UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14-A INFORMATION

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.      )

Filed by the Registrant x                            Filed by a Party other than the Registrant ¨

Check the appropriate box:

K•Swiss Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

31248 Oak Crest Drive

Westlake Village, California 91361

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To be held May 20, 2008

To the Stockholders of

K•Swiss Inc.:

The Annual Meeting of Stockholders of K•Swiss Inc. (the “Company”) will be held at the K•Swiss^® Corporate Office, 31248 Oak Crest Drive, Westlake Village, California 91361 on Tuesday, May 20, 2008 at 10:00 a.m., Los Angeles time. The purpose of the Annual Meeting is to consider and vote upon the following matters, as more fully described in the accompanying Proxy Statement:

(1) For holders of Class A Common Stock to elect two directors, and for holders of Class B Common Stock to elect four directors, in each case to serve one-year terms ending at the 2009 annual meeting, or until their successors are elected and qualified.

(2) To ratify the appointment of Grant Thornton LLP as the Company’s independent auditors for fiscal year 2008.

(3) To approve the re-pricing of certain stock options issued under the Company’s 1999 Stock Incentive Plan.

(4) To transact such other business as may properly come before the meeting and any adjournment or postponement thereof.

The Board of Directors has fixed the close of business on March 24, 2008 as the record date for the determination of stockholders entitled to receive notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. In order to constitute a quorum for the conduct of business at the Annual Meeting, holders of a majority in voting interest of the Company’s outstanding Common Stock must be present in person or be represented by proxy.

All stockholders are cordially invited to attend the meeting in person. However, to assure your representation at the meeting, you are requested to mark, date, sign and return the enclosed proxy card as promptly as possible in the envelope provided. Stockholders attending the meeting may vote in person even if they have returned a proxy.

By Order of the Board of Directors

Steven Nichols

Chairman of the Board and President

Westlake Village, California

April 8, 2008

K•SWISS INC.

31248 Oak Crest Drive

Westlake Village, California 91361

PROXY STATEMENT

FOR ANNUAL MEETING OF STOCKHOLDERS

May 20, 2008

GENERAL INFORMATION ON THE MEETING

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be Held on May 20, 2008

The Proxy Statement and accompanying Annual Report to stockholders are available at www.k-swiss.com.

This Proxy Statement is being mailed on or about April 8, 2008 in connection with the solicitation of proxies by and on behalf of the Board of Directors of K•Swiss Inc., a Delaware corporation (“K•Swiss” or the “Company”), for use at the Annual Meeting of Stockholders of the Company (the “Annual Meeting”), which is to be held on Tuesday, May 20, 2008 at 10:00 a.m., Los Angeles time at the K•Swiss^® Corporate Office, 31248 Oak Crest Drive, Westlake Village, California 91361, and any adjournment or postponement thereof.

The entire cost of soliciting proxies will be borne by the Company, including expenses incurred in connection with preparing and mailing the proxy solicitation materials. In addition to the use of mails, proxies may be solicited by certain officers, directors and regular employees of the Company, without extra compensation, by telephone, fax or personal interview. Although there is no formal agreement to do so, the Company will reimburse brokerage houses and other custodians, nominees and fiduciaries for reasonable expenses incurred in sending proxies and proxy material to the beneficial owners of the Company’s stock.

RECORD DATE AND VOTING

Only stockholders of record at the close of business on March 24, 2008 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement thereof. As of the Record Date, 26,599,282 shares of Class A Common Stock and 8,059,524 shares of Class B Common Stock were outstanding, all of which shares are entitled to be voted at the Annual Meeting. As of the Record Date, 2,421,617 shares of Class A Common Stock were issued but held by the Company as treasury shares and are not entitled to vote at the Annual Meeting. Stockholders are entitled to one vote for each share of Class A Common Stock held of record, and ten votes for each share of Class B Common Stock held of record. At the Annual Meeting, holders of shares of Class A Common Stock will be entitled to elect two members of the Company’s Board of Directors, and holders of shares of Class B Common Stock will be entitled to elect the remaining four members of the Company’s Board of Directors. With respect to the election of directors or matters to which a class vote is required by law, the presence, either in person or by proxy, of persons entitled to vote a majority in voting interest of the outstanding shares of a class of the Company’s Common Stock is necessary to constitute a quorum for the election of directors to represent such class or for such other matters requiring a class vote. With respect to matters other than the election of directors or matters to which a class vote is not required by law, the presence, either in person or by proxy, of persons entitled to vote a majority in voting interest of the Company’s outstanding Common Stock is necessary to constitute a quorum for the transaction of business at the Annual Meeting.

