1996, the EU increased by 2% the
number of pairs of footwear admissible in 1997 under the remaining quotas. It
also opened up the 1997 quotas seven months early. In the past, these quotas
have limited imports of the Company's products manufactured in China into the EU
countries. The Company has not suffered significant adverse effects as a result
of the quotas to date, and expects that it could benefit from the increased
quota figures in 1997. The Company is not aware of any other significant
proposed changes to the EU's quotas. In addition, antidumping complaints filed
by various European footwear manufacturers in the EU against footwear imported
from China, Indonesia and Thailand are pending before EU authorities. The
Company is unable to predict whether these or other antidumping complaints in
the EU will lead to the imposition of duties on any of the Company's footwear
imports or whether such duties, if imposed, would significantly limit imports of
the Company's products into the EU countries.

In addition, extension of "most favored nation" ("MFN") status for China
must be approved by the President so that Chinese exports to the U.S. may
continue to have favorable duty rates. China's MFN status was renewed in 1996
without any linkage to areas of U.S. concern, such as human rights and weapons
proliferation. If it is not renewed in 1997, the Company would be required to
seek alternative sources for the footwear it now obtains from producers in
China. The Company's operations could, however, be materially and adversely
affected by a substantial delay in locating such alternative sources of
production.

A number of developments have affected L.A. Gear's business in Mexico over
recent years and will continue to affect it in the future. In November 1993,
Mexico issued a final antidumping order imposing duties on footwear imported
from China. The final order imposed a duty of varying rates depending on the
type of footwear imported. These duties were not applicable to L.A. Gear's
imports of footwear from China, which met a "minimum normal value" requirement,
until August 1994, when changes in the relevant tariff classifications resulted
in the imposition of duties of 232% and 323% on certain of L.A. Gear's imports.
In August 1994, Mexico modified its certificate of

<PAGE>

origin requirements by instituting, among other changes, particularly stringent
procedural requirements for imports of footwear from non-GATT countries,
including China. Although these procedures and other regulations limit L.A.
Gear's ability to import certain footwear from China into Mexico, the
certificate of origin requirements do not apply to other footwear imported by
L.A. Gear because such footwear qualifies for an exemption based on its price.
In December 1994, L.A. Gear filed a petition with the Ministry of Commerce
requesting a review of the antidumping duties, and subsequently filed additional
materials in support of the petition. In August 1996 the Ministry of Commerce
issued a preliminary resolution confirming the dumping duties imposed in 1993.
In January 1997, a public hearing on the matter was held. L.A. Gear is
presently unable to determine whether its petition ultimately will result in the
elimination or lowering of antidumping duties on products that L.A. Gear sells
in the Mexican market.

ITEM 2. PROPERTIES

L.A. Gear's worldwide headquarters are located in a 97,000 square foot
leased facility in Santa Monica, California. The lease for the Santa Monica
facility expires in October 2002 and L.A. Gear has the option to extend such
term for two additional periods of five years each. L.A. Gear has subleased
approximately 23,000 square feet of this facility in connection with its 1995
consolidation efforts and is trying to sublease an additional 44,000 square feet
associated with its 1996 restructuring.

L.A. Gear's warehouse and distribution operations occupy approximately
410,000 square feet in two leased locations in Ontario, California. These
leases expire in June 1999 and L.A. Gear has options to extend each lease term
for an additional five years. L.A. Gear is also attempting to sublease an
additional 119,000 square feet of distribution space in this facility in
connection with its 1996 restructuring.

In 1996, L.A. Gear's wholly owned foreign subsidiaries collectively
leased approximately 60,000 square feet used primarily for warehouse and
office space. These leases expire over periods ranging from February 1997
through December 2002.

L.A. Gear believes that its existing facilities are adequate to meet its
expected needs and that, if needed, additional or alternative space will be
available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

FINEXPANCE S.P.A. V. L.A. GEAR, INC. TRIBUNAL OF CHIAVARI, ITALY. On
February 9, 1993, Finexpance S.p.A. ("Finexpance"), the exclusive distributor of
the Company's products in Italy from January 22, 1988 until February 1, 1993,
filed a complaint against L.A. Gear alleging, among other things, unfair
competition and loss of customer base and goodwill. Plaintiff is seeking
damages in excess of $22 million. L.A. Gear believes Finexpance's claims are
without merit and intends to vigorously defend the action. The next hearing in
this matter is currently scheduled for April 23, 1997.

L.A. GEAR, INC. V. NICHOLAS RODGERS, ET. AL. L.A. Gear recently filed a
complaint and motion in the United States District Court for the Central
District of California for an injunction against Nicholas Rodgers and two
companies owned and/or controlled by him entitled L.A. Gear, Inc. v. Orlaford
Limited, et.al., Civil Case No. 96-7767 LGB (Cwx). Rodgers is the holder of a
patent that relates to the lighted shoe technology previously employed in styles
marketed under the name "L.A. Lights" that Rodgers has licensed to L.A. Gear's
sourcing agent for its lighted shoes, BBC International, Ltd. ("BBC"), in return
for royalty payments. BBC had in turn granted a sublicense to the Company to
allow the Company to sell such lighted shoes in return for a commission
covering, among other things, the royalty BBC was required to pay Rodgers.
Early last year, and unbeknownst to L.A. Gear, Rodgers filed suit against BBC in
Wisconsin for patent infringement claiming that in addition to the Company's
shoes, BBC was sourcing the manufacture of shoes for Kmart and others for which
no royalty was being paid. Rodgers sought to terminate BBC's license on the
patent. Once L.A. Gear learned of this suit, it began using a technology
different from the technology described in Rodger's patent to manufacture its
lighted shoes. In imposing sanctions against BBC, however, the Wisconsin court
specifically ruled that L.A. Gear was not a party to

<PAGE>

the Wisconsin action and hence no sanctions could be imposed against L.A. Gear.
Meanwhile, BBC after having contempt sanctions imposed on it in Wisconsin,
appealed the Wisconsin court's ruling. Subsequently, BBC and Rodgers reached a
settlement.

L.A. Gear, in its suit, seeks a determination that the technologies
currently used in its lighted shoes are different than the technology that was
subject of the action against BBC in Wisconsin, and that such shoes do not
infringe any patent held by Rodgers. L.A. Gear's motion for an injunction,
which seeks to prevent Rodgers from enforcing his patent against L.A. Gear,
currently is due to be heard by the court on or after April 14, 1997. Pending a
hearing, L.A. Gear and Rodgers have agreed upon a stipulated order which
prevents Rodgers from interfering with the sale of L.A. Gear shoes. On January
3, 1997, Rodgers filed a motion to dismiss the action on the grounds that no
jurisdiction existed over Rodgers in California. Alternatively, Rodgers seeks
to transfer the action to Wisconsin. That motion is also due to be heard on
April 14, 1997. Rodgers also filed an action against L.A. Gear on January 17,
1997 for patent infringement. L.A. Gear's response to that complaint is due on
March 10, 1997. L.A. Gear believes the claims against it are without merit and
intends to vigorously defend this action.

L.A. GEAR, INC. V. AARON DESIGNS, ET.AL. In September 1996, L.A. Gear
filed suit in the United States District Court for the Central District of
California against Aaron Designs, a Taiwanese company and its owner Tseng Lu
Chien entitled L.A. Gear, Inc. v. Aaron Designs, et. al., Civil Case No. 96-6351
LGB (Ex). L.A. Gear's complaint sought a declaration from the court that the
defendants did not have a valid or enforceable copyright for the
electroluminescent patterns used on the side panels of L.A. Gear NEONZ-TM-
shoes. L.A. Gear has also claimed that defendants engaged in fraud on the U.S.
Copyright Office and U.S. Customs Service by using their invalid copyright to
have a number of pairs of NEONZ-TM- shoes seized by Customs.

Upon filing its complaint and an application for a temporary restraining
order against defendants, an agreement was reached whereby defendants agreed to
release all shoes seized by Customs and agreed not to interfere with L.A. Gear's
importation or sale of NEONZ-TM- footwear pending the court's resolution of the
validity of the alleged copyrights. Believing that defendants may attempt to
interfere with L.A. Gear's sale of NEONZ-TM- shoes by use of patents that were
equally invalid and unenforceable, on November 8, 1996 L.A. Gear filed a motion
for preliminary injunction against defendants seeking further court protection.
Thereafter, defendants agreed not to interfere with L.A. Gear's importation or
sale of NEONZ-TM- shoes by use of any copyrights, patents or any other means
pending the court's resolution of the injunction motion. The court is currently
scheduled to decide the injunction motion on April 14, 1997. On January 6, 1997
defendants filed a counterclaim against L.A. Gear alleging, among other things,
patent and copyright infringement. L.A. Gear has filed a reply to the
counterclaim denying all claims asserted against it. L.A. Gear believes the
counterclaims against it are without merit and intends to vigorously defend this
action.

MIX FRANCE V. L.A. GEAR, INC., COMMERCIAL COURT OF PARIS, FRANCE. In
February 1996, the liquidator of Mix France, a former distributor of the
Company's products in France, asserted claims against the Company alleging,
among other things, breach of contract, improper transfer of intangible property
(e.g., loss of customer base) and failure to receive reimbursement for expenses
borne by Mix France on behalf of the Company. Plaintiff is seeking an
unspecified amount of damages. As part of the judicial liquidation proceedings,
the Company has submitted a claim for approximately $50,000 with respect to
products sold to Mix France for which the Company never received payment. An
expert has been appointment by the Court to investigate the claims in this
matter and such expert's report is due in the near future. Although the Company
acknowledges its responsibility to reimburse Mix France for certain expenses,
upon the receipt of proper documentation of the incurrence of such expenses
(estimated to be approximately $100,000), the Company believes the remainder of
plaintiff's claims are without merit and intends to vigorously defend this
action.

No assurances can be given as to the likelihood of a favorable outcome in
the foregoing legal proceedings or, in the event of an unfavorable outcome, as
to the estimated amount of potential losses that may be incurred by L.A. Gear in
connection therewith. Failure by L.A. Gear to prevail in the foregoing matters
could have a material adverse effect on the financial condition or results of
operations of the Company.

In addition to the foregoing matters, L.A. Gear is a party to various other
legal proceedings, none of which, individually or in the aggregate, is
considered by the Company to be material.

<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of fiscal 1996.

<PAGE>

PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The information required in this item is incorporated by reference to
"Notes to Consolidated Financial Statements - Note 18 - Market for the
Registrant's Common Stock and Related Stockholder Matters; Selected Quarterly
Financial Data (unaudited)" appearing on page 29 in the Annual Report to
Shareholders, a copy of which is filed as Exhibit 13.1 to this report.

ITEM 6. SELECTED FINANCIAL DATA

The information required in this item is incorporated by reference to
"Selected Financial Data" appearing on page 3 of the Annual Report to
Shareholders, a copy of which is filed as Exhibit 13.1 to this report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information required in this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 4 through 13 in the Annual Report to
Shareholders, a copy of which is filed as Exhibit 13.1 to this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required in this item is incorporated by reference to the
consolidated financial statements, together with the report thereon of Price
Waterhouse LLP dated February 21, 1997, appearing on pages 14 through 30 in the
Annual Report to Shareholders, a copy of which is filed as Exhibit 13.1 to this
report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required in this item is incorporated by reference to
"Election of Directors - Nominees for Election", "Executive Officers of the
Company" and the last paragraph of "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement, which will be filed
with the Commission within 120 days of the end of the fiscal year covered by
this report.

ITEM 11. EXECUTIVE COMPENSATION

The information required in this item is incorporated by reference to
"Executive Compensation"; "Director Compensation", "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and
"Compensation Committee Interlocks and Insider Participation" contained in
the Proxy Statement, which will be filed with the Commission within 120 days
of the end of the fiscal year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in this item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" and
"Ownership of Common Stock By Directors and Officers" contained in the Proxy
Statement, which will be filed with the Commission within 120 days of the end
of the fiscal year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in this term is incorporated by reference to
"Certain Relationships and Related Transactions" contained in the Proxy
Statement, which will be filed with the Commission within 120 days of the
end of the fiscal year covered by this report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions; the size and growth of the overall athletic
footwear market; changes in consumer preferences and demographics; competition;
success of operating initiatives; development and operating costs; advertising
and promotional efforts; brand awareness; the existence or adherence to
development schedules; the existence or absence of adverse publicity; new
product development and introduction; the loss of significant customers;
availability, location and terms of product distribution channels; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; changes
in, or the failure to comply with governmental regulations; liability and other
claims asserted against the Company; business disruptions; the ability to
reverse recent trends that have caused reductions in market share and
substantial losses; continued access to licensed intellectual property rights;
continued access to adequate sources of product supply; risks associated with
unaffiliated manufacturers and sales agents and international operations; and
other factors referenced in this report. Given such uncertainties, shareholders
are cautioned not to be place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such forward-looking
statements to reflect future events or developments.

In addition, the Company has implemented several measures in fiscal 1995
and 1996 discussed elsewhere in this Form 10-K in an effort to reorganize its
production and distribution structures and to reduce its overhead and other
costs. The Company's ability to capitalize on these measures will depend in
large part on its ability to predict and quickly exploit fashion trends in the
footwear market and thereby attain its revenue and margin goals. The

<PAGE>

Company believes that its business strategy for fiscal 1997 will better position
it to address changes in the marketplace and to build on its past successes in
offering branded footwear in the children's market. However, if sales, margins
and operating expense savings in fiscal 1997 fall below management's
expectations, additional sources of working capital may be necessary and
difficult to obtain. There can be no assurances that the Company will be able
to successfully exploit this strategy or that the strategy will have the desired
effect.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. CONSOLIDATED FINANCIAL STATEMENTS: Page in
Annual Report*
-------------
<S> <C>
Report of Independent Accountants.......................................... 30
Consolidated Balance Sheets at November 30, 1996 and 1995.................. 14
Consolidated Statements of Operations
for the Years Ended November 30, 1996, 1995 and 1994...................... 15
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended November 30, 1996, 1995 and 1994...................... 16
Consolidated Statements of Cash Flows
for the Years Ended November 30, 1996, 1995 and 1994...................... 17
Notes to Consolidated Financial Statements................................. 18-29

* Incorporated by reference to the indicated pages in the
Annual Report to Shareholders, a copy of which is filed as
Exhibit 13.1 to this report.

2. FINANCIAL STATEMENT SCHEDULE: Page in
Form 10-K
---------
Report of Independent Accountants on Financial Statement Schedule II....... 16
Valuation and Qualifying Accounts and Reserves............................. 17

All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial
statements or notes thereto.

3. EXHIBITS:

See Index to Exhibits at Page 18 of this report. Management
contracts or compensatory plans or arrangements required to be
filed as exhibits to this report are identified on the Index to
Exhibits of this report by an asterisk.

(b) REPORTS ON FORM 8-K:

Not applicable

</TABLE>

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of L.A. Gear, Inc.

Our audits of the consolidated financial statements referred to in our
report dated February 21, 1997 appearing in the 1996 Annual Report to
Shareholders of L.A. Gear, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule for the years
ended November 30, 1996, 1995, and 1994 listed in Item 14(a) of this
Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ Price Waterhouse LLP
- ------------------------
Los Angeles, California
February 21, 1997

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts and Reserves
Years ended November 30, 1996, 1995 and 1994
(in thousands)

BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
DEDUCTED FROM ASSETS TO WHICH THEY APPLY:

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
MERCHANDISE RETURNS:

YEAR ENDED NOVEMBER 30, 1994 $ 5,917 $17,283 $16,725 (1) $ 6,475
YEAR ENDED NOVEMBER 30, 1995 6,475 7,653 6,575 (1) 7,553
YEAR ENDED NOVEMBER 30, 1996 7,553 3,310 6,724 (1) 4,139

RESERVE FOR INVENTORY OBSOLESCENCE:

YEAR ENDED NOVEMBER 30, 1994 $ 8,546 $11,613 $13,089 $ 7,070
YEAR ENDED NOVEMBER 30, 1995 7,070 10,647 10,645 7,072
YEAR ENDED NOVEMBER 30, 1996 7,072 9,198 5,836 10,434

DEFERRED TAX VALUATION ALLOWANCE:

YEAR ENDED NOVEMBER 30, 1994 $ -- $46,905 (2) $ -- $46,905
YEAR ENDED NOVEMBER 30, 1995 46,905 17,203 (2) -- 64,108
YEAR ENDED NOVEMBER 30, 1996 64,108 25,855 (2) -- 89,963

RESERVE FOR UNUSED BARTER CREDITS:

YEAR ENDED NOVEMBER 30, 1994 $ 2,000 $ -- $ -- $ 2,000
YEAR ENDED NOVEMBER 30, 1995 2,000 4,568 -- 6,568
YEAR ENDED NOVEMBER 30, 1996 6,568 -- 1,485 5,083

COSTS RELATED TO DISCONTINUED
OPERATIONS:

YEAR ENDED NOVEMBER 30, 1994 $ 1,009 $ -- $ 1,009 (3) $ --
YEAR ENDED NOVEMBER 30, 1995 -- -- -- --
YEAR ENDED NOVEMBER 30, 1996 -- -- -- --

</TABLE>

(1) Actual merchandise returns and write-offs of accounts receivable, net of
recoveries.

(2) Represents primarily the non-recognition of tax benefits for operating
losses.

(3) Costs paid and reclassification of fair market value reserve to reduce
carrying value of property.

<PAGE>

EXHIBIT INDEX

EXHIBIT NO.

3.1 Registrant's Restated Articles of Incorporation, as amended to date. (1)

3.2 Registrant's Bylaws, as amended to date. (2)

4.1 Form of stock certificate evidencing Registrant's Common Stock. (3)

4.2 Form of stock certificate evidencing the Registrant's Series B
Cumulative Convertible Preferred Stock. (4)

4.3 Indenture, dated as of December 24, 1992, with respect to the
Registrant's 7 3/4% Convertible Debentures due 2002. (5)

4.4 Form of 7 3/4% Convertible Subordinated Debenture due 2002, in Global
Form.(6)

4.5 Form of 7 3/4% Convertible Subordinated Debentures due 2002, in
Definitive Form.(7)

10.1* L.A. Gear, Inc. 1986 Stock Option Plan, as amended to date. (8)

10.2* Form of L.A. Gear, Inc. 1986 Stock Option Plan Non-qualified Stock
Option Agreement.(9)

10.3* L.A. Gear, Inc. Employee Stock Savings Plan, as amended and restated
effective August 1, 1993. (10)

10.4* Second Complete Amendment and Restatement to the L.A. Gear, Inc.
Employee Stock Savings Plan and Trust, dated November 1, 1995. (11)

10.5 Master Lease Agreement between Registrant and Hewlett-Packard Company
concerning computer hardware and software and related Operating
LeaseEquipment Schedule & Payment Agreements executed on January 4,
1989(12)

10.6 Amendment, dated as of October 25, 1993, to Master Lease Agreement
between Registrant and Hewlett-Packard Company concerning computer
hardware and software and related Operating Lease Equipment Schedule &
Payment Agreements executed on January 4, 1989.(13)

10.7 Master Lease Agreement, as amended, dated as of June 23, 1989, by and
between Metlife Capital Corporation and Registrant. (14)

10.8 Letter Agreement, dated June 8, 1994, between Wal-Mart Stores, Inc. and
Registrant. Portions of this agreement have been omitted and filed
separately with the Commission pursuant to request for confidential
treatment.(15)

10.9 Letter Agreement, dated June 14, 1994, between Mark R. Goldston and
Registrant.(16)

10.10* Employment Agreement, dated as of December 7, 1993, between William L.
Benford and Registrant. (17)

10.11* Employment Agreement, dated as of December 7, 1993, between David F.
Gatto and Registrant. (18)

10.12* Employment Agreement, dated as of September 11, 1995, between James V.
Moodhe and Registrant. (19)

10.13* Employment Agreement, dated as of February 15, 1994, between Thomas F.
Larkins and Registrant. (20)

10.14* Employment Agreement, dated as of February 1, 1996, between Tracey C.
Doi and Registrant. (21)

10.15* Employment Agreement, dated as of February 1, 1996, between Victor J.
Trippetti, Jr. and Registrant. (22)

10.16 Form of Indemnification Agreement entered into between Registrant and
each of its Directors and Executive Officers. (23)

<PAGE>

10.17 Stock Purchase Agreement, dated as of May 27, 1991, by and between
Registrant and Trefoil Capital Investors, L.P., as amended to date.(24)

10.18 Registration Rights Agreement, dated as of May 27, 1991, by and between
Registrant and Trefoil Capital Investors, L.P. (25)

10.19 Management Services Letter Agreement, dated September 12, 1994, by and
between Registrant and Shamrock Capital Advisors, Inc. (26)

10.20 Sourcing Agreement dated April 28, 1992 between Registrant and LASCO
Sports Limited. Portions of this agreement have been omitted and filed
separately with the Commission pursuant to request for confidential
treatment. (27)

10.21 Amendment, effective as of December 1, 1993, to Sourcing Agreement,
dated April 28, 1992, between Registrant and LASCO Sports Limited.
Portions of this amendment have been omitted and filed separately with
the Commission pursuant to request for confidential treatment. (28)

10.22 Supplemental, dated as of January 1, 1995, to Sourcing Agreement, dated
April 28, 1992, between the Registrant and LASCO Sports Limited.
Portions of this supplemental and the underlying agreement have been
omitted and filed separately with the Commission pursuant to request for
confidential information. (29)

10.23 Stock Purchase Agreement dated April 28, 1992 between Registrant and
Pentland Ventures Ltd. (30)

10.24 Registration Rights Agreement dated April 28, 1992 between Registrant
and Pentland Ventures Ltd. (31)

10.25 Stock Option Agreement dated April 28, 1992 between Registrant and
Pentland Ventures, Ltd. (32)

10.26 Amendment, dated as of July 20, 1993, to Stock Option Agreement, dated
as of April 28, 1992, between Pentland Ventures Ltd. and Registrant, and
to Registration Rights Agreement, dated as of April 28, 1992, between
Pentland Ventures Ltd. and Registrant. (33)

10.27 Lease Agreement dated October 15, 1992 between Registrant and Santa
Monica Associates. (34)

10.28* L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non-employee
Directors and Eligible Executive Officers (Amended and Restated as of
March 19, 1996). (35)

10.29* L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non-employee
Directors form of Non-qualified Stock Option Agreement for Non-employee
Directors. (36)

10.30* L.A. Gear, Inc. 1993 Stock Incentive Plan. (37)

10.31* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Non-qualified Stock
Option Agreement. (38)

10.32* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Incentive Stock Option
Agreement. (39)

10.33* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Restricted Stock
Option Agreement. (40)

10.34 Registration Rights Agreement, dated as of December 24, 1992, among
Registrant and Kidder, Peabody & Co. Incorporated and Sutro & Co.
Incorporated. (41)

10.35* Summary Description of L.A. Gear, Inc. Management Incentive Program(42)

10.36* Amended and Restated Non-qualified Stock Option Agreement, dated as of
October 19, 1993, between Stanley P. Gold and Registrant. (43)

19
<PAGE>

10.37 Loan and Security Agreement, dated as of November 22, 1993, between L.A.
Gear California, Inc. and BankAmerica Business Credit, Inc. (44)

10.38 Patent and Trademark Security Agreement, dated as of November 22, 1993,
by L.A. Gear California, Inc. and Registrant in favor of BankAmerica
Business Credit, Inc. (45)

10.39 Guaranty, dated as of November 22, 1993, by Registrant and Raegal
Finance Inc. in favor of BankAmerica Business Credit, Inc. (46)

10.40 Security Agreement, dated as of November 22, 1993, by Registrant in
favor of BankAmerica Business Credit, Inc. (47)

10.41 Pledge Agreement, dated as of November 22, 1993, by Registrant in favor
of BankAmerica Business Credit, Inc. (48)

10.42 Security Agreement, dated as of November 22, 1993, by Raegal Finance
Inc. in favor of BankAmerica Business Credit, Inc. (49)

10.43 Pledge Agreement, dated as of November 22, 1993, by Raegal Finance Inc.
in favor of BankAmerica Business Credit, Inc. (50)

10.44 First Amendment to Loan and Security Agreement, dated as of May 31,
1994, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (51)

10.45 Second Amendment to Loan and Security Agreement, dated as of August 31,
1994, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (52)

10.46 Third Amendment to Loan and Security Agreement, dated as of January 25,
1995, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (53)

10.47 Fourth Amendment to Loan and Security Agreement, dated as of February
28, 1995, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (54)

10.48 Fifth Amendment to Loan and Security Agreement, dated as of July 14,
1995, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (55)

10.49 Sixth Amendment to Loan and Security Agreement, dated as of November 30,
1995, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc. (56)

10.50 Buying Agent Agreement, dated as of March 12, 1992, between Registrant
and BBC International, as amended by Addendum, dated as of August 29,
1992, Second Addendum, dated as of December 23, 1992, and Third
Addendum, dated as of December 3, 1993. Portions of this agreement have
been omitted and filed separately with the Commission pursuant to
request for confidential treatment. (57)

10.51 Standard Industrial Lease-Net, dated as of January 1, 1993, between
Registrant and the Prudential Insurance Company of America. (58)

10.52 First Amendment to Lease (1777 South Vintage Avenue), dated as of
February 14, 1994, between Registrant and the Prudential Insurance
Company of America. (59)

10.53 Standard Industrial Lease-Net, dated as of January 1, 1993, between
Registrant and the Prudential Insurance Company of America. (60)

10.54 First Amendment to Lease (1661 South Vintage Avenue), dated as of
February 14, 1994, between Registrant and the Prudential Insurance
Company of America. (61)

10.55 Agreement, dated March 14, 1995, between Mark R. Goldston and the
Registrant. (62)

20
<PAGE>

10.56 Share Exchange Agreement, dated as of December 12, 1995, between L.A.
Gear, Inc. and Trefoil Capital Investors, L.P. (63)

10.57 Buying agency agreement, dated March 6, 1996, between the Company and
BBC International, Ltd. Portions of this agreement have been omitted
and filed separately with the Commission pursuant to a request for
confidential treatment. (64)

10.58 Seventh Amendment to Loan and Security Agreement, effective as of August
31, 1996, between L.A. Gear California, Inc. and BankAmerica Business
Credit, Inc.. (65)

10.59 Management Services Letter Agreement, dated as of June 1, 1996, between
Company and Shamrock Capital Advisors, Inc. (66)

10.60* Employment Agreement, dated as of August 26, 1996, between Bruce W.
MacGregor and the Company. (67)

10.61 Eighth Amendment to Loan and Security Agreement, effective as of
November 30, 1996, between L.A. Gear California, Inc. and BABC. (68)

10.62 Buying Agency Agreement, dated March 6, 1996, by and between the Company
and BBC International, Ltd. (69)

10.63* Consulting Agreement, dated as of February 1, 1996, between Bruce W.
MacGregor and the Company. (4)

10.64* Employment Agreement, dated as of March 11, 1996, between James V.
Moodhe and the Company. (4)

10.65 Form of L.A. Gear, Inc. 1997 Employee Incentive Plan. (4)

10.66* Description of Reduction in Force Severance Plan (4)

13.1 L.A. Gear, Inc. Annual Report to Shareholders for the fiscal year ended
November 30, 1996. (4)

21.1 Subsidiaries of Registrant. (4)

23.1 Consent of Price Waterhouse LLP, independent accountants. (4)

27.1 Financial Data Schedule. (4)

__________________

1 Previously filed as Exhibit 3.1 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

2 Previously filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

3 Previously filed as Exhibit 4.1 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

4 Filed herewith.

5 Previously filed as Exhibit 4.3 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

6 Previously filed as Exhibit 4.4 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

7 Previously filed as Exhibit 4.5 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

8 Previously filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K for fiscal 1991 and incorporated herein by this reference.

21
<PAGE>

9 Previously filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

10 Previously filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

11 Previously filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for fiscal 1995 and incorporated herein by this reference.

12 Previously filed as Exhibit 10.97 to the Company's Annual Report on Form
10-K for fiscal 1988 and incorporated herein by this reference.

13 Previously filed as Exhibit 10.5 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

14 Previously filed as Exhibit 10.117 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1989 and incorporated herein by
this reference.

15 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1994 and incorporated herein by
this reference.

16 Previously filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1994 and incorporated herein by
this reference.

17 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 28, 1994 and incorporated herein
by this reference.

18 Previously filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 28, 1994 and incorporated herein
by this reference.

19 Previously filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1995 and incorporated herein by
this reference.

20 Previously filed as Exhibit 10.5 to the Company's Quarterly Report Form
10-Q for the quarter ended February 28, 1994 and incorporated herein by
this reference.

21 Previously filed as Exhibit 10.14 to the Company's Annual Report on Form
10-K for fiscal 1995 and incorporated herein by this reference.

22 Previously filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for fiscal 1995 and incorporated herein by this reference.

23 Previously filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for fiscal 1991 and incorporated herein by this reference.

24 Previously filed as Appendix I to the Company's Proxy Statements in
connection with the Annual Meeting of Shareholders held on September 10,
1991 and incorporated herein by this reference.

25 Previously filed as Exhibit 28.1(b) to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 1, 1991
and incorporated herein by this reference.

26 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994 and incorporated herein by
this reference.

22
<PAGE>

27 Previously filed as Exhibit 10.27 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

28 Previously filed as Exhibit 10.18 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

29 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 3l, 1995 and incorporated herein by
this reference.

30 Previously filed as Exhibit 10.28 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

31 Previously filed as Exhibit 10.29 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

32 Previously filed as Exhibit 10.30 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

33 Previously filed as Exhibit 10.22 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

34 Previously filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

35 Previously filed as Appendix A to the Company's Proxy Statement dated
May 6, 1996 and incorporated herein by this reference.

36 Previously filed as Exhibit 10.25 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

37 Previously filed as Appendix I to the Company's Proxy Statement in
connection with the Annual Meeting of Shareholders held on April 13, 1993
and incorporated herein by this reference.

38 Previously filed as Exhibit 10.27 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

39 Previously filed as Exhibit 10.28 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

40 Previously filed as Exhibit 10.29 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

41 Previously filed as Exhibit 10.36 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.

42 Previously filed as Exhibit 10.35 to the Company's Annual Report on Form
10-K for fiscal 1995 and incorporated herein by this reference.

43 Previously filed as Exhibit 10.32 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

44 Previously filed as Exhibit 99.1 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.

23
<PAGE>

45 Previously filed as Exhibit 99.1(a) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

46 Previously filed as Exhibit 99.1(b) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

47 Previously filed as Exhibit 99.1(c) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

48 Previously filed as Exhibit 99.1(d) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

49 Previously filed as Exhibit 99.1(e) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

50 Previously filed as Exhibit 99.1(f) to the Company's Current Report of
Form 8-K filed with the Securities and Exchange Commission on November 23,
1993 and incorporated herein by reference.

51 Previously filed as Exhibit 99.2 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on June 2, 1994 and
incorporated herein by reference.

52 Previously filed as Exhibit 99.3 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on September 2, 1994
and incorporated herein by reference.

53 Previously filed as Exhibit 99.5 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on January 26, 1995
and incorporated herein by this reference.

54 Previously filed as Exhibit 99.7 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on March 3, 1995 and
incorporated herein by this reference.

55 Previously filed as Exhibit 99.8 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on July 17, 1995 and
incorporated herein by this reference.

56 Previously filed as Exhibit 99.10 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 9,
1996 and incorporated herein by this reference.

57 Previously filed as Exhibit 10.40 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

58 Previously filed as Exhibit 10.41 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

59 Previously filed as Exhibit 10.42 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

60 Previously filed as Exhibit 10.43 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

61 Previously filed as Exhibit 10.44 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.

62 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 28, 1995 and incorporated herein
by this reference.

24
<PAGE>

63 Previously filed as Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on December 12, 1995
and incorporated herein by this reference.

64 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 28, 1996 and incorporated herein
by this reference.

65 Previously filed as Exhibit 99.11 to the Company's Current Report on
Form 8-K with the Securities and Exchange Commission on September 17, 1996
and incorporated herein by this reference.

66 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1996 and incorporated herein by
this reference.

67 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1996 and incorporated herein by
this reference.

68 Previously filed as Exhibit 99.2 to the Company's Current Report on Form
8-K with the Securities and Exchange Commission on February 20, 1997 and
incorporated herein by this reference.

69 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 29, 1996 and incorporated herein
by this reference. Portions of this agreement were omitted and filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.

25
<PAGE>

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

L.A. GEAR, INC.

By: /s/ Bruce W. MacGregor
-----------------------
Bruce W. MacGregor
President and
Chief Operating Officer

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

/s/ Stanley P. Gold /s/ Willie D. Davis
- ------------------------------- ---------------------------
Stanley P. Gold Willie D. Davis
Director, Chairman of the Board Director
and Chief Executive Officer
(Principal Executive Officer)

/s/ Bruce W. MacGregor /s/ Stephen A. Koffler

- ------------------------------- ---------------------------
Bruce W. MacGregor Stephen A. Koffler
President and Director
Chief Operating Officer

/s/ Victor J. Trippetti /s/ Ann E. Meyers
- ------------------------------- ---------------------------
Victor J. Trippetti Ann E. Meyers
Senior Vice President and Director
Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ William L. Benford /s/ Clifford A. Miller
- ------------------------------- ---------------------------
William L. Benford Clifford A. Miller
Director Director

/s/ Walter C. Bladstrom /s/ Robert G. Moskowitz
- ------------------------------- ---------------------------
Walter C. Bladstrom Robert G. Moskowitz
Director Director

/s/ Allan E. Dalshaug /s/ Vappalak A. Ravindran
- ------------------------------- ---------------------------
Allan E. Dalshaug Vappalak A. Ravindran
Director Director

Dated February 28, 1997

<PAGE>

INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
NO. 2 107,902 SHARES

L.A. GEAR, INC.
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
1,161,822 SHARES AUTHORIZED

THIS CERTIFIES THAT TREFOIL CAPITAL INVESTORS, L.P.

is the record owner of xxxx107,902xxxx fully paid and non-assessable shares
of Series B Cumulative Convertible Preferred Stock of L.A. Gear, Inc. (the
"Company"), transferable on the books of the Company by the holder hereof in
person or by duly authorized attorney upon the surrender of this Certificate
properly endorsed. See the reverse side of this Certificate for a summary of
the rights, preferences, privileges and restrictions of the Series B
Cumulative Convertible Preferred Stock as set forth in the Certificate of
Determination for the Series B Cumulative Convertible Preferred Stock, which
Certificate of Determination and any and all amendments thereto may be
obtained, upon request and without charge from the Company at its principal
executive office.

THE SHARES EVIDENCED HEREBY ARE REDEEMABLE AND CONVERTIBLE AS SET FORTH IN
THE CERTIFICATE OF DETERMINATION FOR THE SERIES B CUMULATIVE CONVERTIBLE
PREFERRED STOCK AND RESTRICTED AS TO TRANSFER AS SET FORTH ON THE REVERSE
HEREOF.

IN WITNESS WHEREOF the Company has caused this Certificate to be
signed by its duly authorized officers and its corporate seal to be hereunto
affixed this 12th day of April, 1996.

/s/ THOMAS F. LARKINS /s/ WILLIAM L. BENFORD
- ------------------------------ -------------------------------
Thomas F. Larkins Secretary William L. Benford President

<PAGE>
EXHIBIT 10.63

CONSULTING AGREEMENT

CONSULTING AGREEMENT, dated as of February 1, 1996 (the "Agreement"),
between L.A. GEAR, INC., a California corporation (the "Company"), and Bruce
W. MacGregor ("Consultant").

In consideration of the premises and the mutual agreements hereinafter
contained, the parties hereto, intending to be legally bound, agree as
follows:

1. TERM.

The Company hereby retains Consultant, and Consultant hereby agrees
to render consulting and advisory services to the Company on an exclusive
full time basis, upon the terms and conditions set forth herein. The term of
Consultant's services under this Agreement shall commence as of February 1,
1996 and shall continue through the close of business on July 31, 1996 (the
"Consultancy Term"). Unless this Agreement is earlier terminated as provided
herein, the Company and Consultant agree to discuss the possibility and terms
of any future relationship between the two parties during the sixty (60) day
period immediately preceding the Expiration of the Consultancy Term.

2. SERVICES.

(a) During the Consultancy Term, Consultant shall serve as a
strategic business development consultant to the Company, and shall perform
such duties, services and responsibilities as are assigned to him by the
Company (the "Services"), including, without limitation, the preparation, and
submission to the President of the Company, of written business plans for the
launch of new brands or sub-brands by means of internal generation, licensing
and/or acquisition ("Business Plans"), and the execution, to the extent
reasonably practicable during the Consultancy Term, of those Business Plans
which are approved by the President of the Company.

(b) Each Business Plan prepared by Consultant in the performance
of his Services hereunder shall include, among other things, definition and
analysis of (i) the concept of, and opportunities for, the proposed brand,
(ii) the market for the proposed brand (including, without limitation, the
target consumer, dynamics and trends, distribution channels, pricing issues
and growth potential), (iii) anticipated competition (current and potential),
(iv) financial proformas on a net present value basis and (v) perceived
threats and risks facing the proposed brand. Any and all

<PAGE>
Business Plans prepared by Consultant during the Consultancy Term, whether
complete or incomplete at the expiration of the Consultancy Term, shall be
the sole and absolute property of the Company.