1

Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspector of election appointed for the Annual Meeting and will determine whether or not a quorum is present. The inspector of election will treat abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum but as unvoted for purposes of determining the approval of any matter submitted to the stockholders for a vote. If a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter.

A stockholder giving a proxy may revoke it at any time before it is voted by filing a written notice of revocation with the Secretary of the Company at 31248 Oak Crest Drive, Westlake Village, California 91361, or by appearing at the Annual Meeting and voting in person. A prior proxy is automatically revoked by a stockholder giving a valid proxy bearing a later date. Shares represented by all valid proxies will be voted in accordance with the instructions contained in the proxies. In the absence of instructions, shares represented by valid proxies will be voted in accordance with recommendations of the Board of Directors as shown on the proxy. The Company intends to disclose the results of the vote of the Annual Meeting by May 31, 2008.

PROPOSAL ONE

ELECTION OF DIRECTORS

Under the Restated Certificate of Incorporation and the Restated Bylaws of the Company, two (2) directors out of a total of six (6) are to be elected at the Annual Meeting by the holders of Class A Common Stock to serve one-year terms expiring at the 2009 Annual Meeting of Stockholders or until their successors are duly elected and qualified. The remaining four (4) directors are to be elected at the Annual Meeting by the holders of Class B Common Stock to serve one-year terms expiring at the 2009 Annual Meeting of Stockholders or until their successors are duly elected and qualified. Unless authority to vote for a certain nominee is withheld by an indication thereon, the Class A Common Stock proxy will be voted to re-elect David Lewin and Mark Louie, and the Class B Common Stock proxy will be voted to re-elect Steven Nichols, George Powlick, Lawrence Feldman and Stephen Fine, in all cases to serve until the 2009 Annual Meeting of Stockholders or until their respective successors are elected and qualified. The Company has no reason to believe that any of those named will not be available as a candidate. However, if such a situation should arise, the proxies may be voted for the election of other nominees as directors at the discretion of the person acting pursuant to the proxies. Certain information regarding the nominees for election by the holders of Class A Common Stock and the holders of Class B Common Stock is set forth below.

The vote of a plurality of the shares of Class A Common Stock voting at the Annual Meeting (with each share entitled to one vote) is required for the election of the two (2) directors to be elected by the holders of Class A Common Stock. The vote of a plurality of the shares of Class B Common Stock voting at the Annual Meeting (with each share entitled to ten votes) is required for the election of the four (4) directors to be elected by the holders of Class B Common Stock.

Nominees for Election by Class A Common Stockholders at the 2008 Annual Meeting

2

Nominees for Election by Class B Common Stockholders at the 2008 Annual Meeting

Principal Occupations of Class A and Class B Nominees During Last Five Years

Steven Nichols has been President, Chief Executive Officer and Chairman of the Board of the Company since 1987. From 1980 to 1986, Mr. Nichols was a director and Vice-President—Merchandise of Stride Rite Corp., a footwear manufacturer and holding company. In addition, Mr. Nichols was President of Stride-Rite Footwear from 1982 to 1986. From 1979 to 1982, Mr. Nichols served as an officer and President of Stride Rite Retail Corp., the largest retailer of branded children’s shoes in the United States. From 1962 through 1979, Mr. Nichols was an officer of Nichols Foot Form Corp., which operated a chain of New York retail footwear stores.