(c) Consultant agrees to travel as the Company determines is
necessary in connection with the rendering of his Services hereunder and
shall be available to render Services at the Company's headquarters located
in Santa Monica, California during the Consultancy Term. Consultant shall not
engage in any other business activity which would interfere with the
performance of his Services hereunder.

3. CONSULTING FEE.

In consideration of the Services rendered hereunder, the Company
will pay Consultant a fee in the amount of $120,000 (the "Consulting Fee").
The Company will pay the Consulting Fee to Consultant in six equal monthly
installments of $20,000, each of which shall be payable on the last business
day of each month, commencing on February 29, 1996.

4. EXPENSES.

The Company shall reimburse Consultant for reasonable out-of-pocket
expenses incurred by Consultant solely in rendering Services to the Company
(including, without limitation, travel expenses) within thirty (30) days
after Consultant's presentation to the Company of appropriate bills or
vouchers evidencing such expenses.

5. ADDITIONAL COVENANTS.

(a) CONFIDENTIAL INFORMATION. Consultant agrees that during the
Consultancy Term and at all times thereafter Consultant shall keep
confidential and shall not use, divulge or disclose, either directly or
indirectly, to any third party (except with the prior authorization of the
Company or in connection with Consultant's rendering of Services hereunder),
any information relating to the confidential affairs of the Company
("Confidential Information"), including, without limitation, (i) any and all
information relating to the Company's strategies, future plans, projects and
business policies and practices, and (ii) any and all other forms of
information considered by the Company to be confidential, proprietary or in
the nature of trade secrets (including, without limitation, technical
information, business and marketing plans (including, without limitation,
Business Plans), customer information and other information concerning
products, promotions, development, financing and expansion plans). Upon the
termination of this Agreement, Consultant will return to the Company all
documents, records, notebooks and other materials constituting or

<PAGE>

containing Confidential Information, whether prepared by Consultant or
others. This confidentiality covenant has no temporal, geographical or
territorial restrictions. In the event that Consultant is requested pursuant
to subpoena or other legal process to disclose any of the Confidential
Information, Consultant will provide the Company with prompt notice so that
the Company may seek a protective order or other appropriate remedy and/or
waive compliance with this Section 5(a) and Consultant will furnish only that
portion of the Confidential Information which is legally required.

(b) NON-COMPETITION. By and in consideration of the Company's
entering into this Agreement and the payments to be made by the Company to
Consultant hereunder, and further in consideration of Consultant's exposure
to Confidential Information, Consultant agrees that Consultant will not,
during the Consultancy Term, directly or indirectly own, manage, operate,
join, control, be employed by, or participate in the ownership, management,
operation or control of, or be connected in any manner, including but not
limited to holding the position of shareholder, director, officer,
Consultant, independent contractor, employee, partner, or investor, with any
person, corporation, partnership or other entity which is engaged in the
footwear and/or apparel business.

(c) REMEDIES. Consultant agrees that any breach of the terms of
this Section 5 would result in irreparable injury and damage to the Company
for which the Company would have no adequate remedy at law. Consultant
further agrees therefore, that in the event of such breach, or any threat of
breach, the Company shall be entitled to an immediate injunction and
restraining order, without having to prove damages, in addition to any other
remedies to which the Company is entitled at law or in equity. The terms of
this Section 5(c) shall not prevent the Company from pursuing any other
available remedies for any breach or threatened breach hereof, including,
without limitation, the recovery of damages from Consultant.

(d) SURVIVAL. The provisions of this Section 5 shall survive any
expiration or termination of the Consultancy Term, and the existence of any
claim or cause of action by Consultant against the company, whether
predicated on this Agreement or otherwise, shall not constitute a defense to
the enforcement by the Company of the covenants and agreements of this
Section 5.

(e) COMPANY. For purposes of this Section 5, the term "Company"
shall refer to the Company and its subsidiaries and affiliates.

<PAGE>

6. RELATIONSHIP OF PARTIES.

Consultant and the Company hereby expressly acknowledge that the
relationship between them is that of an independent contractor and a client,
respectively. Neither this Agreement nor anything contained herein shall
imply any agent/principal, employment, joint venture or partnership
relationship between the parties, and the parties hereto expressly disclaim
any such relationships. Under no circumstances shall Consultant have or
represent to any third party that he has any authority to bind or commit the
Company with respect to any matter. In connection with such independent
contractor relationship, Consultant agrees to provide the Company with the
following items prior to rendering any services hereunder:

- A copy of Consultant's appropriate city or county business license;
- Consultant's business card;
- A signed and completed IRS Form 4669;
- A signed and completed IRS Form W-9.

Additionally, Consultant shall provide any other documentation or forms
under California or Federal law which may be required for independent
contractors. Consultant shall further submit any invoices or requests for
reimbursement to the Company on consultant's letterhead or business invoice
forms.

7. TAXES.

In the event that the Company is held liable for any personal taxes,
including, without limitation, any applicable taxes required to be withheld
pursuant to federal, state or local law with respect to payments made or
benefits granted hereunder, Consultant shall indemnify and hold the Company
harmless from and against any penalties or interest associated therewith. In
the event that the Company is compelled by any taxing authority to withhold
any such taxes, the Company shall give Consultant notice thereof and shall
have the right to deduct the same from subsequent payments due under this
Agreement.

8. TERMINATION.

Except as otherwise provided herein, this Agreement (and the Consultancy
Term) shall terminate upon the earlier of the close of business on (i) July
31, 1996, (ii) an early termination date mutually agreed to in writing by the
Company and Consultant, (iii) the date of Consultant's death, or (iv) the day
on which the Company delivers to Consultant a written notice

<PAGE>

of the Company's election to terminate this Agreement for "Cause". For
purposes of this Agreement, "Cause" shall mean (i) Consultant's material
breach of this Agreement, (ii) conviction of Consultant for (x) any crime
constituting a felony in the jurisdiction in which committed, (y) any crime
involving moral turpitude (whether or not a felony), or (z) any other
criminal act against the Company involving dishonesty or willful misconduct
intended to injure the Company, (iii) substance abuse by Consultant, or (iv)
willful malfeasance, dishonesty or misconduct by consultant which discredits
or damages the Company. Within thirty (30) days following the date of
termination of this Agreement, the Company shall pay Consultant any portion
of the consulting Fee accrued hereunder on or prior to the date of
termination but not paid. Except as otherwise provided herein, the foregoing
payments upon termination shall constitute the exclusive payments due
Consultant upon termination under this Agreement.

9. ENTIRE AGREEMENT.

This Agreement expresses the entire understanding of the parties hereto
with respect to the subject matter hereof and supersedes all prior
agreements, written or oral, between them as to such subject matter. This
Agreement may not be amended, nor may any provision hereof be modified or
waived, except by an agreement in writing signed by the party against whom
enforcement of any waiver change, amendment, modification or discharge is
sought.

10. NOTICES.

All notices and any other communications required or permitted hereunder
shall be in writing and shall be deemed to have been duly given (i) if
personally delivered when so delivered, or (ii) if mailed, three business
days after having been placed in the United States mail, registered or
certified, return receipt requested, postage prepaid, addressed to the party
to whom it is directed at the address set forth below, or at such other
address or attention as may be designated in writing by either party to the
other:

If to the Company to:

L.A. GEAR, INC.
2850 Ocean Park Blvd.
Santa Monica, CA 90405
Attention: General Counsel

<PAGE>

If to Consultant:

Bruce W. MacGregor
13515 Streamside Drive
Lake Oswego, Oregon 97035

11. GOVERNING LAW.

This Agreement has been executed and delivered in the State of
California and its validity, interpretation, performance and enforcement
shall be governed by and construed in accordance with the laws thereof
applicable to contracts executed and to be wholly performed in the State of
California, without regard to principles of conflict of laws.

12. SUCCESSORS AND ASSIGNS.

This Agreement shall inure to the benefit of, and be binding upon, the
parties hereto and their respective heirs, executors, personal
representatives, estates, successors and assigns. Consultant may not assign
her rights or obligations under this Agreement without the prior written
consent of the Company.

13. WAIVERS.

No waiver by either party hereto of any breach by the other party hereto
of any provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions at the time or at any
prior or subsequent time.

<PAGE>

14. COUNTERPARTS.

This Agreement may be executed in two counterparts, each of which shall
be deemed to be an original but both of which together shall constitute one
and the same instrument.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.

L.A. GEAR, INC.

By: /s/ W. L. Benford
--------------------------------

Name: William L. Benford
------------------------------

Title: President
-----------------------------

CONSULTANT

/s/ Bruce W. MacGregor
-----------------------------------
Bruce W. MacGregor

<PAGE>
EXHIBIT 10.64

EMPLOYMENT AGREEMENT

AGREEMENT made as of March 11, 1996, by and between L.A. GEAR, INC., a
California corporation (the "Company"), and James Moodhe (the "Employee").

WHEREAS, the Company desires to retain the exclusive services of
Employee and Employee desires to be employed by the Company for the term of
this Agreement;

NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto agree as follows:

1. DUTIES.

(a) The Employee shall serve as Senior Vice President Design,
Development, Marketing of the Company or such other position as may be agreed
between the Employee and the Company, and shall perform such duties, services
and responsibilities as are consistent with such positions. The Employee's
duties, services and responsibilities will be performed under the overall
supervision of the Executive Vice President of the Company (or such other
executive officer as may be designed by the President of the Company) and
consistent with the policies of the Board of Directors of the Company (the
"Board of Directors").

(b) During the Employment Term (as defined in Section 2(a) below),
the Employee shall devote his full business time, attention and skill to the
performance of such duties, services and responsibilities, and will use his
best efforts to promote the interests of the Company. The Employee will not,
without the prior written approval of the Board of Directors, engage in any
other business activity which would interfere with the performance of his
duties, services and responsibilities hereunder or which is in violation of
policies established from time to time by the Company.

2. TERM.

(a) The term of employment of the Employee hereunder shall
commence as of the date hereof shall continue in full force and effect until
March 10, 1997, unless earlier terminated or renewed as provided herein (the
"Employment Term"). The terms of this Agreement shall be coincident with the
Employment Term.

(b) On the six-month anniversary of the date hereof, and on each
six-month anniversary thereafter, the Employment Term shall be extended by
six months, on the same terms and conditions contained herein, unless the
Company delivers written notice to the Employee on or prior to such six month
anniversary date of its intention not to extend the then-current Employment
Term, in which case the Employment Term and this Agreement shall expire on
the then-current date of expiration of the Employment Term.

<PAGE>

3. COMPENSATION. In consideration of the performance by the Employee
of the Employee's obligations during the Employment Term (including any
services as an officer, director, employee, member of any committee of the
Company or any of its subsidiaries, or otherwise), the Company will during
the Employment Term pay the Employee a salary (the "Salary") at an annual
rate of not less that $275,000.

During the Employment Term, the Employee will be eligible to participate
in any management bonus plan then in effect for similarly situated employees
pursuant to the terms and conditions of such management bonus plan.

The Salary shall be payable in accordance with the normal payroll
practices of the Company then in effect. The Salary, and all bonuses or other
forms of compensation paid to the Employee hereunder, shall be subject to all
applicable taxes required to be withheld by the Company pursuant to federal,
state or local law. The Employee shall be solely responsible for income taxes
imposed on the Employee by reasons of any cash or non-cash compensation and
benefits provided hereunder.

In addition to the payment of Salary, the Employee shall be entitled to
participate in any employee benefit plans then in effect for similarly
situated employees to the extent the Employee meets the eligibility
requirements for any such plan; PROVIDED, HOWEVER, that nothing in this
paragraph shall require the Company to provide health or medial insurance
benefits to the Employee or any dependent of the Employee with respect to any
condition existing prior to the commencement of the Employee's employment by
the Company pursuant to the Prior Employment Agreement (as defined below),
except as covered by the Company's health and medical insurance plans
sponsored for employees in general.

The Employee shall be entitled to three weeks vacation (in addition to
the usual national holidays) per year, which vacation shall be accrued
ratably during each year during which the Employee serves hereunder, subject
to the limitations set forth in this paragraph. Any accrued but unused
vacation may be carried forward into subsequent years; PROVIDED, HOWEVER that
accrued but unused vacation available to the Employee may not, at any time,
exceed a total of six weeks. Vacation shall not be earned at any time that
accrued but unused vacation totals six weeks and shall not resume to be
earned until accrued but unused vacation again declines below six weeks. Such
vacation shall be taken at such time or times as may be agreed between the
Employee and the Company.

If (i) the Employee is absent from work for 180 calendar days in any
twelve-month period by reason of illness or incapacity (whether physical or
otherwise) or (ii) the Company reasonably determines that the Employee is
unable to perform his duties, services and responsibilities hereunder by
reason of illness or incapacity (whether physical or otherwise) for a total
of 180 calendar days in any twelve-month period during the Employment Term
("Disability"), the Company shall not be obligated to pay the Employee

<PAGE>

any compensation (Salary or bonus) for any period in excess of such 180 days;
furthermore, any such payments shall be reduced by any amount the Employee is
entitled to receive as a result of such disability under any plan provided
through the Company or under state or federal law.

4. TERMINATION.

(a) Except as otherwise provided in this Agreement, the employment of
Employee hereunder and the Employment Term shall terminate upon the earliest
to occur of the dates specified below:

(i) the close of business on the date of expiration of the
Employment Term;

(ii) the close of business on the date of the Employee's death;

(iii) the close of business on the day on which the Company shall
have delivered to the Employee a written notice of the Company's election to
terminate his employment for "Cause" (as defined in Section 4(c) hereof);

(iv) the close of business on the day on which the Company shall
have delivered to the Employee a written notice of the Company's election to
terminate his employment because of Disability;

(v) the close of business on the day following the date on which
the Board of Directors shall have adopted a resolution terminating the
employment of the Employee hereunder and such termination is not for death,
Cause or Disability; or

(vi) the close of business on an early termination date mutually
agreed to in writing by the Company and the Employee.

(b) Any purported termination by the Company or by the Employee
pursuant to Section 4(a) hereof shall be communicated by written "Notice of
Termination" to the other. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which indicates the specified
termination provision in this Agreement relied upon and which sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated.
For purposes of this Agreement, no such purported termination shall be
effective without delivery of such Notice of Termination.

(c) For purposes of this Agreement, termination of employment for
"Cause" shall mean termination based on (i) the Employee's breach of this
Agreement,

<PAGE>

(ii) conviction of the Employee for (x) any crime constituting a felony in
the jurisdiction in which committed, (y) any crime involving moral turpitude
(whether or not a felony), or (z) any other criminal act against the Company
involving dishonesty or willful misconduct intended to injure the Company
(whether or not a felony), (iii) substance abuse by the Employee, (iv) the
failure or refusal of the Employee to follow the lawful and proper directives
of the Board of Directors (or of any superior officer of the Company having
direct supervisory authority over the Employee), or (v) willful malfeasance
or gross misconduct by the Employee which discredits or damages the Company.

(d) In the event of termination of this Agreement, for whatever
reason, the Employee agrees to cooperate with the Company and to be
reasonably available to the Company with respect to continuing and/or future
matters arising out of the Employee's employment or any other relationship
with the Company, whether such matters are business-related, legal or
otherwise. The Company agrees to reimburse the Employee for the Employee's
reasonable travel expenses incurred in complying with the terms of this
paragraph upon delivery by the Employee of the Company of valid receipts for
such expenses. The provisions of this paragraph shall survive termination of
this Agreement.

5. TERMINATION PAYMENTS. If the Employee's employment with the
Company terminates for whatever reason, the Company will pay the Employee any
portion of the Salary accrued hereunder on or prior to the date of
termination but not paid. Subject to the last sentence of the following
paragraph, if the Employee's employment with the Company terminates pursuant
to Section 4(a)(v), the Company will continue to pay the Employee an amount
equal to the Employee's Salary (at the salary rate in effect on the date of
termination of the Employee's employment hereunder) for the remainder of the
term of this Agreement.

Except as otherwise provided in any stock option agreement between the
Company and the Employee in effect at the time of the termination of the
Employee's employment, the foregoing payments upon termination shall
constitute the exclusive payments due the Employee upon termination under
this Agreement, but shall have no effect on any benefits which may be due the
Employee under any plan of the Company which provides benefits after
termination of employment. The Employee shall not be required to mitigate the
foregoing amounts payable upon termination of this Agreement by seeking other
employment or otherwise; PROVIDED, HOWEVER, that the foregoing payments shall
be reduced or mitigated by virtue of any cash compensation (including any
deferred portion thereof) received or earned by the Employee from any other
employer, or from personal services rendered by the Employee to a third party
as an independent contractor, during the period commencing on the date of
termination of this Agreement and ending on the date on which the Employment
Term had been scheduled to expire.

<PAGE>

6. EMPLOYEE COVENANTS.

(a) UNAUTHORIZED DISCLOSURE. The Employee agrees and understands
that in the Employee's position with the Company, the Employee will be
exposed to and receive information relating to the confidential affairs of
the Company, including but not limited to technical information, business and
marketing plans, strategies, customer information, other information
concerning the Company's products, promotions, development, financing,
expansion plans, business policies and practices, and other forms of
information considered by the Company to be confidential and in the nature of
trade secrets. Except to the extent that the proper performance of the
Employee's duties, services and responsibilities hereunder may require
disclosure, and except as such information (i) was known to the Employee
prior to his employment by the Company or (ii) was or becomes generally
available to the public other than as a result of a disclosure by the
Employee in violation of the provisions of this Section 6(a), the Employee
agrees that during the Employment Term and thereafter the Employee will keep
such information confidential and not disclose such information, either
directly or indirectly, to any third person or entity without the prior
written consent of the Company. This confidentiality covenant has no
temporal, geographical or territorial restriction. Upon termination of this
Agreement, the Employee will promptly supply to the Company all property,
keys, notes, memoranda, writings, lists, files, reports, customer lists,
correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical
data or any other tangible product or document which has been produced by,
received by or otherwise submitted to the Employee during or prior to the
Employment Term. Any material breach of the terms of this paragraph shall be
considered Cause.

(b) INVENTIONS. (i) the Employee agrees that any and all
inventions, discoveries, improvements, processes, business application
software, patents, copyrights and trademarks made, developed, discovered or
acquired by him during the Employment Term, solely or jointly with others or
otherwise and which relate to the business of the Company and all knowledge
possessed by the Employee relating thereto (collectively, the "Inventions"),
shall be fully and promptly disclosed to the Board of Directors and to such
person or persons as the Board of Directors shall direct and shall be the
sole and absolute property of the Company and the Company shall be the sole
and absolute owner thereof. The Employee agrees that he will at all times
keep all of the same secret from everyone except the Company and such persons
as the Board of Directors may from time to time direct. The Employee shall,
as requested by the Company at any time and from time to time, whether prior
to or after the expiration of the Employment Term, execute and deliver to the
Company any instruments deemed necessary by the Company to effect disclosure
and assignment of the Inventions to the Company or its designees and any
patent applications (United States or foreign) and renewals with respect
thereto, including any other instruments deemed necessary by the Company for
the prosecution of patent applications or the acquisition of letters patent.

<PAGE>

(ii) Reference is hereby made to Appendix A to this Agreement
reprinting the text of Section 2870 through 2872 of the California Labor
Code. Execution of this Agreement by the Employee shall confirm that the
Employee has received and read such Appendix A. The provisions of this
Section 6(b) shall not apply to any invention which qualifies fully under the
provisions of Section 2870 of the California Labor Code.

(c) NON-COMPETITION. By and in consideration of the Company's
entering into this Agreement and the Salary and benefits to be provided by
the Company hereunder, and further in consideration of the Employee's
exposure to the proprietary information of the Company, the Employee agrees
that the Employee will not, during the Employment Term, directly or
indirectly own, manage, operate, join, control, be employed by, or
participate in the ownership, management, operation or control of or be
connected in any manner, including but not limited to holding the positions
of shareholder, director, officer, consultant, independent contractor,
employee, partner, or investor, with any Competing Enterprise. For purposes
of this paragraph, the term "Competing Enterprise" shall mean any person,
corporation, partnership or other entity engaged in the design and marketing
of athletic and casual footwear and/or related apparel products and
accessories. The prohibition of this clause (c) shall not be deemed to
prevent Employee from owning 2% or less of any class of equity securities of
an entity that has a class of equity securities registered under Section 12
of the Securities Exchange Act of 1934, as amended.

(d) NON-SOLICITATION. During the Employment Term and for a period
of one year thereafter, the Employee shall not interfere with the Company's
relationship with, or endeavor to entice away from the Company, any person
who at any time during the Employment Term was an employee or customer of the
Company or otherwise had a material business relationship with the Company.

(e) REMEDIES. The Employee agrees that any breach of the terms of
this Section 6 would result in irreparable injury and damage to the Company
for which the Company would have adequate remedy at law; the Employee
therefore also agrees that in the event of such breach or any threat of
breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach and/or threatened breach and/or
continued breach by the Employee and/or any and all persons and/or entities
acting for and/or with the Employee, without having to prove damages, in
addition to any other remedies to which the Company may be entitled at law or
in equity. The terms of this paragraph shall not prevent the Company from
pursuing any other available remedies for any breach or threatened breach
hereof, including but not limited to the recovery of damages from the
Employee.

The provisions of subsections (a), (b), (d) and (e) of this Section 6
shall survive any termination of this Agreement and the Employment Term. The
existence of any claim or cause of action by the Employee against the
Company, whether predicated on this Agreement or

<PAGE>

otherwise, shall not constitute a defense to the enforcement by the Company
of the covenants and agreements of this Section 6.

(f) "COMPANY". For the purposes of this Section 6 only, the term
"Company" shall mean, collectively, L.A. Gear, Inc., a California
corporation,and its successors, assigns and nominees, and all individuals,
corporations and other entities that directly, or indirectly through one or
more intermediaries, control or are controlled by or are under common control
with any of the foregoing.

7. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been
given (i) if personally delivered, when so delivered, or (ii) if mailed,
three (3) business days after having been placed in the United States mail,
registered or certified, postage prepaid, addressed to the party to whom it
is directed at the address set forth below:

If to the Company:

L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
Attention: President

With a copy to:

L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
Attention: Legal Dept. - Office of General Counsel

If to the Employee:

James Moodhe
500 Country Valley Road
Westlake Village, CA 91362

by registered or certified mail, postage prepaid, return receipt requested.

8. BINDING EFFECT/ASSIGNMENT. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
executors, personal representatives, estate, successors (including, without
limitation, by way of merger) and assigns. Notwithstanding the provisions of
the immediately preceding sentence, the Employee

<PAGE>
shall not assign all or any portion of this Agreement without the prior
written consent of the Company.

9. PRIOR EMPLOYMENT AGREEMENT. Upon the execution of this Agreement
by each of the Employee and the Company, except as provided below, the
Employment Agreement, dated as of September 11, 1995 (the "Prior Employment
Agreement"), by and between the Company and the Employee, are hereby
terminated, effective as of the date hereof, and of no further force and
effect. Notwithstanding anything to the contrary in the foregoing, Section 6
of the Prior Employment Agreement shall remain in full force and effect and
shall survive the termination of the other provisions of the Prior Employment
Agreement pursuant to this Section 9.

10. ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parites hereto with respect to the subject matter hereof
and supersedes all prior agreements, written or oral, between them as to such
subject matter. This Agreement may not be amended, nor may any provision
hereof be modified or waived, except by an instrument in writing duly signed
by the party to be charged.

11. SEVERABILITY. If any provision of this Agreement, or any
applicaton thereof to any circumstances, is invalid, in whole or in part,
such provision or application shall to that extent be severable and shall not
affect other provisions or applications of this Agreement.

12. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California,
without reference to the principles of conflict of laws.

13. MODIFICATIONS AND WAIVERS. No provisions of this Agreement may
be modified, altered or amended except by an instrument in writing executed
by the parties hereto. No waiver by either party hereto of any breach by the
other party hereto of any provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions at
the time or at any prior or subsequent time.

14. HEADINGS. The headings contained herein are solely for the
purposes of reference, are not part of this Agreement and shall not in any
way affect the meaning or interpretation of this Agreement.

15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.

8
<PAGE>

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by authority of its Board of Directors, and the Employee has hereunto set his
hand, as of the day and year first above written.

L.A. GEAR, INC.

By: /s/ William L. Benford
----------------------
Title: President

/s/ James Moodhe
----------------------
James Moodhe
(Employee)

<PAGE>
Appendix A

NOTIFICATION TO EMPLOYEE

Set forth below is the text of Sections 2870, 2871 and 2872 of the
California Labor Code, as published in West's Ann. Cal.Labor Code (1989) and
West's Ann. Cal.Labor Code (1994 Supp.):

SECTION 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS

(a) Any provision in an employment agreement which provides
that an employee shall assign, or offer to assign, any of his or her rights
in an invention to his or her employer shall not apply to an invention that
the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:

(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee
for the employer.

(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded
from being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable.

SECTION 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE IF
INVENTIONS

No employer shall require a provision made void and
unenforceable by Section 2870 as a condition of employment or continued
employment. Nothing in this article shall be construed to forbid or restrict
the right of an employer to provide in contracts of employment for
disclosure, provided that any such disclosures be received in confidence, of
all of the employee's inventions made solely or jointly with others during
the term of his or her employment, a review process by the employer to
determine such issues as may arise, and for full title to certain patents and
inventions to be in the United States, as required by contracts between the
employer and the United States or any of its agencies.

<PAGE>

SECTION 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF

If an employee agreement entered into after January 1, 1980,
contains a provision requiring the employee to assign or offer to assign any
of his or her rights to any invention to his or her employer, the employer
must also, at the time the agreement is made, provide a written notification
to the employee that the agreement does not apply to an invention which
qualifies fully under the provisions of Section 2870. In any suit or action
arising thereunder, the burden of proof shall be on the employee claiming the
benefits of its provisions.

<PAGE>

EXHIBIT 10.65

Summary Description of L.A. Gear, Inc.
1997 Employee Incentive Plan

In December 1996, the Board of Directors adopted and approved the 1997 Employee
Incentive Plan (the "Plan") for all full-time employees of the Company as well
as employees joining the Company after December 1, 1996 (on a pro-rata basis
commencing on the first day of the fiscal quarter following such employee's
commencement date). The Plan combines equity and cash components and includes
incentives for all employees to assist the Company in its turnaround efforts.
The guaranteed cash award component is calculated as a fixed percentage of the
employees salary (ranging from 15% for the highest paid employees to 6% for
employees in the fourth tier), and vest one-half on May 31, 1997 and one-half on
November 30, 1997, except for vice president-level positions and above, which
vest in full on December 1, 1997; provided, in all cases, pro-rata portions of
awards shall vest on the elimination of the employee's position with the Company
prior to the vesting date. Stock option awards for all employees vest on
December 1, 1997. No payout or vesting occurs if there is a termination of
employment due to voluntary resignation, death, disability or for cause.

<PAGE>

EXHIBIT 10.66

DESCRIPTION OF
REDUCTION IN FORCE SEVERANCE PLAN
----------------------------------

In an effort to encourage the retention of key management personnel, the
Company has adopted a Reduction in Force Severance Plan, pursuant to which
employees at the Director level and above will be eligible to receive
Severance payments if their positions are eliminated in fiscal 1997 (other
than due to voluntary resignation, death, disability or cause). The size of
the Severance payment for each such employee will be based upon position and
length of service as follows:

Position Length of Service SEVERANCE Payment
- -------- ----------------- ------------------

Director level 0-2 years 12 weeks salary
2-5 years 16 weeks salary
over 5 years 20 weeks salary

Vice President level 0-2 years 20 weeks salary
and above 2-5 years 24 weeks salary
over 5 years 28 weeks salary

<PAGE>

L.A. GEAR, INC.

[L.A. GEAR LOGO]

1996
ANNUAL REPORT

<PAGE>

[L.A. GEAR LOGO]

<PAGE>

This Annual Report contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
under LIQUIDITY AND CAPITAL RESOURCES and OUTLOOK FOR FISCAL 1997. See SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS.

A LETTER TO OUR SHAREHOLDERS

1996 was another very difficult year for the Company. Despite a
reorganization plan that was adopted in September 1995, the Company continued to
register significant declines in both revenues and gross profit margins.
Worldwide sales decreased $100.2 million, or 34%, to $196.4 million, with sales
in the United States falling $56.4 million (29%) and international sales
decreasing $43.7 million (42%).

Consequently, in order to generate higher revenues and margins as well as
more closely align operating expenses with the Company's lower sales volume, an
even more extensive restructuring plan was implemented in November 1996. This
plan necessitated a charge of $28.8 million to the fourth quarter 1996 results
and contributed to a total net loss of $61.7 million for the year. The latest
restructuring affects all aspects of the Company's business worldwide and
includes an operating strategy designed to provide a solid base upon which the
Company can grow. The plan contains several key components including:

NEW OPERATING MANAGEMENT - In November 1996, Bruce W. MacGregor assumed the
responsibilities of President and Chief Operating Officer. Mr. MacGregor has
over twelve years of experience in the footwear industry, including senior
marketing and design positions at Avia International. He also served as
Co-founder, President and Chief Executive Officer of Deja Shoe, an adult casual
footwear company. In addition, new executives have been appointed to most key
leadership positions of the Company, including: Vice President-Product (design,
development and sourcing); Vice President-U.S. Sales; Vice
President-International; and Chief Financial Officer.

NEW BUSINESS STRATEGY AND PRODUCTS - Beginning with the Fall 1997 product
line, the Company will adopt a definitive product segmentation strategy aimed at
differentiating its products among its various tiers of distribution channels.
This strategy involves two major components: (1) introducing new Company brands
to appeal to demographic groups with whom the Company is not currently achieving
significant market share penetration; and (2) differentiating the L.A. Gear
product line by use of sub-brands and co-labeling.

The first two new brands being introduced for Fall 1997 are Mongo-TM-, a
fashion-forward casual shoe designed to appeal to trend-setting young adults;
and Digit3-TM-, a performance brand for the extreme sports enthusiast. The
Mongo-TM- brand is similar to Fatmox-TM- by L.A. Gear, a sub-brand which the
Company introduced in Europe in 1996 and which has been well received.

Within the women's product line, the Company will be refocusing on shoes
with athletic silhouettes and will be adding the co-label ABS+-TM- to its
women's athletic shoes containing new cushioning technology. This line will
augment updated basic and fitness styles that reflect the Company's heritage.

Building off its innovative and successful children's lighted shoes line,
the Company will be using the sub-brand L.A. Lights-Registered Trademark- by
L.A. Gear as the umbrella brand for all four of its children's lighted product
lines. Included under this sub-brand will be two new technologies in Fall 1997:
Lazerlites-TM-, a fiber optic technology that causes shoe laces to light when
motion activated, and Faderz-TM-, a bottom-lighted shoe that yields a constant
light setting when motion activated, and fades off when motion ceases. Also
being offered will be two currently available technologies, Lites-TM-,
bottom-lighted styles, and NEONZ-TM-, lighted side-panel shoes.

Successful product differentiation and distribution segmentation are vital
to the Company's attempts to realize revenue growth and margin improvement.
Accordingly, the Company will offer its newest technologies and brands at higher
tiered distribution channels while continuing to offer its basic lines through
its current channels of distribution. Our customers will be serviced by a
restructured sales force consisting primarily of independent agents carrying
either the Company's adult or children's full product line.

<PAGE>

INTERNATIONAL REORGANIZATION - The Company plans to convert certain
subsidiary operations in Europe into independent distributorships and
consolidate functions, where appropriate, in the remaining subsidiaries. This
strategy will eliminate significant expenses while continuing to allow the
Company to provide products in countries where the L.A. Gear-Registered
Trademark- brand enjoys widespread recognition and acceptance.

EXPENSE REDUCTION - The restructuring plan included significant expense
reduction programs, including reduced worldwide staffing and a significant
reduction in leased space requirements at our corporate headquarters and
distribution center in Southern California. These programs are targeted to
reduce operating expenses by over $30 million on an annualized basis. In
addition to the restructuring, certain product lines have been narrowed or
discontinued in order to focus the Company's design, development and marketing
efforts more effectively.

By implementing these far-reaching changes throughout the Company, we
believe that L.A. Gear is positioned to be more competitive in the fast-changing
environment in which it operates without compromising its full service
philosophy to its customers. We believe that our new business strategy directly
addresses the Company's continuing challenges of increasing revenues and gross
margins. The ongoing support and patience of our employees, shareholders,
bondholders, customers and suppliers are deeply appreciated.

Sincerely,

Stanley P. Gold Bruce W. MacGregor
Chairman and Chief Executive Officer President & Chief Operating Officer

<PAGE>

SELECTED FINANCIAL DATA

FOR THE FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<S> <C> <C> <C> <C> <C>
NET SALES $196,448 $296,551 $415,966 $398,358 $430,194

NET LOSS (61,689) (51,397) (22,195) (32,513) (71,901)

LOSS APPLICABLE TO COMMON STOCK (70,077) (59,143) (29,695) (40,180) (79,647)

PER COMMON SHARE:

LOSS BEFORE PREFERRED DIVIDENDS $ (2.69) $ (2.24) $ (0.97) $ (1.42) $ (3.39)

LOSS APPLICABLE TO COMMON STOCK (3.06) (2.58) (1.29) (1.75) (3.76)

<CAPTION>
AT NOVEMBER 30,
---------------

1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 34,239 $ 35,956 $ 49,710 $ 27,790 $ 83,982 (A)

INVENTORIES 32,809 51,677 57,597 109,797 61,923

WORKING CAPITAL 46,467 103,999 147,848 161,948 168,049

TOTAL ASSETS 100,956 159,575 224,463 254,613 250,144

CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000 50,000 50,000 --

MANDATORILY REDEEMABLE SERIES A PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS -- 107,746 100,000 100,000 100,000

SHAREHOLDERS' EQUITY (DEFICIT) 4,504 (40,627) 18,149 46,797 87,451

(A) CASH AND CASH EQUIVALENTS INCLUDED $29.0 MILLION OF COLLATERALIZED CASH.

</TABLE>

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALL REFERENCES TO YEARS ARE TO THE FISCAL YEARS ENDED NOVEMBER 30, 1996, 1995
AND 1994 AS APPLICABLE

1996 COMPARED TO 1995

NET SALES In 1996, the Company's net sales decreased by 33.8% to $196.4 million
from $296.6 million in 1995 primarily due to (i) a 24.5% decrease in the total
number of pairs sold to 13.2 million pairs in 1996 from 17.5 million pairs in
1995 and (ii) a decrease of $2.14 in the overall average selling price per pair.
Domestic net sales decreased by 29.3% from the prior year. International net
sales, which accounted for approximately 30.7% of the Company's total net sales,
decreased by 42.0% from the previous year.

The following table sets forth certain information regarding the Company's
net sales:

NET SALES
------------------------------------------
1996 1995
------------------------------------------
$ % $ %
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)

DOMESTIC FOOTWEAR
CHILDREN'S $ 74,981 38% $107,570 36%
WOMEN'S 38,362 20 46,422 16
MEN'S 20,430 10 35,842 12
OTHER 2,282 1 2,659 1
- -----------------------------------------------------------------------------
TOTAL DOMESTIC SALES 136,055 69 192,493 65
- -----------------------------------------------------------------------------

INTERNATIONAL FOOTWEAR
CHILDREN'S 32,095 17 57,623 19
WOMEN'S 13,879 7 22,500 8
MEN'S 10,219 5 18,810 6
OTHER 4,200 2 5,125 2
- -----------------------------------------------------------------------------
TOTAL INTERNATIONAL SALES 60,393 31 104,058 35
- -----------------------------------------------------------------------------
TOTAL NET SALES $196,448 100% $296,551 100%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

The following table sets forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during 1996 as
compared to 1995:

CHANGES BETWEEN 1996 AND 1995
------------------------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- -----------------------------------------------------------------------------
CHILDREN'S (17.9)% (39.9)% (24.8)%
WOMEN'S (5.2)% (32.7)% (12.9)%
MEN'S (38.8)% (45.1)% (40.8)%

TOTAL VOLUME (DECREASE) (18.0)% (39.2)% (24.5)%

The decrease in overall net sales in 1996 was primarily attributable to (i)
reduced worldwide demand for the Company's children's lighted footwear and adult
products and (ii) a $2.20 per pair decrease in the average domestic selling
price, primarily with respect to children's lighted footwear and the Wal-Mart
line. Despite the lower total international sales, the response to the new
adult Fatmox-TM- line in Europe has been positive, generating over half of the
European adult sales for the second half of 1996.

Total sales of the Company's children's lighted shoes decreased by $60.8
million to $61.5 million in 1996 from $122.3 million in 1995. Domestic sales of
children's lighted product decreased by $33.6 million due to a drop in both
volume (to 2.4 million pairs from 4.3 million pairs) and average selling price
(to $15.94 from $16.99) primarily as a result of lower priced lighted shoes
offered by competitors and reduced demand for the Company's lighted product.
Internationally, children's lighted sales decreased by $27.2 million compared to
1995, primarily due to reduced demand worldwide for the Company's lighted
product. As a result, sales of children's lighted shoes accounted for only
57.4% of total children's net sales in 1996, down from 74.0% in 1995.