George Powlick, Vice-President—Finance, Chief Financial Officer and Secretary of the Company since January 1988, Director of the Company since 1990 and Chief Operating Officer of the Company since September 2004, joined the Company in January 1988. Mr. Powlick is a certified public accountant and was an audit partner in the independent public accounting firm of Grant Thornton LLP from 1975 to 1987.

Lawrence Feldman, a Director of the Company, has been President of the Rug Warehouse, Inc., a New York City oriental rug retailer and wholesaler, since 1977 and Vice-President of Loom & Weave, LLC, a wholesaler of collectible antique textiles and rugs, since 2000. From 1973 to 1977, Mr. Feldman was Vice-President for Design and Product Development for Hart Schaffner & Marx, a clothing manufacturer and retailer.

Stephen Fine, a Director of the Company, has been a Director, President and Chief Operating Officer of The Biltrite Corporation, a supplier of rubber and plastics products used in footwear, flooring and industrial applications, since 1985. From 1982 to 1985, Mr. Fine served as Executive Vice-President of Biltrite. From 1970 to 1982, Mr. Fine held various executive positions with American Biltrite Inc. Mr. Fine was a Director of Maxwell Shoe Company Inc., a manufacturer of women’s casual and dress footwear from April 1994 to July 2004.

David Lewin, a Director of the Company, is the Neil Jacoby Professor of Management, Human Resources and Organizational Behavior at The John E. Anderson Graduate School of Management at the University of California at Los Angeles. Mr. Lewin has been a professor at UCLA since 1990. Beginning in 2006, Mr. Lewin has served as a Director of the National Academy of Human Resources, a non-profit organization. Since 1975, Mr. Lewin has consulted with business and non-business enterprises on a range of human resource management issues, including consulting on employment matters for LECG, LLC, an international consultancy firm providing expert testimony and analysis in wage and hour, antitrust, industrial organization and related litigation, since 2003. Since 1992, Mr. Lewin has also been a General Partner with Competitive Advantage Partners, a consulting firm.

3

Mark Louie, a Director of the Company, is a Managing Director of C. M. Capital Corporation, an Advisor to a Hong Kong based family with investments in the U.S. and throughout the world since April 2006. In connection with this position, Mr. Louie is a general partner of the Mingly China Growth Fund, LP, a Cayman Islands exempted limited partnership and a director of the Govtor Mingly Growth Venture Capital Company Ltd., both which invest in primarily private companies in the Greater China Area. From December 2004 to April 2006, Mr. Louie was a Senior Vice President—Business Development and Strategy for C. M. Capital Corporation. Beginning February 2000, Mr. Louie has been a Managing Member and Chief Financial Officer of TechFund Europe Management, LLC and affiliated entities (“TechFund”), an early stage venture capital investor. Beginning February 2004, Mr. Louie has provided financial consulting services to various businesses and companies, affiliated with or independent of C. M. Capital Corporation or TechFund. From 1983 to 2000, Mr. Louie was a Vice-President in the Investment Banking Division of Goldman Sachs Group, Inc.

Independence of the Board of Directors

The Board of Directors has determined that a majority of the Board of Directors is “independent” in accordance with the Marketplace Rules of the NASDAQ Stock Market as well as the independence standards adopted by the Board of Directors. The Board of Directors has determined that Messrs. Lawrence Feldman, Stephen Fine, David Lewin and Mark Louie are “independent” directors under these standards.

Stock Ownership and Corporate Governance Guidelines

Pursuant to a recommendation of the Corporate Governance and Nominating Committee in 2005, the full Board of Directors adopted a non-binding stock ownership guideline for directors, recommending that each director own, no later than December 31, 2010 (or five years after a director first joins the Board of Directors, whichever is later), an amount of Class A Common Stock of the Company equal to four times the cash retainer the Company pays each director for the year ended December 31, 2010. The Board of Directors encourages each director to meet such guideline within the noted timeframe. Prior to accepting any other assignment on the board of directors of a for-profit entity, members of the Board of Directors must seek and receive prior approval from the Corporate Governance and Nominating Committee. Additionally, the Corporate Governance and Nominating Committee continues to review and evaluate potential enhancements to the Company’s corporate governance philosophy and structure, including the adoption of corporate governance guidelines.

Meetings of the Board of Directors and Committees

The Board of Directors held six formal meetings during fiscal year 2007 and took action on one matter by unanimous written consent. Each Director attended at least 75% of the meetings of the Board of Directors and the Board Committees of which he was a member. Directors are expected to attend the annual meetings of stockholders. Last year all directors attended this meeting.

The Board of Directors has the following standing committees: the Compensation and Stock Option Committee (“Compensation Committee”), the Audit Committee and the Corporate Governance and Nominating Committee (“Governance Committee”).

Compensation and Stock Option Committee

The Compensation Committee is composed of Messrs. Feldman, Fine (Chairman) and Lewin. The Board of Directors has determined that Messrs. Feldman, Fine and Lewin are “independent directors” under the Marketplace Rules of the NASDAQ Stock Market as well as the independence standards adopted by the Board of Directors. This Committee met four times during fiscal year 2007 and took action on one matter by unanimous written consent.

4

The Compensation Committee’s purpose is to discharge the responsibilities of the Board of Directors relating to the compensation of the Company’s executive officers and produce the annual report on executive compensation for inclusion in the Company’s proxy statement. The duties and responsibilities of the Compensation Committee, which are discussed in detail in its charter, include, among other duties, the responsibility to:

In overseeing these plans, the Compensation Committee may delegate any of the foregoing duties and responsibilities to a subcommittee of the Compensation Committee consisting of not less than two members of the committee. The Chief Executive Officer and Chief Financial Officer are active in setting compensation packages. See discussion in “Compensation Discussion and Analysis.”

The Compensation Committee has the authority to retain, at the expense of the Company, such outside counsel, experts, and other advisors as it determines appropriate to assist it in the full performance of its functions, including sole authority to retain and terminate any compensation consultant used to assist the Compensation Committee in the evaluation of director, Chief Executive Officer or senior executive compensation, and to approve the consultant’s fees and other retention terms. In fiscal year 2007, the Compensation Committee did not retain any such compensation consultants.

The Compensation Committee charter is available on K•Swiss’ website at www.k-swiss.com.

Audit Committee

The Audit Committee is composed of Messrs. Feldman (Chairman), Fine and Louie. The Board of Directors has determined that Messrs. Feldman, Fine and Louie are “independent directors” under the Marketplace Rules of the NASDAQ Stock Market as well as the independence standards adopted by the Board of Directors and also meet the requirements set forth in Rule 10A-3(b)(1) under the Exchange Act. The Board of Directors has determined that Mr. Louie qualifies as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K in the Exchange Act. The Audit Committee charter is available on K•Swiss’ website at www.k-swiss.com. This committee met seven times during fiscal year 2007.

Corporate Governance and Nominating Committee

The Governance Committee is composed of Messrs. Feldman (Chairman), Fine and Lewin. The Board of Directors has determined that Messrs. Feldman, Fine and Lewin are “independent directors” under the Marketplace Rules of the NASDAQ Stock Market as well as the independence standards adopted by the Board of Directors. The Governance Committee charter is available on K•Swiss’ website at www.k-swiss.com. This committee met once during fiscal year 2007.

5

Executive Sessions of Independent Directors

During fiscal year 2007, the Company’s independent directors met regularly in executive sessions outside the presence of management and intend to do so in fiscal year 2008 as well. Such executive sessions are generally held in conjunction with each regularly scheduled meeting of the Board of Directors. The Board of Directors has not formally appointed a single director to preside as lead director of these executive sessions. Instead, various independent directors preside at such sessions from time to time depending on the nature of the topics discussed. The independent directors have discussed the issue of executive management succession planning. Communications to the independent directors may be sent to independent directors c/o Corporate Secretary, K•Swiss Inc., 31248 Oak Crest Drive, Westlake Village, California 91361.