GROSS MARGIN The consolidated gross margin for 1996 decreased to 24.0% from
29.9% principally due to a decline in international gross margins to 21.2% from
36.0%. The decrease in the international margin was due to (i) an increase of
approximately $3 million in markdowns issued to customers of the Company's Far
East joint venture with Inchcape Pacific Limited ("Inchcape"), (ii) an increase
in inventory reserves established in the fourth quarter by

<PAGE>

the Company's European subsidiaries, primarily for Graf/x-TM- and (iii) low
margins realized on sales of lighted product and increases in reserves for slow
moving and discontinued lighted inventory.

Domestically, the gross margin decreased to 25.3% from 26.7% in the prior
year. The domestic margin was negatively impacted by $6.1 million in markdown
and obsolescence reserves in the fourth quarter, primarily associated with the
discontinuance of the Graf/x-TM- line, an increase in reserves due to
significant reductions in the women's casual product line and obsolescence
reserves for certain NEONZ-TM- products, partially offset by the settlement of a
number of outstanding claims against factories for defective product, net of
liabilities to such factories for unamortized molds and tooling in the second
and third quarters.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND RESTRUCTURING CHARGES In
November 1996, the Company adopted a reorganization plan which included a cost
reduction program aimed at bringing the Company's operating expenses in line
with its anticipated sales base. The plan resulted in a restructuring charge of
$28.8 million in 1996 and primarily consisted of the following key elements: (i)
an approximate 52% reduction in the Company's full-time domestic workforce (from
approximately 314 to 150 employees); (ii) reduction of corporate overhead
through space consolidation at the Company's Santa Monica, California
headquarters and Ontario, California distribution center; and (iii) a
consolidation and restructuring of the Company's European operations (including
an $8.3 million write-off of goodwill), providing for, where appropriate,
distribution to the Company's European customers through independent
distributors rather than through direct subsidiaries.

In September 1995, the Company announced a corporate reorganization plan
designed to reengineer key business processes, streamline the Company's
organizational structure and substantially reduce operating expenses which
resulted in a restructuring charge of $5.1 million. In addition, the Company
incurred non-recurring charges of $5.6 million in fiscal 1995. Exclusive of
restructuring and non-recurring charges of $28.8 million and $10.7 million in
1996 and 1995, respectively, total selling, general and administrative expenses
decreased by $44.1 million or 33.7% to $86.8 million in 1996 from $130.9 million
in 1995.

Domestic selling, general and administrative expenses (exclusive of
restructuring and non-recurring charges of $10.6 million and $10.2 million in
1996 and 1995, respectively) decreased by $32.9 million or 35.0% in 1996. The
reduction in domestic expenses was primarily due to the benefits realized from
the implementation of the Company's 1995 corporate reorganization plan which
reduced (i) advertising and promotional expenses by $12.2 million, (ii)
compensation and benefit expenses by $5.2 million, (iii) professional and
consulting fees by $3.0 million, (iv) depreciation by $2.8 million and (v) other
net expenses by $4.9 million. In addition, bad debt expense decreased by $2.6
million as a result of lower sales, a reduced level of bad debt write-offs and a
$0.9 million recovery of bad debt in the first quarter of 1996. Sales
commissions also decreased by $2.2 million due to reduced sales in 1996 compared
to 1995. Approximately $2.6 million in restructuring costs incurred in 1996 was
applied against the restructuring reserve established in fiscal 1995.

International selling, general and administrative expenses (exclusive of
restructuring charges of $18.2 million in 1996 and $0.5 million in 1995)
decreased by $11.2 million, or 30.3%, to $25.8 million compared to $37.0
million in 1995 primarily due to lower advertising and promotional expenses,
compensation and benefits and bad debt expense.

Total selling, general and administrative expenses, exclusive of
restructuring and non-recurring charges, as a percentage of net sales, remained
constant at approximately 44% in 1996 as in 1995. Changes in the Company's
selling, general and administrative expenses cannot be directly related to
fluctuations in sales volume as a substantial portion of such expenses are
incurred to benefit future periods, such as media, advertising and trade show
expenses. The benefits of the 1996 cost reduction plan are expected to be
realized in fiscal 1997.

LITIGATION SETTLEMENTS, NET Fiscal 1996 results include net settlement income
of $1.9 million, primarily in connection with the settlement of an environmental
compliance matter. Fiscal 1995 results include net settlement income of $2.3
million, substantially all of which was in connection with the settlement of
certain patent and trademark infringement actions. See NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, NOTE 15 - LITIGATION.

INTEREST EXPENSE/INCOME Interest expense of $4.1 million and $4.2 million in
1996 and 1995, respectively, was primarily related to interest costs on the $50
million, 73/4% convertible subordinated debentures due 2002 (the "Debentures")
issued in December 1992. Interest income amounted to $2.0 million in both 1996
and in 1995.

<PAGE>

MINORITY INTEREST Minority interest increased to $7.0 million in 1996 from $1.3
million in 1995. This increase relates to losses incurred by the Company's Far
East joint venture with Inchcape primarily as a result of markdowns given to its
customers and reduced sales of children's lighted product. Minority interest
represents the share of the joint venture's losses allocated to Inchcape
pursuant to the terms of the joint venture agreement.

In September 1996, L.A. Gear (Far East) Limited, the Company's Far East
joint venture with Inchcape, ceased operations as the exclusive marketer,
distributor and seller of L.A. Gear branded footwear, apparel and accessories in
select Far East markets. The Company anticipates receiving approximately $1.0
million in proceeds upon the dissolution of the joint venture to be recognized
as income upon receipt. See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, NOTE 4
- - BUSINESS ACQUISITIONS AND DISPOSITIONS.

The Company is currently reviewing alternative means of distributing L.A.
Gear branded products in the Far East markets previously serviced by the joint
venture. Separately, the Company entered into agreements with Itochu
Corporation in July 1996 and Daiwa Corporation in September 1996 to distribute
L.A. Gear branded footwear and L.A. Gear branded apparel and accessories,
respectively, in Japan, a market not previously serviced by the joint venture.

MANAGEMENT In June 1996, David Gatto, Executive Vice President, resigned from
the Company. In August 1996, James Moodhe, Senior Vice President-Marketing,
Design and Development, left the Company to pursue other career opportunities.
Also in August 1996, Bruce MacGregor joined the Company as Senior Vice President
- - Product and Marketing. Prior to joining the Company, Mr. MacGregor served as
Vice President - Marketing at Avia International and Co-founder, President and
Chief Executive Officer at Deja Shoe.

In November 1996, the Company announced that William L. Benford, President
and Chief Operating Officer, was resigning as an officer of the Company to join
Shamrock Capital Advisors, Inc. ("SCA"), in early February 1997. SCA is the
financial advisor to Trefoil Capital Investors, L.P. ("Trefoil"), the largest
beneficial owner of the Company's stock. Mr. MacGregor has been named as the
Company's new President and Chief Operating Officer. Mr. Benford will continue
to serve on the Company's Board of Directors. Also in November 1996, Victor
Trippetti was promoted from Vice President and Treasurer to Senior Vice
President and Chief Financial Officer of the Company.

As part of the Company's cost reduction plan adopted in November 1996,
Tracey Doi, former Vice President and Controller, left the Company in January
1997 to pursue other opportunities, and Thomas Larkins, Senior Vice President
and Chief Administrative Officer, will be leaving the Company during fiscal 1997
following his completion of certain projects.

DOMESTIC AND INTERNATIONAL INDUSTRY SEGMENTS For information concerning the
Company's industry segments, see NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
NOTE 17 - SEGMENT REPORTING.

1995 COMPARED TO 1994

NET SALES In 1995, the Company's net sales decreased by 28.7% to $296.6 million
from $416.0 million in 1994 primarily due to (i) a 23.8% decrease in the total
number of pairs sold to 17.5 million pairs in 1995 from 22.9 million pairs in
1994 and (ii) a decrease of $1.36 in the overall average selling price per pair.
Domestic net sales decreased by 35.3% from the prior year. International net
sales, which accounted for approximately 35.1% of the Company's total net sales,
decreased by 12.1% from the previous year.

<PAGE>

The following table sets forth certain information regarding the Company's
net sales:

NET SALES
-----------------------------------------------
1995 1994
-----------------------------------------------
$ % $ %
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)

DOMESTIC FOOTWEAR
CHILDREN'S $107,570 36% $165,460 40%
WOMEN'S 46,422 16 63,218 15
MEN'S 35,842 12 67,186 16
OTHER 2,659 1 1,721 1
- -----------------------------------------------------------------------------
TOTAL DOMESTIC SALES 192,493 65 297,585 72
- -----------------------------------------------------------------------------
INTERNATIONAL FOOTWEAR
CHILDREN'S 57,623 19 48,340 11
WOMEN'S 22,500 8 25,431 6
MEN'S 18,810 6 40,643 10
OTHER 5,125 2 3,967 1
- -----------------------------------------------------------------------------
TOTAL INTERNATIONAL SALES 104,058 35 118,381 28
- -----------------------------------------------------------------------------
TOTAL NET SALES $296,551 100% $415,966 100%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

The following table sets forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during 1995 as
compared to 1994:

CHANGES BETWEEN 1995 AND 1994
------------------------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- -----------------------------------------------------------------------------
CHILDREN'S (26.2)% 14.1% (17.0)%
WOMEN'S (19.5)% (28.4)% (22.2)%
MEN'S (35.4)% (51.1)% (41.4)%

TOTAL VOLUME (DECREASE) (26.3)% (17.6)% (23.8)%

The decrease in 1995 domestic net sales principally represents (i) a 26.2%
drop in the number of pairs of children's shoes sold primarily due to a $49.4
million decrease in domestic sales of children's lighted product, (ii) a 35.4%
decrease in the number of pairs of men's shoes sold in 1995 compared to 1994
primarily due to sales of approximately $12.0 million of a newly introduced
men's lighted LEAP GEAR-TM- product line in the first quarter of 1994 without a
comparable introduction in the first quarter of 1995 and lower sales of the
FLAK-TM- product line in 1995 compared to 1994, (iii) a 19.5% decrease in the
number of pairs of women's shoes sold in 1995 compared to 1994 primarily due to
overall reduced demand and (iv) a decrease of $2.33 in the average selling price
per pair to $15.65 in 1995 from $17.98 in 1994. Due to the long lead times
required to introduce new footwear products to market, the Company was unable to
offer more women's shoe styles in 1995 despite its refocused efforts on the
women's and children's markets. The decrease in the average selling price per
pair was principally due to the Company's focus on offering more value-priced
products for men and women, a reduced emphasis on more expensive performance
athletic footwear and sales of a product line developed for Wal-Mart. Sales to
Wal-Mart amounted to $45.3 million and $39.6 million in 1995 and 1994,
respectively.

Total sales of the Company's children's lighted shoes decreased by $36.4
million to $122.3 million in 1995 from $158.7 million in 1994. Sales of
children's lighted shoes accounted for 74.0% and 74.2% of total children's net
sales in 1995 and 1994, respectively. Domestic sales of children's lighted
product decreased by $49.4 million in 1995 compared to 1994 primarily due to a
drop in both volume (to 4.3 million pairs from 6.2 million pairs) and average
selling price per pair (to $16.99 from $19.73) as a result of excess inventory
at retailers, lower priced lighted shoes offered by competitors and the possible
effect of adverse publicity regarding selected styles of its children's lighted
shoes manufactured prior to May 1994 which utilized motion-activated switches
containing mercury. Internationally, sales of children's lighted product grew
by $13.0 million in 1995 compared to 1994, particularly in Europe and Asia.

Sales by the Company's European subsidiaries and Far East joint venture
increased by 23.7% compared to 1994 principally due to increased demand for
children's lighted products. Overall, the average selling price per pair
internationally increased by $0.87 from $17.71 in 1994 to $18.58 in 1995. Total
international net sales in 1995 decreased by approximately $14.3 million from
the prior year primarily due to reduced sales in Mexico, Central and South
America and Poland. Sales in Mexico, Central and South America were adversely
affected by poor economic conditions in those regions. In 1994, the Company
sold approximately $6.5 million in excess inventory into Poland with no
corresponding sales in 1995. The number of pairs of men's shoes sold
internationally decreased by 51.1% from

<PAGE>

the prior year primarily due to lower sales of the FLAK-TM- product line in
Germany and the impact of the lower sales in Mexico, Central and South America
and Poland. The number of pairs of women's shoes sold internationally decreased
by 28.4% primarily due to overall reduced demand.

GROSS MARGIN Gross margin increased to 29.9% for 1995 from 29.7% in 1994
primarily due to the improvement in the international gross margin to 36.0% from
30.0% in the prior year as a result of the increased demand for children's
lighted products and reduced international sales of excess inventory in 1995.
The increase in the international margin was partially offset by a decrease in
the domestic gross margin to 26.7% in 1995 from 29.5% in 1994 primarily as a
result of domestic sales of selected discontinued men's styles in 1995 and an
increase in inventory obsolescence reserves in the fourth quarter.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND RESTRUCTURING CHARGES In
September 1995, the Company announced a corporate reorganization plan designed
to reengineer key business processes, streamline the Company's organizational
structure and substantially reduce operating expenses. The reorganization plan
resulted in a restructuring charge of $5.1 million in 1995 primarily relating to
the elimination of approximately 160 full time jobs, the closure of the
Company's retail outlet division and office space consolidation at the corporate
headquarters. In addition, during the fourth quarter of 1995 the Company
incurred non-recurring charges of $5.6 million in connection with (i) a $4.6
million increase in the reserve for unused barter credits and (ii) a $1.0
million write off of goodwill related to the acquisition of certain assets of
the Company's exclusive distributor (and one of its affiliates) in Mexico in
June 1994. In 1994, the Company incurred non-recurring charges of $2.5 million
for payments due under contractual obligations to certain individuals upon
realignment of senior management. Exclusive of restructuring and non-recurring
charges of $10.7 million and $2.5 million in 1995 and 1994, respectively, total
selling, general and administrative expenses decreased by $10.5 million or 7.4%
to $130.9 million during 1995 from $141.4 million during 1994.

Domestic selling, general and administrative expenses (exclusive of
restructuring and non-recurring charges of $10.2 million) decreased by $15.4
million or 14.1% in 1995. This decrease include reductions in (i) compensation
expenses of $4.1 million, (ii) sourcing fees of $3.1 million, (iii) depreciation
of $2.0 million, (iv) advertising and promotional expenses of $1.9 million, (v)
legal fees of $1.5 million, (vi) sales commissions of $1.3 million and (vii)
other net variable expenses of $3.9 million. These overall expense reductions
were offset by an increase of $2.4 million in bad debt expense primarily due to
increased reserves to cover the Company's exposure to its customers importing
product into Mexico and a general deterioration in the retail environment.

International selling, general and administrative expenses, exclusive of
restructuring charges of $0.5 million in 1995, increased by $4.9 million
primarily due to higher expenses of the European subsidiaries and Far East joint
venture as a result of the increase in volume of their business. The joint
venture, which was formed in December 1993 with Inchcape to engage in marketing,
sales and distribution of L.A. Gear-Registered Trademark- branded footwear,
apparel and accessories in selected Far East markets, was still in the start-up
phase in 1994.

As a result of the devaluation of the peso in fiscal 1995, the Company's
Mexican subsidiary incurred a foreign exchange loss of $0.5 million related to
the partial repayment of intercompany indebtedness. There were no other
significant exchange gains or losses in 1995 or 1994.

As a percentage of net sales, selling, general and administrative expenses
(exclusive of restructuring and non-recurring charges) increased to
approximately 44% in 1995 from approximately 34% in 1994. Changes in the
Company's selling, general and administrative expenses cannot be directly
related to fluctuations in sales volume as a substantial portion of expenses are
incurred to benefit future periods, such as media, advertising and trade show
expenses.

LITIGATION SETTLEMENTS, NET Fiscal 1995 results include net settlement income
of $2.3 million, substantially all of which was in connection with the
settlement of certain patent and trademark infringement actions. Fiscal 1994
results included a net credit of $1.3 million representing settlement income
primarily in connection with trademark and patent infringement lawsuits
partially offset by expenses relating to the settlement of employment litigation
and a dispute with a former distributor.

<PAGE>

INTEREST EXPENSE/INCOME Interest expense of $4.2 million and $4.4 million in
1995 and 1994, respectively, primarily related to interest costs on the $50
million Debentures.

Interest income increased to $2.0 million in 1995 from $1.4 million in 1994
primarily as a result of higher interest rates on approximately the same average
cash balances.

DOMESTIC AND INTERNATIONAL INDUSTRY SEGMENTS For information concerning the
Company's industry segments, see NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
NOTE 17 - SEGMENT REPORTING.

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth certain data with respect to the Company's
liquidity and capital resources.

YEAR ENDED NOVEMBER 30,
-----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT INTEREST RATES)

CASH AND CASH EQUIVALENTS $34,239 $ 35,956 $ 49,710
WORKING CAPITAL 46,467 103,999 147,848
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 618 (11,212) 28,369
CASH USED IN INVESTING ACTIVITIES (710) (3,256) (4,448)
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,877) 622 (1,016)
OUTSTANDING LETTERS OF CREDIT 26,467 24,440 36,699
BORROWINGS UNDER INTERNATIONAL CREDIT FACILITIES -- 1,233 557
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS -- 107,746 100,000
WEIGHTED AVERAGE INTEREST RATES ON CREDIT FACILITIES -- 8.2% 8.3%

CASH AND CASH EQUIVALENTS Cash and cash equivalent balances decreased by $1.7
million from November 30, 1995 to a balance of $34.2 million at November 30,
1996 primarily due to cash used to fund operating losses offset by reduced
working capital requirements. However, a substantial portion of the cash
expenditures associated with the Company's 1996 cost reduction plan are being
incurred after the end of fiscal 1996, although such costs have been reflected
as a charge to earnings in the consolidated statement of operations for fiscal
1996. These cash expenditures (including severance payments), together with a
seasonal need for cash outlays in the first quarter of fiscal 1997, have
significantly reduced the Company's cash balances from that shown at the end of
fiscal 1996. However, the Company believes that it has sufficient funding under
the Revolving Facility to meet its short term liquidity needs. See BORROWING
FACILITIES AND LIQUIDITY.

ACCOUNTS RECEIVABLE, NET Net accounts receivable at November 30, 1996 decreased
by $22.7 million from the prior year primarily due to reduced sales in October
and November 1996 (including an $8.2 million reduction in sales to Wal-Mart)
compared to the same period in 1995.