Annual Evaluations and Director Education

Pursuant to the terms of their charters, each of the Compensation, Audit and Governance Committees evaluate their respective performance and assess the adequacy of their respective charters annually. Additionally, the Company’s policy is to provide an orientation process for new directors, including a review of background material on the Company, meetings with senior management and a briefing on key issues facing the Company.

Communications with the Board of Directors

Any stockholder interested in communicating with members of the Board of Directors, any of its committees, the independent directors as a group or the Board of Directors as a whole, may send written communications to the Board of Directors or any of the directors to K•Swiss Inc., 31248 Oak Crest Drive, Westlake Village, California 91361, Attention: George Powlick, Secretary. Communications received in writing are forwarded to the Board of Directors or to any individual director or directors to whom the communication is directed, unless the communication is unduly hostile, threatening, illegal, does not reasonably relate to the Company or its business, or is similarly inappropriate. The Secretary has the authority to discard or disregard any inappropriate communications or to take other appropriate actions with respect to any such inappropriate communications.

Vote Required and Board Recommendation

The vote of a plurality of the shares of Class A Common Stock voting at the Annual Meeting (with each share entitled to one vote) is required for the election of the two directors to be elected by the holders of Class A Common Stock. The vote of a plurality of the shares of Class B Common Stock voting at the Annual Meeting (with each share entitled to ten votes) is required for the election of the four directors to be elected by the holders of Class B Common Stock. The Board of Directors unanimously recommends a vote “FOR” the election of each of the nominated directors.

PROPOSAL TWO

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The appointment of auditors is approved annually by the Audit Committee of the Board of Directors. Grant Thornton LLP has been selected by the Audit Committee for fiscal year 2008. In making its appointment, the Audit Committee reviewed both the audit scope and estimated audit fees for the coming year.

Grant Thornton LLP was the Company’s certified public accountant for fiscal year 2007. During fiscal year 2007, the Company also engaged Grant Thornton LLP to render certain non-audit professional services involving general consultations, as further described below.

6

Each professional service performed by Grant Thornton LLP during fiscal year 2007 was reviewed, and the possible effect of such service on the independence of the firm was considered, by the Audit Committee. Additionally, the Audit Committee requires the rotation of its outside auditor’s audit partners as required by the Sarbanes-Oxley Act and the related rules of the Securities and Exchange Commission. Representatives of Grant Thornton LLP will be present at the Annual Meeting and will be given an opportunity to make a statement if they desire to do so and will respond to questions from stockholders.

Audit Committee Pre-Approval Policy

The Audit Committee has adopted policies and procedures for pre-approving all audit services, audit-related services, tax services and non-audit services performed by Grant Thornton LLP. Specifically, the Audit Committee has pre-approved the use of Grant Thornton LLP for detailed, specific types of services within the following categories: annual audits, quarterly reviews and statutory audits, preparation of certain international corporate tax returns, regulatory implementation and compliance and risk assessment guidance. In each case, the Audit Committee has also set specific annual ranges or limits on the amount of each category of services which the Company would obtain from Grant Thornton LLP. These limits and amounts are established annually by the Audit Committee. Any proposed services exceeding these levels or amounts require specific pre-approval by the Audit Committee. The Audit Committee has designated the Company’s Corporate Controller to monitor the performance of all services provided by the independent auditor, to determine whether such services are in compliance with the Company’s pre-approval policies and procedures and to report to the Audit Committee on a periodic basis on the results of its monitoring. All audit, audit-related, tax and other non-audit services described below were pre-approved pursuant to this policy.