INVENTORY Inventory decreased by $18.9 million from $51.7 million at November
30, 1995 to $32.8 million at November 30, 1996, due to planned inventory
management resulting from lower sales volume, the shipment of 0.6 million pairs
to Wal-Mart in the first half of 1996 from the November 30, 1995 inventory and
the Company's continuing efforts to effectively manage inventory levels.

ACCOUNTS PAYABLES AND ACCRUED LIABILITIES Accounts payable and accrued
liabilities at November 30, 1996 increased by $13.6 million from the prior year
primarily due to an increase in accrued restructuring charges.

BORROWING FACILITIES AND LIQUIDITY Effective as of August 31, 1996, the Company
entered into an amendment to its existing revolving credit facility with
BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit (the
"Revolving Facility"). The amendment provided for, among other things, (i) an
extension of the term of the Revolving Facility for an additional three years to
November 30, 1999, (ii) a reduction in the maximum amount available for
aggregate loans and letters of credit at any time from $75 million to $50
million, (iii) an increase in the maximum amount of aggregate loans permitted to
be outstanding at any time from $10 million to $20 million and (iv) a reduction
in the minimum Adjusted Tangible Net Worth (as defined in the Revolving
Facility) required to be maintained under the Revolving Facility, with a
restriction on the payment of cash dividends on the Company's

<PAGE>

Series B Cumulative Convertible Preferred Stock and a reduction in the amount of
the available Borrowing Base (as defined in the Revolving Facility) if the
Company's Adjusted Tangible Net Worth falls below certain thresholds.

Effective November 30, 1996, the Company entered into a further amendment
to its Revolving Facility with BABC (the "November 30 Amendment"). The
amendment provides for, among other things, (i) a reduction in the term of the
Revolving Facility from November 30, 1999 to May 31, 1998, (ii) a reduction in
the maximum amount available for aggregate loans and letters of credit at any
time from $50 million to $25 million, (iii) a reduction in the maximum amount of
aggregate loans permitted to be outstanding at any time from $20 million to $10
million, (iv) certain revisions to the borrowing availability calculation
including the elimination of a reserve against availability, (v) a reduction in
the minimum Adjusted Tangible Net Worth required to be maintained under the
Revolving Facility and (vi) an increase in bank fees. The Company is currently
negotiating with various lenders to secure borrowing facilities beyond May 31,
1998.

The Revolving Facility is secured primarily by the Company's domestic
assets and is subject to certain financial covenants. Cash borrowings under the
Revolving Facility bear interest at a rate equal to Bank of America's publicly
announced reference rate plus one and one-half percent. There were no domestic
cash borrowings under the Revolving Facility at any time during the year ended
November 30, 1996 and, as of that date, approximately $26.5 million of domestic
letters of credit were outstanding under the Revolving Facility and $10 million
was available for borrowing. In connection with the execution of the November
30 Amendment, BABC granted a waiver through December 31, 1996 of the $25 million
limit on aggregate loans and letters of credit.

The Company's liquidity is contingent primarily on attaining forecast sales
levels, gross margins and operating expenses and securing financing beyond May
31, 1998. The Company believes that, based on its current forecast, its present
funding sources are sufficient to meet its liquidity needs through fiscal 1997.
However, the Company can make no assurances that it will meet its current
forecast. Factors influencing the Company's ability to sustain adequate
liquidity levels include the reduced size of the business and related working
capital needs, the timing of the sale or closure of certain of the Company's
European subsidiaries and the level of domestic operating costs. In the event
that the Company's future operating results fall below management's
expectations, the Company will consider other available alternatives.

CONVERTIBLE DEBENTURES The $50 million Debentures are convertible into shares
of the Company's Common Stock at a conversion rate of $12.30 per share, and are
redeemable by the Company at any time, initially at a specified premium to par,
declining to par for redemptions on or after November 30, 2000.

SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/SHARE EXCHANGE TRANSACTION On
April 9, 1996, the Company's shareholders approved the exchange (the "Share
Exchange Transaction") of all of the issued and outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock, stated value $100 per
share ("Series A Preferred Stock"), and all accrued and unpaid dividends thereon
for (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B Cumulative Convertible Preferred Stock, stated value
$100 per share ("Series B Preferred Stock"), plus (ii) an additional number of
shares of Series B Preferred Stock equal to the dollar amount of accrued and
unpaid dividends in respect to the Series A Preferred Stock through the closing
of the Share Exchange Transaction. The Share Exchange Transaction was completed
on April 12, 1996 and, as a result, Trefoil, the holder of all the Series A
Preferred Stock, was issued 1,107,902 shares of Series B Preferred Stock and the
Series A Preferred Stock was retired.

The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
which was due in August 1996), (ii) a reduction in the conversion price from
$10.00 to $6.75 per share and (iii) the voting of shares of Series B Preferred
Stock (on an as converted basis) together with shares of the Company's Common
Stock on all matters, including the election of directors. The coupon rate of
7.5% per annum for dividends with respect to the Series B Preferred Stock
remains unchanged from that of the Series A Preferred Stock. During the fiscal
year ended November 30, 1996, the Company was entitled, at its option, to pay
dividends on the Series B Preferred Stock in either additional shares of Series
B Preferred Stock or in cash. Thereafter, dividends on the Series B Preferred
Stock are payable only in cash. The Company elected to pay the dividends of
$1.1 million, $2.1 million and $2.1 million due on May 31, August 31 and
November 30, 1996, respectively, in additional shares of Series B Preferred
Stock. The holders of the Series B shares are entitled to receive, when, as and
if declared by the Board of Directors out of assets of the Company legally
available therefor, cumulative cash dividends at an annual rate of 7.5% (if in
arrears, compounded quarterly at a rate of 8.625%

<PAGE>

per annum with respect to dividends in arrears, through the date of payment of
such arrearages), payable quarterly in arrears on the last business day of
February, May, August and November.

The Company's Board of Directors has approved the non-payment of the cash
dividend required on the Series B Preferred Stock (see NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, NOTE 12 - SERIES A CUMULATIVE CONVERTIBLE PREFERRED
STOCK/SHARE EXCHANGE TRANSACTION) due February 28, 1997. As a result of such
default, future dividends will accrue at a rate of 8.625% per annum compounded
quarterly with respect to dividends in arrears.

INVESTMENT POLICIES The Company's cash investment policy allows the investment
of available cash in accordance with certain quality, maturity and
diversification parameters. The basic objectives of this policy are (i) safety
and preservation of capital, (ii) liquidity of investments sufficient to meet
cash flow requirements and (iii) attainment of an optimal market rate of return
on invested funds consistent with the stated objectives.

FORWARD EXCHANGE CONTRACTS The Company enters into forward exchange contracts,
with terms of less than one year, to offset the effects of exchange rate changes
on cash flow exposures denominated in foreign currencies. These exposures are
primarily repayments of U.S. dollar denominated liabilities by the Company's
foreign subsidiaries. These contracts are marked to market and realized and
unrealized gains and losses are recognized in the consolidated statement of
operations.

COMMITMENTS In the normal course of business the Company enters into various
agreements for obtaining footwear technology and product sourcing. In addition,
the Company occupies certain facilities, including corporate offices and
distribution centers and rents certain equipment under operating leases.
Agreements and lease commitments with terms extending through the year 2002
contain provisions for future guaranteed minimum payments aggregating
approximately $21.0 million. There were no commitments for any material capital
expenditures at November 30, 1996.

INCOME TAXES At November 30, 1996, the Company had a federal tax net operating
loss ("NOL") carryforward of approximately $101.4 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2011. The Company also
has a federal alternative minimum tax credit carryforward of approximately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely. California franchise tax NOL carryforwards of
approximately $88.3 million will, if unused, expire primarily in fiscal year
1998. In addition, the Company has other state and foreign NOL carryforwards
with varying limitations on future utilization. The Company's NOL carryforwards
may be restricted upon a change in control.

BACKLOG The Company had a combined domestic and international order backlog of
$46.5 million and $88.0 million at December 31, 1996 and 1995, respectively.
The lower backlog at December 31, 1996 is primarily due to (i) the inclusion in
the December 31, 1995 backlog of the then-remaining balance ($29.5 million) of
Wal-Mart's $80 million minimum purchase commitment for fiscal 1995 and (ii) an
approximate $12.0 million decrease in orders for children's lighted product.
Children's lights as a percentage of the total December 31, 1996 and 1995
backlog, excluding Wal-Mart orders, were 28.0% and 40.2%, respectively. The
Company's agreement with Wal-Mart does not provide for the sale of L.A. Gear
lighted footwear products to Wal-Mart. Wal-Mart was not subject to any minimum
purchase commitment for fiscal 1996 and is not subject to any minimum purchase
commitment for fiscal 1997. The combined backlog at December 31, 1996 includes
$5.5 million for Wal-Mart. Shipments and sales for future periods depend on,
among other things, the combination of "futures" and "at once" orders.
Accordingly, the comparison of backlog from period to period may not be
indicative of eventual actual shipments.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
is required to be implemented by the Company for the fiscal year beginning
December 1, 1996 and is not expected to have a material impact on the Company's
financial position or results of operations.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company will adopt the
disclosure-only provisions of SFAS No. 123 for the year ending November 30,
1997. The adoption of SFAS No. 123 will not have a material impact on the
Company's financial position or results of operations.

<PAGE>

OUTLOOK FOR FISCAL 1997

As part of the Company's November 1996 restructuring plan, in addition to
introducing a cost reduction plan designed to reduce operating expenses by over
$30 million on an annualized basis, management adopted a new strategy regarding
its product offerings, distribution channels and sales force utilization. The
Company will apply this new strategy to generate increased sales and margins,
rejuvenate brand identity in fiscal 1997 and bring operating expenses in line
with the Company's anticipated sales base.

For fiscal 1997, the Company has developed a branding, sub-branding and
co-labeling strategy aimed at (i) building on brand success of products such as
its children's lights and elevating the integrity of its women's athletic
product and (ii) introducing new brands to penetrate additional market segments.

As a result of the success of its children's lighted technology, the
Company has consolidated all of its lighted product offerings under the L.A.
Lights-Registered Trademark- sub-brand umbrella. In addition to Lites-TM- by
L.A. Gear and NEONZ-TM-, the Company will introduce two new technologies under
the L.A. Lights-Registered Trademark- umbrella for Fall 1997, including
Lazerlites-TM-, utilizing fiber optic technology in the form of motion sensitive
shoe laces, and, Faderz-TM-, optimizing diode lights that feature a fading
system on the bottoms.

The Company believes that it has a viable market niche for women's
technology-aided athletic shoes and will introduce ABS+-TM- in Fall 1997 as a
co-label brand for women featuring functional, technically enhanced athletic
footwear.

In addition, the Company will launch two new brands in Fall 1997, Digit
3-TM- and Mongo-TM-. Digit 3-TM- is a performance brand for the extreme sports
enthusiast. Digit 3-TM- will have a suggested retail price point of $55 and
will be marketed to the 13 to 24 year old fashion conscious male and female.
Mongo-TM- is an aggressive, hard-core style shoe featuring fat
snowboard-inspired outsoles marketed to young adults. Mongo-TM- is currently
distributed in Europe under the name Fatmox-TM- by L.A. Gear and, in the second
half of fiscal 1996, accounted for over 50% of adult sales in Europe.

For the Fall 1997 product line, the Company will implement its strategy of
segmenting its products between its tiers of distribution. The Company will
offer it newest technologies and brands at upper tier distribution channels
while continuing to offer its basic lines to all distribution outlets. Products
will be sold through a combination of the Company's sales management team and
independent agents, divided into separate adult and children's representatives.
The new sales force structure is expected to increase effectiveness in the
marketplace and reduce overall selling expenses.

The Company has implemented numerous measures in fiscal 1995 and 1996 in an
effort to reorganize its production and distribution structures and to reduce
its overhead and other costs. The Company's success in capitalizing on these
measures will depend in large part on its ability to predict and quickly exploit
fashion trends in the footwear market and thereby attain its revenue and margin
goals. The Company believes that its business strategy for fiscal 1997 will
better position it to address changes in the marketplace and to build on its
past successes in offering branded footwear in the children's and women's
markets. However, if sales margins and operating expense savings in fiscal 1997
fall below management's expectations, additional sources of working capital may
be necessary and difficult to obtain. There can be no assurances that the
Company will be able to successfully exploit its strategy or that the strategy
will have the desired effect.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those described
under LIQUIDITY AND CAPITAL RESOURCES and OUTLOOK FOR FISCAL 1997 and the
following: general economic and business conditions; competition; success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or adherence to development
schedules; the existence or absence of adverse publicity; availability, location
and terms of product distribution channels; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; business abilities and judgment of personnel;

<PAGE>

availability of qualified personnel; labor and employee benefit costs; changes
in, or the failure to comply with, governmental regulations; the ability to
reverse recent trends that have caused reductions in market share and
substantial losses; continued access to licensed intellectual property rights;
continued access to adequate sources of product supply; risks associated with
unaffiliated manufacturers and international operations; and other factors
referenced in this Annual Report.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

NOVEMBER 30,
-------------------
1996 1995
-------------------

ASSETS

Current assets:
Cash and cash equivalents $ 34,239 $ 35,956
Accounts receivable, net 23,938 46,630
Inventories 32,809 51,677
Prepaid expenses and other current assets 1,933 3,773
------- -------

Total current assets 92,919 138,036

Property and equipment, net 4,445 8,290
Goodwill, net 1,538 11,191
Other assets 2,054 2,058
------- -------

$100,956 $159,575
======= =======

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities $ 46,452 32,804
Borrowings under international credit facilities -- 1,233
------- -------

Total current liabilities 46,452 34,037
------- -------

73/4% convertible subordinated debentures due 2002 50,000 50,000
------- -------

Minority interest -- 8,419
------- -------

Mandatorily redeemable preferred stock:
7.5% Series A Cumulative Convertible Preferred Stock,
$100 stated value; 1,000,000 shares authorized, issued
and outstanding; redemption value of $100 per share
plus accrued and unpaid dividends -- 107,746
------- -------

Shareholders' equity (deficit):
7.5% Series B Cumulative Convertible Preferred Stock,
$100 stated value; 1,161,822 shares authorized; 1,161,337
issued and outstanding at November 30, 1996; no shares
issued at November 30, 1995 115,473 --
Preferred stock, no stated value; 8,838,178 authorized and
unissued at November 30, 1996; 9,000,000 shares
authorized and unissued at November 30, 1995 -- --
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at
November 30, 1996 and 1995 128,093 128,093
Cumulative currency translation adjustment 296 561
Accumulated deficit (239,358) (169,281)
------- -------
Total shareholders' equity (deficit) 4,504 (40,627)
------- -------
Commitments and contingencies -- --
------- -------
$100,956 $159,575
======= =======

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)

YEAR ENDED NOVEMBER 30,
--------------------------------
1996 1995 1994
--------------------------------

Net sales $ 196,448 $296,551 $415,966
Cost of sales 149,213 207,802 292,629
-------- ------- -------
Gross profit 47,235 88,749 123,337

Selling, general and administrative expenses 86,838 136,504 141,427
Restructuring charges 28,829 5,099 2,486
Litigation settlements, net (1,905) (2,323) (1,268)
Interest expense 4,112 4,174 4,437
Interest income (1,964) (1,984) (1,444)
-------- ------- -------

Loss before income taxes and minority interest (68,675) (52,721) (22,301)

Income tax benefit -- -- --
Minority interest 6,986 1,324 106
-------- ------- -------

Net loss (61,689) (51,397) (22,195)

Dividends on mandatorily redeemable Series A
Cumulative Convertible Preferred Stock (3,044) (7,746) (7,500)
Dividends on Series B Cumulative Convertible
Preferred Stock (5,344) -- --
-------- ------- -------

Loss applicable to common stock $ (70,077) $(59,143) $(29,695)
======== ======= =======

Loss per common share $ (3.06) $ (2.58) $ (1.29)
======== ======= =======

Weighted average common shares outstanding 22,937 22,937 22,937
======== ======= =======

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
(in thousands)

YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
---------------------------------------------------------------------------------
SERIES B
CUMULATIVE CUMULATIVE
CONVERTIBLE CURRENCY
PREFERRED STOCK COMMON STOCK TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL
---------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 30, 1993 -- $ -- 22,935 $128,076 $ (836) $ (80,443) $ 46,797

Exercise of stock options -- -- 2 17 -- -- 17

Currency translation adjustment -- -- -- -- 1,030 -- 1,030

Dividends on mandatorily redeemable
Series A Cumulative Convertible
Preferred Stock -- -- -- -- -- (7,500) (7,500)

Net loss -- -- -- -- -- (22,195) (22,195)
----- ------- ------ ------- -------- -------- -------

BALANCE, NOVEMBER 30, 1994 -- -- 22,937 128,093 194 (110,138) 18,149

Currency translation adjustment -- -- -- -- 367 -- 367

Dividends on mandatorily redeemable
Series A Cumulative Convertible
Preferred Stock -- -- -- -- -- (7,746) (7,746)

Net loss -- -- -- -- -- (51,397) (51,397)
----- ------- ------ ------- -------- -------- -------

BALANCE, NOVEMBER 30, 1995 -- -- 22,937 128,093 561 (169,281) (40,627)

Exchange of Series A Cumulative
Convertible Preferred Stock, plus
accrued and unpaid dividends, for
Series B Cumulative Convertible
Preferred Stock, net of costs of
issuance 1,161 110,129 -- -- -- (3,044) 107,085

Currency translation adjustment -- -- -- -- (265) -- (265)

Dividends on Series B Cumulative
Convertible Preferred Stock -- 5,344 -- -- -- (5,344) --

Net loss -- -- -- -- -- (61,689) (61,689)
----- ------- ------ ------- -------- -------- -------

BALANCE, NOVEMBER 30, 1996 1,161 $115,473 22,937 $128,093 $ 296 $(239,358) $ 4,504
===== ======= ====== ======= ======== ======== =======

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)

YEAR ENDED NOVEMBER 30,
-----------------------------------------
1996 1995 1994
-----------------------------------------

<S> <C> <C> <C>
Operating activities:
Net loss $(61,689) $(51,397) $(22,195)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,555 7,266 8,818
Minority interest in net loss of joint venture (6,986) (1,324) (106)
Loss on sale or abandonment of property
and equipment 77 417 72
Increase in reserve for unused barter credits -- 4,568 --
Write-off of goodwill 8,324 1,012 --
Unrealized exchange gain -- (570) --
(Increase) decrease, net of effects of acquisitions, in:
Accounts receivable, net 20,581 30,603 (4,676)
Inventories 18,095 6,100 53,587
Prepaid expenses and other current assets 1,507 3,320 58
Other assets (12) 1,624 --
Increase (decrease), net of effects of acquisitions, in:
Accounts payable and accrued liabilities 16,166 (12,831) (6,180)
Costs related to discontinued operations -- -- (1,009)
------- ------- -------
Net cash provided by (used in) operating
activities 618 (11,212) 28,369
------- ------- -------
Investing activities:
Capital expenditures (710) (3,256) (3,969)
Cash paid for acquisition of subsidiaries, net of
cash acquired -- -- (479)
------- ------- -------
Net cash used in investing activities (710) (3,256) (4,448)
------- ------- -------
Financing activities:
Payment of dividends on mandatorily redeemable
preferred stock -- -- (7,500)
Proceeds from minority's investment in joint venture -- -- 9,850
Exercise of stock options and warrants -- -- 17
Costs related to issuance of Series B Shares (661) -- --
Net (repayments) borrowings under international
credit facilities (1,216) 622 (3,383)
------- ------- -------

Net cash (used in) provided by
financing activities (1,877) 622 (1,016)
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents 252 92 (985)
------- ------- -------

Net (decrease) increase in cash and
cash equivalents (1,717) (13,754) 21,920
Cash and cash equivalents at beginning of year 35,956 49,710 27,790
------- ------- -------

Cash and cash equivalents at end of year $ 34,239 $ 35,956 $ 49,710
======= ======= =======

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. BACKGROUND AND ORGANIZATION

L.A. Gear, Inc., incorporated on February 7, 1979 in the State of
California, designs, develops and markets a broad range of quality athletic and
lifestyle footwear for adults and children.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION The consolidated financial statements include the
accounts of L.A. Gear, Inc. and its majority-owned subsidiaries (collectively
referred to as the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.

Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION Revenues are recognized when title passes based on the
terms of the sale. Sales are recorded net of returns, discounts and allowances.

CASH AND CASH EQUIVALENTS Cash equivalents are all highly liquid, temporary
cash investments, primarily institutional money market funds.

BARTER TRANSACTIONS The Company records barter transactions based on the fair
value of nonmonetary assets, primarily inventory, surrendered. Fair market
value is presumed to be the asset's carrying value, adjusted for any impairment,
so that no gain is recognized on the barter transaction. Impairment losses on
the barter credits are recognized when the fair value of remaining barter
credits is less than the carrying amount or it is probable that the barter
credits will not be used.

INVENTORIES Inventories, substantially all of which consist of purchased
finished goods, are stated at the lower of first-in, first-out (FIFO) cost or
market. The Company establishes inventory obsolescence reserves adjusting the
inventory for any impairment in carrying cost to the estimated net realizable
value.

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and include
improvements that significantly add to the productive capacity or extend the
useful life of the asset. The costs of major remodeling and improvements
relating to leased facilities are capitalized as leasehold improvements. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less any
proceeds, is charged or credited to operations. Costs of maintenance and
repairs are expensed when incurred. Depreciation and amortization are computed
over the estimated useful lives of depreciable assets (three to seven years) on
the straight-line method. Leasehold improvements are amortized using the
straight-line method over the shorter of the remaining term of the applicable
lease or the life of the asset.

GOODWILL The excess of the acquisition cost over the fair value of the net
assets of businesses acquired in purchase transactions has been included in
goodwill and is amortized, using the straight-line method, over the period of
expected benefit of fifteen years.

The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying businesses. Adjustments are made if the sum of
the expected future net cash flows is less than carrying value. Statement of
Financial Accounting Standard ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. SFAS No. 121 is required to be implemented by the Company for the
fiscal year beginning December 1, 1996 and is not expected to have a significant
impact on the Company's financial position or results of operations.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

FOREIGN CURRENCY TRANSLATION The U.S. dollar is the functional currency for the
Company's consolidated operations except for its foreign subsidiaries which use
the currency of their respective countries. Adjustments resulting from
translating foreign functional currency financial statements into U.S. dollars
are recorded in a separate component of shareholders' equity.

ADVERTISING AND PROMOTIONAL EXPENDITURES The Company recognizes advertising
and promotional expenses as incurred or, in the case of endorsement contracts,
on the straight-line amortization basis over the term of the contract.

LOSS PER COMMON SHARE Loss per common share has been computed based on the loss
applicable to common stock (net loss plus dividends on the Series A Cumulative
Convertible Preferred Stock and Series B Cumulative Convertible Preferred Stock)
divided by the weighted average number of common shares outstanding during each
period.

INCOME TAXES The Company accounts for income taxes under the liability method.
Deferred tax liabilities are recognized for taxable temporary differences and
deferred tax assets are recognized for deductible temporary differences and tax
loss and credit carryforwards. A valuation allowance is established to reduce
deferred tax assets if some, or all, of such deferred tax assets are not likely
to be realized.

CONCENTRATION OF CREDIT RISK The Company sells its products to retailers and
other customers and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company closely monitors its exposure to credit risk and maintains
allowances for anticipated losses. See NOTE 6 - ACCOUNTS RECEIVABLE.

STOCK OPTIONS In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company will adopt
the disclosure-only provisions of SFAS No. 123 in the fiscal year ending
November 30, 1997 and the adoption of SFAS No. 123 will not have a material
impact on the Company's financial position or results of operations.

RECLASSIFICATIONS Certain reclassifications have been made to 1995 and 1994
amounts in order to conform to the 1996 presentation.

NOTE 3. RESTRUCTURING CHARGES AND LIQUIDITY

During the fourth quarter of fiscal 1996, management committed to a
restructuring plan aimed at bringing the Company's operating expenses in line
with its anticipated sales base. Due to this action the Company incurred
restructuring charges of $28.8 million in fiscal 1996. These charges include
(i) $18.2 million related to a consolidation and restructuring of the Company's
European operations (including an $8.3 million write-off of goodwill) which will
result in certain of the Company's European customers being serviced through
independent distributors rather than through direct subsidiaries, (ii) $4.4
million related to space consolidation at the Company's Santa Monica, California
headquarters and Ontario, California distribution center, (iii) $3.4 million in
connection with an approximately 52% reduction in the Company's full-time
domestic work force (from approximately 314 to 150 employees), (iv) $1.6 million
related to the early termination of underutilized sponsorships and (v) $1.2
million of other costs.

In September 1995, the Company announced a corporate reorganization plan
designed to reengineer key business processes, streamline the Company's
organizational structure and substantially reduce operating expenses. The
reorganization plan resulted in a restructuring charge of $5.1 million in
1995 primarily related to the elimination of approximately 160 full time
jobs, the closure of the Company's retail outlet division and office space
consolidation at the corporate headquarters. In addition, in 1995, the
Company incurred non-recurring charges of

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

$5.6 million in connection with (i) a $4.6 million increase in the reserve for
unused barter credits and (ii) a $1.0 million write-off of goodwill related to
the acquisition of the Company's Mexican business. At November 30, 1996, the
1995 accrual had been substantially utilized for the type and amount of charges
included in the provision.

A substantial portion of the cash expenditures associated with the
Company's 1996 cost reduction plan will be incurred after the end of fiscal
1996, although such costs have been reflected as a charge to earnings in the
consolidated statement of operations for fiscal 1996. These cash expenditures
(including severance payments), together with a seasonal need for cash outlays
in the first quarter of fiscal 1997, have significantly reduced the Company's
cash balances from that shown at the end of fiscal 1996. However, the Company
believes that it has sufficient funding under the Revolving Facility (as defined
in Note 8) to meet its short term liquidity needs.

NOTE 4. BUSINESS ACQUISITIONS AND DISPOSITIONS

In December 1993, a joint venture was formed with Inchcape Pacific Limited
("Inchcape"), a wholly owned subsidiary of Inchcape plc, to engage in the
marketing, distribution and sales of L.A. Gear-Registered Trademark- branded
footwear, apparel and accessories in selected Far East markets. The Company
contributed the rights to distribute L.A. Gear branded products for a 50% share
in the joint venture. Profits and losses have been allocated based on specific
terms of the joint venture agreement. In September 1996, the joint venture
ceased operations. The Company has netted the assets, liabilities and minority
interest of the joint venture, the net impact of which is not material to its
consolidated balance sheet at November 30, 1996. The Company anticipates
receiving approximately $1.0 million in proceeds upon dissolution of the joint
venture to be recognized as income upon receipt.

Effective June 8, 1994, the Company acquired for $2.0 million certain
assets of the Company's exclusive distributor (and one of its affiliates) in
Mexico. The excess of the purchase price over the estimated fair value of net
assets acquired in such transaction, amounting to $1.1 million, was recorded as
goodwill. The purchase price for the acquisition was settled by reducing the
balance on outstanding amounts owed by the distributor to the Company. The
acquisition was accounted for under the purchase method and, accordingly, the
acquired assets have been recorded at their estimated fair value at the
effective date of the acquisition.

In 1995, the goodwill balance of approximately $1.0 million related to the
acquisition of the Company's Mexican business was written off as a result of the
economic crisis and the devaluation of the peso.

Pro forma results of operations have not been presented as they would not
be materially different from the historical amounts reported.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

<S> <C> <C> <C>
CASH PAID (RECEIVED) DURING THE YEAR FOR:
INTEREST PAID $ 2,189 $ 4,186 $ 4,433
======= ====== =======
INTEREST RECEIVED $ (1,964) $(1,984) $ (1,444)
======= ====== =======
INCOME TAXES, NET $ -- $ -- $ --
======= ====== =======
NONCASH INVESTING ACTIVITIES:
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $ -- $ 1,953

NONCASH FINANCING ACTIVITIES:
DIVIDENDS ACCRUED AND UNPAID ON MANDATORILY
REDEEMABLE SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK $ -- $ 7,746 $ --
======= ====== =======

EXCHANGE OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED
STOCK PLUS ACCRUED AND UNPAID DIVIDENDS FOR SERIES B
CUMULATIVE CONVERTIBLE PREFERRED STOCK $110,790 $ -- $ --
======= ====== =======

SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK ISSUED
IN PAYMENT OF DIVIDENDS DUE ON SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK $ 5,344 $ -- $ --
======= ====== =======

</TABLE>

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable, net of allowance for doubtful accounts and
merchandise returns, consist of the following:

NOVEMBER 30,
1996 1995
- -----------------------------------------------------------------------------
(IN THOUSANDS)

TRADE RECEIVABLES
DOMESTIC $ 12,581 $ 23,125
INTERNATIONAL 14,216 28,291
------- -------
26,797 51,416
OTHER RECEIVABLES 1,280 2,767
------- -------
28,077 54,183
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
MERCHANDISE RETURNS (4,139) (7,553)
------- -------
$ 23,938 $ 46,630
======= =======

NOTE 7. PROPERTY AND EQUIPMENT

Property and equipment, net of accumulated depreciation and amortization,
consist of the following:

NOVEMBER 30,
1996 1995
- -----------------------------------------------------------------------------
(IN THOUSANDS)

COMPUTER SOFTWARE AND EQUIPMENT $ 5,978 $ 15,949
FURNITURE AND EQUIPMENT 4,303 6,384
LEASEHOLD IMPROVEMENTS 2,700 3,683
------- -------
12,981 26,016
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (8,536) (17,726)
------- -------
$ 4,445 $ 8,290
======= =======

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 8. BANK BORROWINGS

Effective as of August 31, 1996, the Company entered into an amendment to
its existing revolving credit facility with BankAmerica Business Credit, Inc.
("BABC") for loans and letters of credit (the "Revolving Facility"). The
amendment provided for, among other things, (i) an extension of the term of the
Revolving Facility for an additional three years to November 30, 1999, (ii) a
reduction in the maximum amount available for aggregate loans and letters of
credit at any time from $75 million to $50 million, (iii) an increase in the
maximum amount of aggregate loans permitted to be outstanding at any time from
$10 million to $20 million and (iv) a reduction in the minimum Adjusted Tangible
Net Worth (as defined in the Revolving Facility) required to be maintained under
the Revolving Facility, with a restriction on the payment of cash dividends on
the Company's Series B Cumulative Convertible Preferred Stock and a reduction in
the amount of the available Borrowing Base (as defined in the Revolving
Facility) if the Company's Adjusted Tangible Net Worth falls below certain
thresholds.

NOTE 9. FINANCIAL INSTRUMENTS

The Company enters into forward contracts, with terms of less than one
year, to offset the effects of exchange rate changes on cash flow exposures
denominated in foreign currencies.

The Company's foreign currency forward contracts at November 30, 1996 are
listed below. All of the contracts mature no later than June 1997. The
currencies listed are in relation to the U.S. dollar and are converted at
year-end market exchange rates.

FOREIGN CURRENCY CONTRACTS SOLD BOUGHT
- -----------------------------------------------------------------------------
(IN MILLIONS)

GERMAN MARK $ 2.1 $ --
FRENCH FRANC 1.6 --
BRITISH POUND 2.5 --
DUTCH GUILDER 0.5 --
ITALIAN LIRA 1.0 --
------ -----
$ 7.7 $ --
====== =====

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

NOVEMBER 30,
1996 1995
- -----------------------------------------------------------------------------
(IN THOUSANDS)

ACCOUNTS PAYABLE $ 3,558 $ 5,249
OTHER ACCRUED LIABILITIES 14,081 15,388
ACCRUED INVENTORY PURCHASES 8,417 7,111
ACCRUED RESTRUCTURING AND NON-RECURRING CHARGES 20,166 2,755
ACCRUED ADVERTISING 230 2,301
------ ------
$46,452 $32,804
====== ======

Accounts payable include issued but uncleared checks of $1.3 million at
November 30, 1996.

NOTE 11. CONVERTIBLE SUBORDINATED DEBENTURES

On December 24, 1992, the Company completed a private sale of $50 million
aggregate principal amount of 73/4% convertible subordinated debentures due 2002
("the Debentures"). On June 18, 1993, the Debentures were registered under the
Securities Act of 1933, as amended.

The fair market value of the Debentures at November 30, 1996 was $26.5
million. The Debentures are convertible into shares of the Company's Common
Stock (the "Common Stock") at a conversion rate of $12.30 per share, subject to
certain antidilution adjustments, and are redeemable by the Company at any time
initially at a specified premium to par, declining to par for redemptions on or
after November 30, 2000. Interest is payable semi-annually on May 31 and
November 30.

The Debentures were delisted from the NASDAQ Small Cap Market, effective
November 21, 1995, as a result of the Company's failure to comply with NASDAQ's
capital and surplus requirements. The Company's $100 million of Series A
mandatorily redeemable Cumulative Convertible Preferred Stock was not included
in the NASDAQ calculation of capital and surplus. Subsequent to the completion
of the Share Exchange Transaction (see NOTE 12 - SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK/SHARE EXCHANGE TRANSACTION), the Company exceeded NASDAQ's
capital and surplus requirements and the Debentures were reinstated on the Small
Cap Market in April 1996.

NOTE 12. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/ SHARE EXCHANGE
TRANSACTION

On April 9, 1996, the Company's shareholders approved the exchange (the
"Share Exchange Transaction") of all of the issued and outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock, stated value $100 per
share ("Series A Preferred Stock"), and all accrued and unpaid dividends thereon
for (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B Cumulative Convertible Preferred Stock, stated value
$100 per share ("Series B Preferred Stock"), plus (ii) an additional number of
shares of Series B Preferred Stock equal to the dollar amount of accrued and
unpaid dividends in respect to the Series A Preferred Stock through the closing
of the Share Exchange Transaction. The Share Exchange Transaction was completed
on April 12, 1996 and, as a result, Trefoil Capital Investors, L.P. ("Trefoil"),
the holder of all the Series A Preferred Stock, was issued 1,107,902 shares of
Series B Preferred Stock and the Series A Preferred Stock was retired.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Thereafter, dividends on the Series B Preferred Stock will be payable only in
cash. The Company elected to pay the dividends of $1.1 million, $2.1 million
and $2.1 million due on May 31, August 31 and November 30, 1996, respectively,
in additional shares of Series B Preferred Stock. Subsequent to the year ended
November 30, 1996, the holders of the Series B shares are entitled to receive,
when, as and if declared by the Board of Directors out of assets of the Company
legally available therefor, cumulative cash dividends at an annual rate of 7.5%
(arrearages of dividends will bear additional dividends compounded quarterly at
a rate of 8.625% per annum through the date of payment of such arrearages),
payable quarterly in arrears on the last business day of February, May, August
and November.

The Company's Board of Directors has approved the non-payment of the cash
dividend required on the Series B Preferred Stock due February 28, 1997. As a
result of such default, future dividends will accrue at a rate of 8.625% per
annum compounded quarterly with respect to dividends in arrears.

NOTE 13. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

In April 1992, an affiliate of Pentland Group plc purchased 1,244,445
shares of the Company's Common Stock for $14 million in cash. Such affiliate
held an option to purchase 400,000 shares of Common Stock (200,000 at $13.50 per
share and 200,000 at $16.125 per share), which expired on April 28, 1996.

1986 STOCK OPTION PLAN The Company has adopted a noncompensatory stock option
plan (the "1986 Plan"), which was approved by the Company's shareholders, for
eligible employees, directors and consultants of the Company. Incentive stock
options and nonqualified stock options issued under this stock option plan are
exercisable for a period of up to ten years from the date of grant. Options
have been granted at prices equal to the fair market value of the Common Stock
at the grant date.

A summary of stock option activities under the 1986 Plan is as follows:

NUMBER OF
SHARES OPTION PRICES
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993 1,971,891 $ 6.13 TO $33.63

GRANTED 131,000 $ 5.63 TO $11.38
EXERCISED (1,810) $ 6.13
CANCELED (361,983) $ 6.13 TO $24.63
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994 1,739,098 $ 5.63 TO $33.63

GRANTED 293,500 $ 2.60 TO $ 5.38
EXERCISED -- --
CANCELED (522,080) $ 4.38 TO $23.38
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 1,510,518 $ 2.60 TO $33.63

GRANTED 803,883 $ 1.75
EXERCISED -- --
CANCELED (958,194) $ 1.75 TO $23.38

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

OUTSTANDING AT NOVEMBER 30, 1996 1,356,207 $ 1.75 TO $33.63
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

At November 30, 1996, 1,356,207 common shares were reserved for the
exercise of outstanding options, options to purchase 592,570 shares were
exercisable and no shares were available for grant as the 1986 plan expired in
May 1996 (options to purchase 1,096,348 shares were exercisable and 591,910
shares were available for grant at November 30, 1995).

1992 STOCK OPTION PLAN In June 1992, the Company adopted, and the
shareholders approved, a separate stock option plan for Eligible Non-Employee
Directors (the "1992 Plan"). The 1992 Plan provides that upon election or
appointment to the Company's Board of Directors, each Eligible Non-Employee
Director (as defined in the 1992 Plan) shall receive a one-time grant of an
option to purchase 20,000 shares of Common Stock at a price equal to the Fair
Market Value (as defined in the 1992 Plan) of the Common Stock on the date
the option is granted. In fiscal 1996, the 1992 Plan was amended to allow
for the granting of stock options to non-employee Directors, as well as the
Chief Executive Officer of the Company if he is a director and is not paid a
salary, in lieu of cash compensation for fiscal years during which the
Company's income applicable to Common Stock is less than $1 million. Up to
1,000,000 shares of Common Stock may be issued or transferred pursuant to the
1992 plan.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

A summary of stock option activities under the 1992 Plan is as follows:

NUMBER OF
SHARES OPTION PRICES
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993 80,000 $ 9.75 TO $14.00

GRANTED -- --
EXERCISED -- --
CANCELED -- --
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994 80,000 $ 9.75 TO $14.00

GRANTED -- --
EXERCISED -- --
CANCELED -- --
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 80,000 $ 9.75 TO $14.00

GRANTED 180,000 $3.62
EXERCISED -- --
CANCELED -- --

- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1996 260,000 $ 3.62 TO $14.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

At November 30, 1996, 260,000 shares were reserved for the exercise of
outstanding options, options to purchase 260,000 shares were exercisable and
740,000 shares were available for grant (options to purchase 70,000 shares were
exercisable and 320,000 shares were available for grant at November 30, 1995).

1993 STOCK INCENTIVE PLAN In April 1993, the Company adopted, and the
shareholders approved, a stock incentive plan (the "1993 Plan") for eligible
employees, directors, officers and consultants of the Company. Incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock, performance units and performance shares may be granted under the 1993
Plan. Up to 2,500,000 shares of Common Stock may be issued or transferred
pursuant to the 1993 Plan. Options granted under this plan may be exercisable
for a period of up to ten years from the date of grant. Options granted to date
under the 1993 Plan have been granted at an exercise price equal to the average
closing price of the Common Stock on the New York Stock Exchange composite tape
for each of the five consecutive trading days immediately preceding the grant
date.

A summary of stock option activities under the 1993 Plan is as follows:

NUMBER OF
SHARES OPTION PRICES
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1993 750,000 $ 11.55

GRANTED 1,423,178 $ 5.75 TO $11.38
EXERCISED -- --
CANCELED (144,403) $ 6.00 TO $ 7.78
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1994 2,028,775 $ 5.75 TO $11.55

GRANTED 367,387 $ 2.66 TO $ 5.83
EXERCISED -- --
CANCELED (340,700) $ 5.18 TO $11.38
- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 2,055,462 $ 2.66 TO $11.55

GRANTED 157,000 $ 1.65 TO $3.58
EXERCISED -- --
CANCELED (539,464) $ 2.66 TO $11.38

- --------------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1996 1,672,998 $1.65 TO $11.55
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

At November 30, 1996, 1,672,998 shares were reserved for the exercise of
outstanding options, options to purchase 1,302,327 shares were exercisable and
827,002 shares were available for grant (options to purchase 1,333,198 shares
were exercisable and 444,538 shares were available for grant at November 30,
1995).

EMPLOYEE STOCK SAVINGS PLAN The Company has a defined contribution employee
stock savings plan covering

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

substantially all employees who are at least 21 years of age and have completed
at least thirty days of employment. The Company made matching contributions of
$317,000, $289,000 and $397,000 for 1996, 1995 and 1994, respectively, in
respect to employee contributions to such plan.

NOTE 14. INCOME TAXES

Domestic and foreign components of loss before income taxes and minority
interest are as follows:

YEAR ENDED NOVEMBER 30,
- ------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
----------------------------------------

DOMESTIC $ (29,183) $ (43,466) $ (12,093)
FOREIGN (39,492) (9,255) (10,208)
$ (68,675) $ (52,721) $ (22,301)

No income tax benefit has been recorded in 1996, 1995 and 1994. The
difference between the tax benefit computed based on applying the U.S. statutory
income tax rate to the loss before income taxes and minority interest and the
recorded benefit was primarily due to the nonrecognition of tax benefits for
operating losses.

Temporary differences and carryforwards which give rise to deferred tax
assets, net of valuation allowance, at November 30, 1996 and 1995 are as
follows:

NOVEMBER 30,
- -------------------------------------------------------------
(IN THOUSANDS) 1996 1995
-------------------------

LOSS CARRYFORWARDS $ 67,700 $ 46,011
TAX CREDIT CARRYFORWARDS 3,226 3,226
RESERVES AND ACCRUED EXPENSES 12,688 8,520
DEPRECIATION AND AMORTIZATION 4,451 5,444
OTHER 1,898 907
-------- -------
TOTAL DEFERRED TAX ASSETS 89,963 64,108
LESS VALUATION ALLOWANCE (89,963) (64,108)
------- -------
NET DEFERRED TAX ASSETS $ -- $ --
======= =======

At November 30, 1996, the Company had a federal tax net operating loss
("NOL") carryforward of approximately $101.4 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2011. The Company also
has a federal alternative minimum tax credit carryforward of approximately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely. California franchise tax NOL carryforwards of
approximately $88.3 million will, if unused, expire primarily in fiscal year
1998. In addition, the Company has other state and foreign NOL carryforwards
with varying limitations on future utilization. The Company's NOL carryforwards
may be restricted upon a change in control. In the event that there is a change
in ownership as defined by Section 382 of the Internal Revenue Code a
significant limitation may be imposed on the availability of the NOL and credit
carryforwards.

NOTE 15. LITIGATION

SETTLEMENTS Fiscal 1996 results include net settlement income of $1.9 million,
primarily in connection with the settlement of an environmental compliance
matter. In 1995, the Company recorded net settlement income of $2.3
million, substantially all of which was in connection with the settlement of
certain patent and trademark infringement actions. Results for 1994 include net
settlement income of $1.3 million in connection with trademark and patent
infringement lawsuits partially offset by expenses relating to the settlement of
employee litigation and a dispute with a former distributor.

PENDING LITIGATION The Company is a defendant in certain legal actions. In the
opinion of management, the disposition of these actions is not expected to have
a material adverse effect upon the Company's financial position or results of
operations.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 16. COMMITMENTS AND CONTINGENCIES

The Company has entered into various agreements for the purpose of
obtaining footwear technology and product sourcing. Such agreements provide
for, among other things, fees and royalties to be paid. At November
30, 1996, the aggregate amount of future commitments under such contracts
totaled $4.9 million and are to be paid as follows: $4.5 million in 1997 and
$0.4 million in 1998.

As part of a change in its marketing emphasis, the Company has allowed
sponsorships and endorsement contracts with professional athletes and others to
expire and in some cases, including Universal Studios Hollywood, contracts have
been terminated. The Company's remaining commitments, including termination
fees, at November 30, 1996 totaled $2.1 million and are to be paid as follows:
$1.7 million in 1997, $0.2 million in 1998 and $0.2 million in 1999.

In September 1994, the Company entered into a new one year management and
consulting agreement with Shamrock Capital Advisors, Inc. ("SCA"), a company
which provides management and consulting services to Trefoil. Selling, general
and administrative expenses included $0.4 million and $0.7 million,
respectively, in 1995 and 1994 for fees to SCA. The agreement was not renewed
and expired according to its terms in September 1995.

In June 1996, the Company entered into a one-year agreement with SCA to
assist in the identification, negotiation and/or structuring of acquisition
opportunities. If the Company acquires a controlling interest in any company or
business during the term of this agreement or for six months thereafter, if the
transaction involves parties introduced by SCA, then the Company shall pay a fee
equal to (i) 11/2% of the aggregate value of the transaction up to $50 million
plus 1% of the aggregate value in excess of $50 million, if SCA has acted as the
sole financial advisor to the Company with respect to the transaction, or (ii)
1% of the aggregate value of the transaction up to $50 million, plus 1/2% of the
aggregate value in excess of $50 million, if another financial or investment
advisor or valuation firm has advised the Company, in addition to or instead of
SCA, with respect to the transaction. L.A. Gear also agreed to reimburse SCA
for all of its out-of-pocket expenses payable to third parties incurred in
connection with SCA's services under the agreement.

The Company occupies certain facilities, including corporate offices and
distribution centers, and rents certain equipment under operating leases. The
Company is in the process of trying to sublease excess space at its corporate
facility and at its distribution center. Rental expense for 1996, 1995 and 1994
amounted to approximately $6.3 million, $8.7 million and $8.4 million,
respectively.

At November 30, 1996, the minimum rental commitments, net of sublease
income, under noncancelable operating leases with an initial or remaining term
in excess of one year were as follows:

YEAR ENDING NOVEMBER 30
- -------------------------------------------------------
(IN THOUSANDS)

1997 $ 3,742
1998 3,183
1999 2,459
2000 1,633
2001 1,576
THEREAFTER 1,481
------

$14,074
======

The Company is subject to inquiries and audits from various taxing
authorities. In the opinion of management, any assessments are not expected to
have a material adverse effect on the Company's financial position or results of
operations.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 17. SEGMENT REPORTING

The Company's principal business is the design, development and marketing
of quality athletic and lifestyle footwear. The Company is a multinational
corporation with subsidiaries operating in 10 countries at November 30, 1996.
Transfers between geographic areas primarily represent intercompany export sales
from the United States and are accounted for based upon established sales prices
between the related companies. In computing results from operations for foreign
subsidiaries, no allocation of general corporate expenses, interest or income
taxes has been made.

1996 1995 1994
- -----------------------------------------------------------------------------
(IN THOUSANDS)

NET SALES
UNITED STATES
DOMESTIC $136,055 $192,493 $298,489
EXPORT CUSTOMERS 18,427 33,656 59,240
SALES TO OVERSEAS SUBSIDIARIES 26,349 37,848 29,020
- -----------------------------------------------------------------------------
TOTAL UNITED STATES 180,831 263,997 386,749
EUROPE 37,134 59,996 50,104
OTHER 4,832 10,406 8,133
ELIMINATIONS (26,349) (37,848) (29,020)
- -----------------------------------------------------------------------------
TOTAL $196,448 $296,551 $415,966
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

1996 1995 1994
- -----------------------------------------------------------------------------
(IN THOUSANDS)

OPERATING PROFIT (LOSS)
UNITED STATES (35,666) (50,537) (18,428)
EUROPE (24,709) 3,161 (726)
OTHER (7,639) (2,990) (1,174)
ELIMINATIONS 1,487 (165) 1,020
- -----------------------------------------------------------------------------
(66,527) (50,531) (19,308)
INTEREST EXPENSE, NET (2,148) (2,190) (2,993)
- -----------------------------------------------------------------------------
TOTAL $(68,675) $(52,721) $(22,301)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

1996 1995 1994
- -----------------------------------------------------------------------------
(IN THOUSANDS)

IDENTIFIABLE ASSETS
UNITED STATES 79,335 111,656 176,321
EUROPE 19,802 38,389 36,134
OTHER 2,235 11,433 13,745
ELIMINATIONS (416) (1,903) (1,737)
- -----------------------------------------------------------------------------
TOTAL $100,956 $159,575 $224,463
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

The Company's domestic customers consist primarily of department, shoe,
sporting goods and athletic footwear stores and wholesale distributors. In 1996
and 1995, sales to Wal-Mart accounted for 17.1% and 15.3%, respectively, of the
Company's net sales. In 1994, none of the Company's customers individually
accounted for 10% or more of the Company's net sales. The Company's five
largest customers worldwide, in the aggregate, accounted for approximately
31.6%, 27.8% and 26.8% of the Company's net sales in 1996, 1995 and 1994,
respectively.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 18. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS; SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "LA". The following table presents summarized unaudited quarterly
results and the range of high and low closing sales prices on the New York Stock
Exchange for the indicated fiscal quarters.

FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1996 1995 1996(2) 1995 (2) 1996 1995 1996(1) 1995(1)
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 78,666 $ 69,392 $ 38,472 $ 79,014 $ 53,431 $ 94,354 $ 25,879 $ 53,791
GROSS PROFIT (LOSS) $ 24,554 $ 20,740 $ 9,698 $ 24,970 $ 14,222 $ 32,542 $ (1,239) $ 10,497
NET INCOME (LOSS) $ 1,099 $(11,642) $ (7,480) $ (5,911) $ (4,848) $ 416 $(50,460) $(34,260)
INCOME (LOSS) PER
COMMON SHARE:
PRIMARY $ 0.04 $ (0.59) $ (0.42) $ (0.34) $ (0.30) $ (0.07) $ (2.29) $ (1.58)
======= ======= ======= ======= ======= ======= ======= =======
FULLY DILUTED $ 0.04 $ (0.59) $ (0.42) $ (0.34) $ (0.30) $ (0.07) $ (2.29) $ (1.58)
======= ======= ======= ======= ======= ======= ======= =======

PRICE RANGE OF
COMMON STOCK:
HIGH $ 3.12 $ 5.87 $ 3.75 $ 4.37 $ 3.75 $ 4.12 $ 3.25 $ 3.12
LOW $ 1.62 $ 3.87 $ 2.12 $ 3.00 $ 2.37 $ 2.25 $ 2.25 $ 1.62

</TABLE>

(1) IN THE FOURTH QUARTER OF 1996, A RESTRUCTURING CHARGE OF $28.8 MILLION WAS
RECORDED. IN ADDITION, THE FOURTH QUARTER RESULTS WERE ADVERSELY AFFECTED
BY INCREASES IN INVENTORY RESERVES DOMESTICALLY AND AT THE COMPANY'S
EUROPEAN SUBSIDIARIES AND LOW MARGINS REALIZED ON SALES OF LIGHTED PRODUCT
WORLDWIDE. IN THE FOURTH QUARTER OF 1995, A RESTRUCTURING CHARGE OF $5.1
MILLION AND NON-RECURRING CHARGES OF $5.6 MILLION WERE RECORDED. SEE NOTE
3 - RESTRUCTURING CHARGES AND LIQUIDITY.

(2) IN THE SECOND QUARTER OF 1996, THE COMPANY RECORDED NET LITIGATION
SETTLEMENT INCOME OF $1.9 MILLION PRIMARILY IN CONNECTION WITH THE
SETTLEMENT OF AN ENVIRONMENTAL COMPLIANCE MATTER. IN THE SECOND QUARTER OF
1995, THE COMPANY RECORDED NET LITIGATION SETTLEMENT INCOME OF $1.9 MILLION
AS PART OF A SETTLEMENT AGREEMENT IN CONNECTION WITH PATENT INFRINGEMENT
LITIGATION. SEE NOTE 15 - LITIGATION.

At February 14, 1997, the Company had approximately 12,050 holders of
record of its Common Stock. To date, the Company has not paid cash dividends on
its Common Stock. The terms of the Series B Preferred Stock place restrictions
on the ability of the Company to pay dividends on the Common Stock. The Company
does not anticipate paying any dividends on the Common Stock in the foreseeable
future.

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF L.A. GEAR, INC.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of L.A.
Gear, Inc. and its subsidiaries at November 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended November 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ Price Waterhouse

Los Angeles, California

February 21, 1997

<PAGE>

DIRECTORS

STANLEY P. GOLD
Chairman of the Board and Chief Executive Officer
L.A. Gear, Inc.
President and Managing Director
Trefoil Investors, Inc. and Shamrock Capital Advisors, Inc.
Director
Walt Disney Company (NYSE-DIS)
Chairman and a Director
Koor Industries Ltd. (NYSE- KOR)

WILLIAM L. BENFORD
Managing Director
Shamrock Capital Advisors, Inc.

WALTER C. BLADSTROM
Private Investor

ALLAN E. DALSHAUG
Chairman of the Board and Chief Executive Officer
Sterling West Bancorp.

WILLIE D. DAVIS
President and Chief Executive Officer
All-Pro Broadcasting, Inc.

STEPHEN A. KOFFLER
President
Koffler & Company
An investment banking firm

ANN E. MEYERS
Sports Commentator

CLIFFORD MILLER
Chairman
The Clifford Group, Inc.
A business consultancy company

ROBERT G. MOSKOWITZ
Managing Director
Trefoil Investors, Inc. and Shamrock Capital Advisors, Inc.

VAPPALAK A. RAVINDRAN
President
Paracor Finance, Inc.
A merchant banking company

OFFICERS

STANLEY P. GOLD
Chairman of the Board and Chief Executive Officer

BRUCE W. MacGREGOR
President and Chief Operating Officer

VICTOR J. TRIPPETTI
Senior Vice President and Chief Financial Officer

RON D. CARPENTER
Vice President of International

MARK A. KIBLER
Vice President of Distribution

ROBERT S. LANDERMAN
Vice President of Sales

ROBERT L. PETERSON
Vice President of Product

NEIL P. EDWARDS
Corporate Controller

GARY L. ESHLEMAN
Treasurer

WILLIAM R. SHERMAN
Secretary and Senior Legal Counsel

DON C. LAWRENCE
Assistant Secretary

INDEPENDENT ACCOUNTANTS

PRICE WATERHOUSE LLP
400 South Hope Street
Los Angeles, California 90071

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005

INVESTOR RELATIONS

L.A. GEAR, INC.
Office of Investor Relations
c/o Victor J. Trippetti
2850 Ocean Park Boulevard
Santa Monica, California 90405

CORPORATE HEADQUARTERS

L.A. GEAR, INC.
2850 Ocean Park Boulevard
Santa Monica, California 90405

FORM 10-K

A copy of the Company's Form 10-K Annual
Report for the year ended November 30, 1996
filed with the Securities and Exchange
Commission is available without charge to any
shareholder.

Requests should be sent to the attention of
the Office of Investor Relations at the
Corporate Headquarters.

<PAGE>

[ARTWORK & L.A. GEAR LOGO]

<PAGE>

[L.A. GEAR LOGO]

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

SUBSIDIARY JURISDICTION OF INCORPORATION

L.A. Gear California, Inc. California

Raegal Finance, Inc. Texas

L.A. Gear Licensing Corp. California

Brands Acquisition Corp. California

L.A. Gear (France) SARL France

L.A. Gear (Benelux) B.V. Netherlands

L.A. Gear (UK) Limited United Kingdom

L.A. Gear (Deutschland) GmbH Germany

L.A. Gear (Italia) SRL Italy

L.A. Gear Korea Korea

L.A. Gear H.K. Ltd. Hong Kong

L.A. Gear Sportswear, Ltd. Hong Kong

L.A. Gear (Mexico) S.A. de C.V. Mexico

L. A. Gear Servicios, S.A. de C.V. Mexico

L.A. Gear - Inchcape Limited British Virgin Islands

L.A. Gear (Far East) Limited British Virgin Islands

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3 (No. 33-59360) and in the Registration Statements on Form
S-8 (Nos. 33-37408, 33-53122 and 33-64678) of L.A. Gear, Inc. of our report
dated February 21, 1997 appearing in the Annual Report to Shareholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 16 of this Form 10-K.

Price Waterhouse LLP
Los Angeles, California
February 21, 1997

<PAGE>
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