Fees Paid to the Independent Registered Public Accounting Firm

The Audit Committee, with the ratification of the stockholders, engaged Grant Thornton LLP to perform an annual audit of the Company’s financial statements for the year ended December 31, 2007. The following table sets forth fees for services Grant Thornton LLP provided during years ended December 31, 2007 and 2006:

The Audit Committee has selected Grant Thornton LLP to audit the Company’s consolidated financial statements for the fiscal year ending December 31, 2008, and the Audit Committee recommends that the stockholders vote for ratification of that appointment. The Company’s Audit Committee has reviewed each

7

professional service described above, has considered the possible effect of such service on the independence of the firm, and has determined that such services have not affected Grant Thornton LLP’s independence. Notwithstanding this selection, the Audit Committee of the Board of Directors, in its discretion, may direct the appointment of new independent auditors at any time during the year if the Audit Committee believes such a change would be in the best interest of the Company and its stockholders. If there is a negative vote on ratification, the Audit Committee will reconsider its selection.

Vote Required and Board Recommendation

The affirmative vote of a majority of the votes cast is required to ratify the Audit Committee’s selection. In addition, the affirmative votes must represent at least a majority of the required quorum. If the stockholders reject the nomination, the Audit Committee will reconsider its selection. The Board of Directors unanimously recommends a vote “FOR” the ratification of the appointment of Grant Thornton LLP as independent auditors.

PROPOSAL THREE

APPROVAL OF RE-PRICING OF CERTAIN STOCK OPTIONS

Overview

On March 4, 2008, the Board of Directors unilaterally acted to amend certain outstanding options to purchase shares of the Company’s Class A Common Stock (the “Eligible Options”) issued under the Company’s 1999 Stock Incentive Plan (the “Option Plan”) held by Eligible Participants (defined below), to reduce the exercise price of such Eligible Options to $14.19 per share, the closing price of the Company’s Common Stock on the NASDAQ stock market on March 4, 2008, conditioned only upon stockholder approval of this proposal at the Annual Meeting. The re-pricing applies to Eligible Options held by persons who are currently employed or actively engaged by the Company, including the Company’s executive officers (except for David Nichols), but does not include the members of the Board of Directors (including Steven Nichols and George Powlick) (collectively, the “Eligible Participants”). On March 4, 2008, Steven Nichols informed the Company of his commitment to vote in favor of this proposal. The re-pricing results in no change in the number of shares of Common Stock subject to each re-priced Eligible Option and no change in the term or other provisions governing such Eligible Options. Under the terms of the Option Plan and applicable NASDAQ Marketplace Rules, stockholder approval is required to implement the re-pricing.

Reasons for the Proposal and Summary of Effects of the Approval of Proposal Three

After careful consideration, the Board of Directors determined that it would be in the best interest of the Company and the Company’s stockholders to implement the re-pricing. Stock options are intended to encourage the Company’s employees to act as owners, which helps align their interests with those of stockholders. The objective of the Option Plan is to encourage ownership of the Company by key personnel whose long-term employment or service is considered essential to the Company’s continued progress. The Board of Directors believes that the Option Plan has proven to be an effective tool that encourages stock option recipients to act in the stockholders’ interest and enables the recipients to have an economic stake in the Company’s success.

The Company’s stock price has declined significantly since October 2006. As of March 4, 2008, the date the Board of Directors approved this proposal subject to stockholder approval, approximately 40% of the Company’s outstanding stock options under the Option Plan had an exercise price above $14.19 per share. On that date, the last reported sale price per share, as quoted on the NASDAQ Stock Market, was $14.19. These numbers illustrate that a large portion of the Company’s outstanding stock options no longer serve as an effective tool to retain and motivate employees. In today’s competitive market for top talent, the Board of Directors believes that it is critical to the future success of the Company to revitalize the incentive value of its stock option program to retain, motivate and reward employees. The failure to address the underwater option issue in the near to medium term

8

will make it more difficult for the Company to retain key employees. The failure to retain these employees could adversely affect the Company’s business, results of operations and future stock price.

In determining to recommend that stockholders approve the re-pricing, the Board of Directors considered several alternatives to provide competitive compensation to the Company’s employees. To replace equity incentives, the Company would need to substantially increase base and target bonus compensation. These increases would substantially increase the Company’s compensation expenses and reduce cash flow from operations. The Board of Directors also considered granting employees additional stock options at current market prices. However, these additional grants would substantially increase the total number of outstanding stock options, or “overhang.” The Board of Directors continues to believe that stock options are an important component of the Company’s employees’ total target compensation, and that replacing this component with additional cash compensation to remain competitive would have a material adverse effect on the Company.

The re-pricing provides an opportunity to motivate the Company’s employees to create stockholder value. By realigning the exercise prices of previously-granted stock options with the current value of the Company’s common stock, the Company believes that the Option Plan will again become an important tool to help retain the Company’s employees, reward their continued loyalty to the Company, and motivate them to continue to create stockholder value. In addition, the re-pricing allows the Company to conserve cash resources and does not result in additional “overhang,” because the re-pricing does not affect the number of shares of common stock subject to each re-priced Eligible Option.

As of March 4, 2008, prior to the granting of new stock options, 1,947,875 stock options were outstanding under the Option Plan, of which 459,391 stock options, having exercise prices ranging from $17.62 to $35.89, constituted Eligible Options held by Eligible Participants. The following table presents summary information concerning the Eligible Options that will be re-priced if Proposal Three is approved by the Company’s stockholders.

Details of the Option Re-Pricing

Implementing the Option Re-Pricing. As noted above, on March 4, 2008, the Board of Directors unilaterally acted to amend the Eligible Options issued under the Option Plan held by Eligible Participants to reduce the exercise price of such Eligible Options to $14.19 per share, the closing price of the Company’s Common Stock on the NASDAQ stock market on March 4, 2008, conditioned only upon stockholder approval of this proposal at the Annual Meeting. Additionally, on March 4, 2008, Steven Nichols informed the Company of his commitment to vote in favor of this proposal.

9

Eligible Employees. The re-pricing applies to Eligible Options held by all persons who are currently employed or actively engaged by the Company, including executive officers (except for David Nichols), but does not include members of the Board of Directors (including Steven Nichols and George Powlick).

Option Vesting. The vesting of the re-priced options will not change as a result of the re-pricing.

Other Option Terms. The other terms and conditions of the re-priced options will not change as a result of the re-pricing.

Accounting Treatment. The option re-pricing will be accounted for under Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share Based Payment” (SFAS No. 123 (Revised 2004)). Under these rules, the re-pricing will be characterized as a modification of the existing options. As a result, the difference between the fair value of the re-priced options over the fair value of the existing options determined as of the time of the re-pricing (March 4, 2008) are expected to result in additional non-cash expense of $850,000 over the next seven (7) years, if the re-pricing is approved.

U.S. Federal Income Tax Consequences. The re-pricing should be treated as a non-taxable modification and neither the Company nor the Company’s employees should recognize any income for U.S. federal income tax purposes upon the re-pricing. Upon the subsequent exercise of the re-priced options, the recipient will have ordinary income equal to the value of the shares over the exercise price at that time and the Company will be entitled to a corresponding deduction.

Effect on Stockholders. The Company believes that its stockholders will benefit from the option re-pricing as its employees respond to the enhanced retention and employee engagement incentives offered by the program. The Board of Directors designed the re-pricing to avoid the dilution in stockholders’ ownership that results from granting new options to supplement underwater options.

Vote Required and Board Recommendation

The affirmative vote of a majority of the votes cast is required to approve the re-pricing of certain stock options. In addition, the affirmative votes must represent at least a majority of the required quorum. The Board of Directors unanimously recommends a vote “FOR” the approval of the re-pricing of certain stock options.

10

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to the Company as of March 24, 2008 with respect to the beneficial ownership of the Company’s Common Stock by (i) each stockholder known by the Company to own beneficially more than 5% of the outstanding shares of any class of Common Stock, (ii) each director of the Company, (iii) each of the named executive officers (as defined in the “Compensation Discussion and Analysis” section below) appearing in the Summary Compensation Table below, and (iv) all directors and officers as a group:

11